Source: https://icoxinnovations.com/investors/link_files/2019/03-26-2019/Form10-K(03-26-2019)IcoxInnovations/Form10-K.html
Timestamp: 2019-05-23 03:47:42
Document Index: 40590102

Matched Legal Cases: ['arty 47', 'arty 560', 'arty 30', 'arty 181', 'arty 480', 'arty 20']

$10,274,714.40 based on a price of $0.60 per share multiplied by 17,124,524 shares of common stock held by non-affiliates. The price of $0.60 per share is based on the private placements of an aggregate of 9,113,659 subscription receipts at a price of $0.60 per subscription receipt, which were completed on March 12 and 19, 2018. On May 31, 2018, each subscription receipt was automatically converted into one share of common stock, for no additional consideration.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: As of March 26, 2019, there were 21,579,474 shares of common stock outstanding.
ITEM 1B. U nresolved S taff C omments 20
This annual report contains forward-looking statements. Forward-looking statements are projections of events, revenues, income, future economic performance or management’s plans and objectives for future operations. In some cases, forward-looking statements can be identified by the use of terminology such as “may”, “should”, “expect”, “plan”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continues” or the negative of these terms or other comparable terminology. Examples of forward-looking statements made in this annual report include or may include, among others, statements about:
● our ability to collect outstanding loans;
While these forward-looking statements and any assumptions upon which they are based are made in good faith and reflect management’s current judgment regarding the direction of our business, actual results may vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Accordingly, readers should not place undue reliance on forward-looking statements. Except as required by applicable law, including the securities laws of the United States and Canada, we do not intend to update any of the forward-looking statements to conform these statements to actual results. All forward-looking statements in this annual report are qualified by this cautionary statement.
As used in this annual report, the terms “we”, “us”, “the Company”, “our” and “ICOx” mean ICOx Innovations Inc. and its wholly-owned subsidiaries, ICOx USA, Inc. (formerly AppCoin Innovations (USA) Inc.), Cathio, Inc., and sBetOne, Inc., unless otherwise specified.
In July 2017, we decided to operate a new business of providing services for blockchain and cryptocurrency technologies and incorporated a Nevada subsidiary, ICOx USA, Inc. (formerly AppCoin Innovations (USA) Inc.) on August 1, 2017.
Effective August 17, 2017, we completed a merger with our wholly-owned subsidiary, AppCoin Innovations Inc., a Nevada corporation, which was incorporated solely to effect a change in our name. As a result, we changed our name from “Redstone Literary Agents, Inc.” to “AppCoin Innovations Inc.”.
Effective February 14, 2018, we completed a merger with our wholly-owned subsidiary, ICOx Innovations Inc., a Nevada corporation, which was incorporated solely to effect a change in our name. As a result, we changed our name from “AppCoin Innovations Inc.” to “ICOx Innovations Inc.”.
On December 29, 2017, the Company signed a master service agreement with Ryde, a company in which there is a common director. The agreement was amended on March 15, 2018, pursuant to which the Company changed the scope of services to provide Ryde with the services in connection with Ryde’s development of an image rights management and protection platform (the “Platform”) using blockchain technology, including (i) the business development and technical services, (ii) the business launch services and (iii) the post-business launch support services. The business services agreement with Ryde provides that the fees for the services provided in connection with the development and launch of the Platform (the business development and technical services and business launch services) were deemed earned on the date of execution of the business services agreement. The Company has waived Ryde’s requirement to pay the $250,000 fixed fee in connection with the business development and technical services as a concession. The Company has recognized the business development and technical service fee of $500,000 during the year end December 31, 2017, paid in January 2018 by Ryde upon the completion of its first round of pre-ICO fundraising. Also, as a condition for entering into the loan agreement, Ryde entered into the amendment no. 2, dated as of July 9, 2018, to the business service agreement dated December 29, 2017 as amended as of March 15, 2018, with our company. Pursuant to the amendment no. 2, the Company and Ryde agreed that each party will be responsible for its respective expenses and agreed not to charge any out of pocket expenses to the other party unless expressly approved by the other party in advance in writing.
In consideration for the 2018-19 Services, Ryde agreed to pay a fixed fee of $1,100,000, which is deemed earned as of October 1, 2018, under the agreement, but is not due and payable until Ryde closes on the sale of Simple Agreements for Future Tokens (“SAFTs”), equity, or token financings, joint venture financings, or any of its affiliates, in a minimum aggregate amount of $12,000,000, including closings occurring prior to October 1, 2018. For financial reporting purposes, the work fee and additional fee are deemed earned on the date of the financing for a minimum aggregate amount of $12,000,000. In consideration for the 2020 Monthly Services fees, Ryde agreed to pay a monthly fee of $35,000 at the beginning of each month commencing January 1, 2020. All fees and other amounts paid to the Company with respect to the Company’s services provided prior to the amendment no. 3 have been earned in connection with the prior services and will not be credited against any of the above fees or other amounts due under the amendment no. 3.
The Company’s chairman and one of its directors, Cameron Chell, is a director, officer and an indirect shareholder of Business Instincts Group Inc. which owns 10% of the common stock of Ryde and he is also a director, officer and indirect shareholder of Blockchain Merchant Group, Inc. which owns 2.5% of the common stock of Ryde and the Company owns 7.5% of the common stock of Ryde. Mr. Chell is also a director, chairman, and officer of Ryde. Mr. Elliott is a former officer of Ryde. Our chief financial officer, Swapan Kakumanu, is also the chief financial officer of Ryde.
Our first client, Ryde, has entered into a licensing partnership agreement with Eastman Kodak Company, which announced the launch of the KODAKOne blockchain platform and KODAKCoin initial coin offering. We are providing the services relating to the KODAKOne blockchain platform and the KODAKCoin initial coin offering pursuant to a business services agreement dated December 29, 2017, as amended as of March 15, 2018 with Ryde.
On October 19, 2018, the Company, through its wholly-owned subsidiary, ICOx USA, Inc. (“ICOx USA”), entered into a master services agreement with BitRail, LLC (“BitRail”) to develop a blockchain-based payment processing application allowing the purchase and sale of cryptocurrencies (the “Payment Processing Application”) to be operated by BitRail Holdings, Inc. (“BitRail Holdings”), a company formed by BitRail.
Under the terms of the master services agreement, ICOx USA initially agreed to provide the services relating to the development of a stable coin cryptocurrency named FreedomCoin. The fee for these services will be provided at ICOx USA’s cost plus approved expenses, and delivered via approved vendors and within written quarterly budgets approved in advance by FreedomCoin, LLC, up to a maximum of $2,000,000. In addition, FreedomCoin, LLC agreed that it will be responsible for paying all expenses charged by third parties to ICOx USA or FreedomCoin, LLC relating to the master services agreement.
Either ICOx USA or FreedomCoin, LLC may terminate the master services agreement or any statement of work to be negotiated by the parties upon the provision of 30 days written notice to the other party, upon receipt of which, the non-terminating party may elect to immediately terminate the master services agreement or applicable statement of work. Upon such termination, ICOx USA will be entitled to no further compensation except for (i) any fees earned and out-of-pocket expenses incurred prior to the termination and (ii) any other amounts or consideration as set forth in any statement of work which are to be paid upon or regardless of such termination. ICOx USA will also retain the warrants held.
Our business is a services and development business that provides a turnkey set of services for companies to develop and integrate blockchain and cryptocurrency technologies into their business operations. We anticipate that we will enable companies to focus on their core competencies while providing the necessary resources and expertise to execute a strategy that will enable companies to integrate new blockchain plus cryptocurrency technologies into their business operations. Our plan is to be compensated on a fee-for-services model, technology licensing model and a reoccurring transaction revenue model. We may accept tokens, coins or equity in payment for our services to the extent permitted under applicable law.
Blockchains are secure by design and are an example of a distributed computing system and decentralization can be achieved with a blockchain. This makes blockchains potentially suitable for the recording of events, medical records and other record management activities, such as identity management, documenting provenance, digital asset registration and transaction processing.
We may receive fees from initial coin offering proceeds, in a combination of cash and tokens, coins or equity, to the extent permitted under applicable law. For any cryptocurrencies received, we intend to hold cryptocurrencies on our balance sheet and to sell them from time to time via regulated trading exchanges, to the extent permitted under applicable law. We are not involved in the issuance of cryptocurrencies or mining or other related technical cryptocurrency production.
We plan to generate revenue through the following services:
● Business modeling and scoping and development;
● Advisory services surrounding token models, and token incentivisation;
2. Blockchain and Technology Program Management
● Product vision and road-mapping;
● Program development and project management; and
● Product development and testing.
● Customer discovery and scoping (not including any distribution or marketing related services, or assistance regarding the offer or sale of any tokens or coins); and
● Product commercialization and support.
4. Business Launch Services
● Public relations & business development plans and strategies maximizing physical and digital outreach (not including any distribution or marketing related services, or assistance regarding the offer or sale of any tokens or coins);
● Establish digital/social media presence (not including any distribution or marketing related services, or assistance regarding the offer or sale of any tokens or coins);
● White labeled investor web wallet;
● Website infographics and design;
● Smart contract creation, sourcing, conceptualization and high-level specifications;
● Provide sourcing, guidance and assistance where required to engineering team surrounding the development of token wallet; and
● Specifications of platform website, and database backend built to collect user information.
5. Post-Business Launch Support Services
● Public relations to support (not including any distribution or marketing related services, or assistance regarding the offer or sale of any tokens or coins);
We intend to implement our sales and marketing plan to attract new clients to our blockchain consulting business as follows:
● Sponsorship of cryptocurrency and blockchain related events;
As of March 26, 2019, we have three clients which have engaged us to build out their business models, technology strategy, market entry strategy, and capital structure, which includes a blockchain platform launch. However, we have several potential customers in our sales pipeline.
We are in a novel business of providing services for companies to develop and integrate blockchain and cryptocurrency technologies into their business operations. We compete with the following competitors:
The Argon Group (“ Argon ”) is an investment bank with a focus on digital finance and cryptocurrency and token-based capital markets. Argon provides financial advisory, placement, and technology services to companies seeking to raise equity, debt, and non-dilutive capital. Argon develops technical placement solutions, including digital tokens powered by advanced smart contracts, which Argon operates through a digital asset placement platform called TokenHub.com.
Polymath simplifies the legal process of creating and selling security tokens. It makes a new token standard, the ST20, and enforces government compliance. Only a “list of authorized investors and their Ethereum wallet addresses” can hold ST20 tokens. In order to launch a legally compliant token, Polymath platform brings together issuers, legal delegates, smart contract developers, know-your-client verification, and a decentralized exchange. All transactions on the Polymath platform take place using the native POLY token.
With thousands of technical experts, IBM is moving quickly into enterprise blockchain and claims the leading blockchain for business platform. This is primarily B2B focused work.
We do not currently own any intellectual property. We intend to aggressively assert our rights under trade secret, patents, trademark and copyright laws to protect any intellectual property that we create, including product design, product research and concepts and recognized trademarks. These rights may be protected through the acquisition of patents and trademark registrations, the maintenance of trade secrets, the development of trade dress, and, where appropriate, litigation against those who are, in our opinion, infringing these rights.
We intend to comply with any applicable anti-money laundering or know your customer rules relating to tokens imposed by the SEC and Canadian securities regulators.
Investment Company Act of 1940 Considerations
We intend to conduct our operations so that we do not fall within, or are excluded from the definition of an “investment company” under the Investment Company Act of 1940.
Under Section 3(a)(1)(A) of the Investment Company Act of 1940, a company is deemed to be an “investment company” if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. We believe that we will not be considered an investment company under Section 3(a)(1)(A) of the Investment Company Act of 1940 because we will not engage primarily or hold ourselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, our new business is a services and development business that provides a turnkey set of services for companies to develop and integrate blockchain and cryptocurrency technologies into their business operations.
Under Section 3(a)(1)(C) of the Investment Company Act of 1940, a company is deemed to be an “investment company” if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of our company’s total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis, which we refer to as the “40% test.” We intend to monitor our holdings and conduct operations so that on an unconsolidated basis we will comply with the 40% test. Nevertheless, because we may accept tokens, coins or equity in payment for our services, to the extent permitted under applicable law, we may acquire “investment securities” having a value exceeding 40% of the value of our company’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. In that case, we intend to rely on a safe harbor exemption from the Investment Company Act of 1940 for so-called “transient investment companies.”
Consistent with the “transient investment company” safe harbor, we will have to reduce our holdings of “investment securities to not more than 40% of our total assets as soon as is reasonably possible and in any event within one year from the earlier of (i) the date on which we own securities and/or cash having a value exceeding 50% of the value of our company’s total assets on either a consolidated or unconsolidated basis or (ii) the date on which we own or propose to acquire “investment securities” having a value exceeding 40% of the value of our company’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. This reduction could be attempted in a number of ways, including the disposition of securities and the acquisition of other assets that would not constitute investment securities for purposes of the Investment Company Act of 1940. If we are required to sell securities, we may sell them sooner than we otherwise would, the sales may be at depressed prices, and we may never realize anticipated benefits from, or may incur losses on, those investments. We may not be able to sell some investments due to contractual or legal restrictions or the inability to locate a suitable buyer. We may also incur tax liabilities when we sell our assets. If we decide to try to acquire additional assets that would not constitute investment securities, we may not be able to identify and acquire suitable assets. If these steps do not achieve a sufficient reduction in our holdings of investment securities within the prescribed period, we will be forced to liquidate some of our securities holdings and invest the proceeds in U.S. government securities and cash items, with a potential loss.
Because we can rely on the “transient investment company” safe harbor only once during any three-year period, we may not accept tokens, coins or equity in payment for our services during the period that this safe harbor is not available.
If we become obligated to register our company as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act of 1940 imposing, among other things:
● limitations on capital structure;
● restrictions on specified investments;
● prohibitions on transactions with affiliates; and
● compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.
If we were required to register our company as an investment company but failed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business, all of which would have a material adverse effect on us.
As at March 26, 2019, we have three executive officers, Bruce Elliott, who is our president, Michael Blum, who is our chief operating officer, secretary, and treasurer, and Swapan Kakumanu, who is our chief financial officer, and no employees. Our management oversees all responsibilities in the areas of corporate administration, business development, and research. We also employ consultants on an as-needed-basis to provide specific expertise in areas of product design and development and other business functions including marketing and accounting. We intend to expand our current management to retain skilled directors, officers, and employees with experience relevant to our business focus.
An investment in our common stock involves a number of very significant risks. You should carefully consider the following risks and uncertainties in addition to other information in this annual report in evaluating our company and our business before purchasing our securities. Our business, operating results and financial condition could be seriously harmed as a result of the occurrence of any of the following risks. You could lose all or part of your investment due to any of these risks. You should invest in our common stock only if you can afford to lose your entire investment.
Lack of liquid markets, and possible manipulation of blockchain/cryptocurrency-based assets may adversely affect us.
The loss or potential loss of our exclusion from regulation pursuant to the Investment Company Act of 1940, the Investment Advisors Act of 1940 or any related state exemptions, could require us to restructure our operations.
The SEC heavily regulates the manner in which “investment companies,” “investment advisors,” and “broker-dealers” are permitted to conduct their business activities. We believe we will conduct our business in a manner that does not result in us being characterized as an investment company, an investment advisor or a broker-dealer, as we do not believe that we will engage in any of the activities that require registration under the Investment Company Act of 1940, the Investment Advisors Act of 1940 or any similar provisions under state law. We intend to continue to conduct our business in such manner. If, however, we are deemed to be an investment company, an investment advisor, or a broker-dealer, we may be required to institute burdensome compliance requirements and our activities may be restricted, which would affect our business to a material degree. The loss or potential loss of our exclusion from regulation pursuant to the Investment Company Act of 1940, the Investment Advisors Act of 1940 or any related state exemptions, could require us to restructure our operations, which could have an adverse effect on our financial condition and results of operations. In addition, we are determined to have engaged in activities that require any such registration, without obtaining such registration, we could be subject to civil and/or criminal liability, which could have an adverse effect on our financial condition and results of operations.
We had cash and cash equivalents in the amount of $898,142 and working capital of $2,945,058 as of December 31, 2018, and cash and cash equivalents of $214,993 and working capital of $697,847 as of December 31, 2017. We anticipate that we will require additional financing while we operate and expand our new business. Further, we anticipate that we will not have sufficient capital to fund our ongoing operations for the next twelve months. We would likely secure any additional financing necessary through a private placement of our common stock through a debt financing. There can be no assurance that any financing will be available to us, or, even if it is, if it will be offered on terms and conditions acceptable to us. Our inability to obtain additional financing in a sufficient amount when needed and upon terms and conditions acceptable to us, could have a material adverse effect upon us. If additional funds are raised by issuing equity securities, dilution to existing or future stockholders will result. If adequate funds are not available on acceptable terms when needed, we may be required to delay, scale back or eliminate the expansion of our new business.
We are currently dependent on three clients.
We currently have three clients which have engaged us to build out their business models, technology strategies, market entry strategies and capital structures, which includes a blockchain platform launch. While we have several potential clients in our sales pipeline, there can be no assurance that we will engage additional clients. If any of our clients discontinue their business with us, or if our clients modify the terms of their business with us on less favorable terms, the effect on our business, operating results and financial condition may become adverse.
Our chief financial officer devotes approximately up to 50% of his working time to our company.
Swapan Kakumanu, our chief financial officer, devotes approximately up to 50% of his working time, or approximately up to 20 hours per week, to our company. Because Mr. Kakumanu works only part-time, instances may occur where he may not be immediately available to provide solutions to problems or address concerns that arise in the course of us conducting our business and thus adversely affect our business. In addition, Mr. Kakumanu can become subject to conflicts of interest because he devotes part of his working time to other business endeavors, including consulting relationships with other entities, and have responsibilities to these other entities. Such conflicts include deciding how much time to devote to our affairs, as well as what business opportunities should be presented to us. Because of these relationships, Mr. Kakumanu could be subject to conflicts of interest.
The directors and officers of our company, including Mr. Kakumanu, are aware of the existence of laws governing the accountability of directors and officers for corporate opportunity and requiring disclosures by the directors and officers of conflicts of interest, and we will rely upon such laws in respect of any directors’ and officers’ conflicts of interest or in respect of any breaches of duty by any of our directors and officers. All such conflicts are to be disclosed by such directors or officers in accordance with applicable laws and the directors and officers are to govern themselves in respect thereof to the best of their ability in accordance with the obligations imposed upon them by law.
Our directors and officers control approximately 22.80% of our voting stock. As a result, they have the ability to influence matters affecting our stockholders, including the election of our directors, the acquisition of assets, and the issuance of securities. Because they control a significant portion of votes, it would be very difficult for investors to replace our management if the investors disagree with the way our business is being operated. Because the influence by our directors and officers could result in management making decisions that are in their best interest and not in the best interest of the investors, you may lose some or all of the value of your investment in our common stock.
We are authorized to issue up to 75,000,000 shares of common stock, of which 21,579,474 shares of common stock were issued and outstanding as of March 26, 2019. Our board of directors has the authority to cause us to issue additional shares of common stock without consent of our stockholders. Consequently, stockholders may experience dilution in their ownership of our stock in the future.
We do not own any property. Our principal offices are located at 4101 Redwood Ave, Building F. Los Angeles, California 90066. Effective May 1, 2018, we entered into a facility services agreement with Business Instincts Group Inc., a company of which Cameron Chell is a director, officer and indirect shareholder, whereby we agreed to pay Business Instincts Group Inc. a basic monthly rent of $16,500 for the complete occupancy term commencing May 1, 2018 until February 28, 2020 to use our office premises for general office purposes. We believe that our office premises are suitable and adequate for our present needs.
We know of no material pending legal proceedings to which our company or subsidiaries is a party or of which any of our properties, or the properties of our subsidiaries, is the subject. In addition, we do not know of any such proceedings contemplated by any governmental authorities.
We know of no material proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder is a party adverse to our company or subsidiaries or has a material interest adverse to our company or subsidiaries.
There is currently no established public trading market for our common stock. There is a limited public market for our common stock. Our common stock has been quoted on the OTCQB operated by the OTC Markets Group under the trading symbol since February 19, 2019. From November 28, 2017 to February 18, 2019, our common stock was quoted on the OTC Pink operated by the OTC Markets Group under the trading symbol “ICOX.” From August 17, 2017 to November 27, 2017, our common stock was quoted on the OTC Pink under the trading symbol “APCN”. Prior to that, our common stock was quoted on the OTC Pink under the trading symbol “RDLA”.
Effective at the opening on December 4, 2018, shares of our common stock have been approved for trading on the TSX Venture Exchange in Canada under the symbol “ICOX.”
Trading in stocks quoted on the OTCQB or the TSX Venture Exchange is often thin and is characterized by wide fluctuations in trading prices due to many factors that may be unrelated or have little to do with a company’s operations or business prospects. We cannot assure you that there will be a market for our common stock in the future.
Set forth below are the range of high and low bid quotations for our common stock from the OTC Pink and high and low closing prices for our common stock from the TSX Venture Exchange for the periods indicated. The market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions:
Quarter Ended OTC Pink
(U.S. dollars) TSX Venture
December 31, 2018 $ 0.40 $ 0.03 $ 0.65 $ 0.35
September 30, 2018 $ 2.30 $ 0.30 N/A N/A
June 30, 2018 $ 2.30 $ 2.30 N/A N/A
March 31, 2018 $ 3.15 $ 2.30 N/A N/A
December 31, 2017 $ 2.60 $ 1.25 N/A N/A
September 30, 2017 $ 1.25 $ 0.05 N/A N/A
June 30, 2017 Nil Nil N/A N/A
March 31, 2017 Nil Nil N/A N/A
As of March 26, 2019, the 21,579,474 issued and outstanding shares of our common stock were held by a total of 120 stockholders of record.
We have not declared any dividends since incorporation and do not anticipate that we will do so in the foreseeable future. Our intention is to retain future earnings, if any, for use in our operations and the expansion of our business.
The following table summarizes certain information regarding our equity compensation plans as at December 31, 2018:
Equity compensation plans not approved by security holders (2017 Equity Incentive Plan) 3,400,000 $ 0.18 774,904
Total 3,400,000 $ 0.18 774,904
On October 15, 2017, as amended on January 22, 2018 and November 22, 2018, our board of directors adopted and approved the 2017 Equity Incentive Plan. The purpose of the plan is to (a) enable us and any of our affiliates to attract and retain the types of employees, consultants and directors who will contribute to our long range success; (b) provide incentives that align the interests of employees, consultants and directors with those of our stockholders; and (c) promote the success of our business.
On November 22, 2018, our board of directors amended our 2017 Equity Incentive Plan in connection with our application to list our common stock on the TSX Venture Exchange. The plan was amended to provide:
○ a participant must either be a Director, Employee or Consultant (as defined by the policies of the TSX Venture Exchange) of our company or a subsidiary of our company at the time of grant of the awards, except as otherwise provided by the policies of the TSX Venture Exchange and, for awards granted to Employees, Consultants or Management Company Employees (as defined by the policies of the TSX Venture Exchange), we must ensure that the participant is a bona fide Employee, Consultant or Management Company Employee, as the case may be;
○ stock options granted to participants engaged in Investor Relations Activities (as defined by the policies of the TSX Venture Exchange) on behalf of our company must expire 30 days after such participants cease to perform such Investor Relations Activities for our company;
if the shares of our common stock are listed on the TSX Venture Exchange, we must obtain disinterested shareholder approval for any amendment to stock options held by insiders that would have the effect of decreasing the exercise price of the stock options.
Since the beginning of our fiscal year ended December 31, 2018, we have not sold any equity securities that were not registered under the Securities Act of 1933 that were not previously reported in a quarterly report on Form 10-Q or in a current report on Form 8-K.
On January 8, 2019, we issued 750,000 shares of our common stock upon conversion of the principal amount of $75,000 of a convertible note. We issued the shares to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933 , as amended) in an offshore transaction in which we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(a)(2) of the Securities Act of 1933 , as amended.
Our management’s discussion and analysis provides a narrative about our financial performance and condition that should be read in conjunction with the audited consolidated financial statements and related notes thereto included in this annual report. This discussion contains forward looking statements reflecting our current expectations and estimates and assumptions about events and trends that may affect our future operating results or financial position. Our actual results and the timing of certain events could differ materially from those discussed in these forward-looking statements due to a number of factors, including, but not limited to, those set forth in the sections of this annual report titled “Risk Factors” and “Forward-Looking Statements”.
We had revenues of $0 for the year ended December 31, 2018 compared to $500,000 in 2017.
The business services agreement dated December 29, 2017, as amended as of March 15, 2018, July 9, 2018, and October 29, 2018 with Ryde, provides that the fees for the services provided in connection with the development and launch of the Platform (the business development and technical services and business launch services) were deemed earned on the date of execution of the business services agreement. We have waived Ryde’s requirement to pay the $250,000 fixed fee in connection with the business development and technical services as a concession. We have recognized the business development and technical services fee of $500,000 during the year ended December 31, 2017, which Ryde paid in January 2018 upon the completion of its first round of pre-ICO fundraising.
We incurred operating expenses of $3,980,160 and $932,843 for the years ended December 31, 2018 and 2017, respectively, representing an increase of $3,047,319 between the two periods. These expenses consisted primarily of consulting fees, service costs, professional fees, stock-based compensation, interest and bank charges, and other general and administrative expenses. The increase in operating expenses between the two periods related to an increase in consulting fees from $547,542 in 2017 to $1,449,681 in 2018 due to our company entering into a consulting agreement with Business Instincts Group Inc. and other individuals to provide strategic and project management services and the company operating under its new business for a full year, an increase in service costs from $199,920 in 2017 to $675,633 in 2018 due to services provided to our customers, an increase in professional fees from $87,014 in 2017 to $329,227 in 2018 due to additional legal and accounting costs incurred due to the change in business and the company operating under its new business for a full year, an increase in interest and bank charges from $1,896 in 2017 to $3,130 as bank fees has increased to higher level of activities in 2018, and an increase in other general and administrative expenses from $96,471 in 2017 to $1,340,645 in 2018 as travel costs and advertising expenses have risen as we met with investors, potential clients, and sought to brand our company, and includes the stock-based compensation issued to our directors in 2018.
We incurred net losses from operations of $3,980,160 and $432,843 for the years ended December 31, 2018 and 2017, respectively, representing an increase of $3,547,317, primarily attributable to the factors discussed above under the heading “Operating Expenses”.
Other income includes $30,864 of interest earned on a loan receivable to a related party compared to $789 for the same period last year. Other expenses include, interest expense on convertible notes payable of $70,558 for the year ended December 31, 2018 compared to $35,004 for the same period last year.
Current Assets $ 3,170,861 $ 880,766
Current Liabilities 286,457 182,919
Working Capital $ 2,884,404 $ 697,847
Current assets of $3,170,861 as at December 31, 2018 and $880,766 as at December 31, 2017 were comprised of only cash and cash equivalents, accounts receivable, prepaid expenses, an outstanding loan receivable, and our capitalized service costs. The increase in current assets as at December 31, 2018 was due to our company receiving $5,907,454 for private placements in exchange for shares less issuance costs, the increase in our loan receivable and accrued interest of $1,179,914, the increase in our capitalized deferred service costs of $874,817, and the increase in our prepaid expenses of $32,215 partially offset by the decrease in our accounts receivable of $480,000 and operating costs.
Current liabilities as at December 31, 2018 were attributable to $239,026 in accounts payable and accrued expenses and $47,431 in accounts payable, related party compared to $131,303 in accounts payable and accrued expenses and $51,616 in accounts payable, related party as at December 31, 2017.
Our cash flows for the year ended December 31, 2018 and December 31, 2017 are as follows:
Net cash (used in) operating activities $ (4,074,305 ) $ (652,524 )
Net cash (used in) investing activities (1,150,000 ) (100,000 )
Net cash provided by financing activities 5,907,454 911,467
Net changes in cash and cash equivalents $ 683,149 $ 158,943
Net cash used in operating activities was $4,074,305 for the year ended December 31, 2018, as compared to $652,524 for the year ended December 31, 2017, an increase of $3,421,781. The increase in net cash used in operating activities was primarily due to having a full year of the new business operations and higher deferred service costs.
Net cash used in investing activities was $1,150,000 for the year ended December 31, 2018 was due to the outstanding loan to a related party, as compared to $100,000 for the year ended December 31, 2017.
Financing activities provided cash of $5,907,454 for the year ended December 31, 2018 and $911,467 for the year ended December 31, 2017. On June 1, 2018, we issued an aggregate of 9,274,524 shares of common stock for total consideration of $5,468,195 and paid offering costs of $235,206. On November 27, 2018, we issued an aggregate of 674,950 share of common stock for total consideration of $674,950 and paid offering costs of $18,485.
We expect that we will require $5.066 million, including our current working capital, to fund our operating expenditures for the next twelve months. Projected working capital requirements for the next twelve months are as follows:
General and administrative expenses 3,051,000
Total $ 5,066,000
Our estimated general and administrative expenses for the next 12 months are $3,051,000 and are comprised of: $1,488,000 for consulting fees, of which approximately $420,000 is allocated to Business Instincts Group Inc., $192,000 is allocated to our president, Bruce Elliott, $144,000 is allocated to our chief operating officer, Michael Blum, $120,000 is allocated to our lead director, James P. Geiskopf, $60,000 is allocated to our chief financial officer, Swapan Kakumanu, $120,000 is allocated for accounting services, $200,000 is allocated to our board of directors and our advisory board, $172,000 is allocated to our investor relations consultants, and $60,000 is allocated to our public relations and marketing consultants; $250,000 for legal and professional fees (including auditing fees); $462,000 for insurance; $180,000 for marketing and advertising expenses; $102,000 for trade shows; $250,000 for travel expenses; $198,000 for office rent and $121,000 for miscellaneous and office expenses.
Our consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We have not yet established a source of revenues sufficient to cover our operating costs and to allow us to continue as a going concern. We have incurred losses since inception resulting in an accumulated deficit of $4,712,862 as at December 31, 2018 (December 31, 2017: $693,008). Our ability to operate as a going concern is dependent on obtaining adequate capital to fund operating losses until we become profitable.
In its report on our financial statements for the years ended December 31, 2018 and 2017, our independent registered public accounting firm included an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Stockholders of ICOX Innovations, Inc.
We have audited the accompanying consolidated balance sheets of ICOX Innovations, Inc. (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that ICOX innovations, Inc. will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has recurring losses from operations and negative cash flows from operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. If the Company is unable to obtain additional financing, there could be a material adverse effect on the Company.
(formerly AppCoin Innovations Inc.)
Cash and cash equivalents $ 898,142 $ 214,993
Prepaid expenses 82,215 30,000
Deferred service costs 874,838 21
Related party loans receivable and related accrued interest 1,280,666 100,752
Total Current Assets 3,170,861 880,766
Total Assets $ 3,170,898 $ 880,803
Accounts payable and accrued expenses $ 239,026 $ 131,303
Accounts payable and accrued expenses, related party 47,431 51,616
Total Current Liabilities 286,457 182,919
Accrued interest on convertible notes 115,518 52,949
Total Liabilities 902,300 736,193
Common stock, $0.001 par value, 75,000,000 shares authorized; 21,579,474 and 11,600,000 shares issued and outstanding as at December 31, 2018 and 2017, respectively 21,579 11,600
Additional paid-in-capital 6,959,881 826,018
Accumulated deficit (4,712,862 ) (693,008 )
Total Stockholders’ Equity 2,268,598 144,610
Total Liabilities and Stockholders’ Equity $ 3,170,898 $ 880,803
Service revenue $ - $ 500,000
Total revenues - 500,000
General and administrative expense 2,744,527 452,923
Consulting fees, related party 560,000 280,000
Service costs 675,633 199,920
Total operating expenses 3,980,160 932,843
Net loss from operations (3,980,160 ) (432,843 )
Interest income, related party 30,864 789
Note interest expense (70,558 ) (35,004 )
Total other income (expense) (39,694 ) (34,215 )
Net loss $ (4,019,854 ) $ (467,058 )
Loss per common share – Basic and diluted $ (0.24 ) $ (0.07 )
Weighted average number of common shares outstanding, basic and diluted 17,077,348 6,934,795
Net loss for the year $ (4,019,854 ) $ (467,058 )
Stock-based compensation 54,544 188,934
Stock-based compensation, related party 181,844 22,500
Accounts receivable, related party 480,000 (500,000 )
Prepaid expense (52,215 ) (30,000 )
Prepaid expense, related party 20,000 (35,000 )
Deferred service costs (874,817 ) (21 )
Accrued interest receivable, related party (29,914 ) (789 )
Accounts payable and accrued expenses 107,723 82,290
Accounts payable and accrued expenses, related party (4,185 ) 51,616
Accrued interest on notes payable 62,569 35,004
Net cash (used in) operating activities (4,074,305 ) (652,524 )
Loan issued to related party (1,250,000 ) (100,000 )
Proceeds from issuance of convertible notes payable - 355,000
Proceeds from share issuance 6,161,145 560,000
Less share issue costs (253,691 ) (3,533 )
Net changes in cash and equivalents 683,149 158,943
Cash and equivalents at beginning of the year 214,993 56,050
Cash and equivalents at end of the year $ 898,142 $ 214,993
Non-cash share issue costs $ 96,519 $ -
Capital Accumulated Deficit Equity
Balance, December 31, 2016 6,000,000 $ 6,000 $ 63,717 $ (225,950 ) $ (156,233 )
Share issuance, net of offering costs of $3,533 5,600,000 5,600 550,867 - 556,467
Stock-based compensation - - 188,934 - 188,934
Stock-based compensation, related party - - 22,500 - 22,500
Net loss for the year - - - (467,058 ) (467,058 )
Balance, December 31, 2017 11,600,000 11,600 826,018 (693,008 ) 144,610
Share issuance, net of offering costs of $350,210 9,979,474 9,979 5,897,475 - 5,907,454
Stock-based compensation - - 54,544 - 54,544
Stock-based compensation, related party - - 181,844 - 181,844
Net loss for the year - - - (4,019,854 ) (4,019,854 )
These consolidated financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred losses since inception resulting in an accumulated deficit of $4,712,863 and $693,008 as of December 31, 2018 and December 31, 2017, respectively, and further losses are anticipated in the pursuit of the Company’s new service business opportunity, raising substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months with existing cash on hand, loans from directors and/or the private placement of common stock.
In order to address the above factors, during the year ended December 31, 2018, the Company completed two private placements of an aggregate of 9,979,474 shares of common stock at an average price of $0.63 per share for aggregate gross proceeds of $6,161,145.
The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles (“ GAAP ”) in the United States of America.
The consolidated financial statements include the accounts of the Company and its subsidiary. All intercompany transactions and balances have been eliminated.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and these differences could be material.
The Company accounts for its contingent liabilities in accordance with ASC No. 450 “Contingencies”. A provision is recorded when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
With respect to legal matters, provisions are reviewed and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. As of December 31, 2018 and 2017, the Company was not a party to any litigation that could have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.
FASB Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”), clarifies the accounting for uncertainty in income taxes recognized in the financial statements. ASC 740 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. ASC 740 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We have determined that the Company does not have uncertain tax positions on its tax returns for the years 2018, 2017, and prior. Based on evaluation of the 2018 transactions and events, the Company does not have any material uncertain tax positions that require measurement.
Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. We had no accrual for interest or penalties on our consolidated balance sheets at December 31, 2018 or 2017, and have not recognized interest and/or penalties in the consolidated statement of operations for the years ended December 31, 2018 or 2017.
We are subject to taxation in the U.S. and the state of California. All of our tax years are subject to examination by the U.S. and California tax authorities due to the carry-forward of unutilized net operating losses.
In considering the collectability of accounts receivable, the Company takes into account the legal obligation for payment by the customer, as well as the financial capacity of the customer to fund its obligation to the Company.
The Company computes earnings (loss) per share in accordance with ASC 105, “Earnings per Share” which requires presentation of both basic and diluted earnings per share on the face of the statement of operations. Basic earnings (loss) per share is computed by dividing net loss available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted earnings (loss) per share gives effect to all dilutive potential common shares outstanding during the period. At December 31, 2018, common shares from the conversion of debt (12,019,929 shares) (Note 4) and exercise of stock options (1,863,882 shares) (Note 10) have been excluded as their effect is anti-dilutive. At December 31, 2017, common shares from the conversion of debt (10,730,320 shares) and exercise of stock options (733,331 shares) have been excluded as their effect is anti-dilutive.
The Company has adopted FASB guidance on stock-based compensation. Under FASB ASC 718-10-30-2, all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. The fair value of the options is calculated based off the Black Scholes valuation model (Note 10).
The Company has issued stock options to employees and non-employees. Stock options granted to non-employees for services or performance not yet rendered would be expensed over the service period or until the goals had been reached. The fair value calculation is recalculated at the end of every reporting period until the goal had been reached, when the expense has been wholly recognized. The stock options granted to non-employees during the year ended December 31, 2017 were for services already rendered in lieu of cash compensation and, as such, the service period has already passed and the entirety of the expense was recognized in the year.
Digital Currency Valuation
Digital currencies consist of cryptocurrency denominated assets and are included in current assets. Digital currencies are carried at their fair market value determined by an average spot rate of the most liquid digital currency exchanges. On an interim basis, we recognize decreases in the value of the assets caused by market declines. Subsequent increases in the value of these assets through market price recoveries during the same fiscal year are recognized in the later interim period, but may not exceed the total previously recognized decreases in value during the same year. Such unrealized gains or losses resulting from changes the value of the digital currency are recorded in Other Income, net in the consolidated statements of operations. Gains and losses realized upon sale of digital currencies are also recorded in Other Income, net in the consolidated statement of operations.
Fair market value is determined by taking the average spot rate from the most liquid digital currency exchanges. Digital currencies are measured using level one fair values, determined by taking the rate from market currency exchanges. Digital currency prices are affected by various forces including global supply and demand, interest rates, exchange rates, inflation or deflation and the global political and economic conditions. The Company may not be able to liquidate its inventory of digital currency at its desired price if required. A decline in the market prices for digital currencies could negatively impact the Company’s future operations. The digital currency market is still a new market and is highly volatile; historical prices are not necessarily indicative of future value; a significant change in the market prices for digital currencies would have a significant impact on the Company’s earnings and financial position.
The Company did not hold any digital currency at December 31, 2018 and December 31, 2017.
Revenue is recognized in accordance with FASB ASC Topic 606, Revenue Recognition. The Company recognizes revenue when persuasive evidence of an arrangement exists, the related services are rendered or delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. The Company has early adopted this policy.
In February 2016, the FASB issued ASU 2016-02, “Leases” which was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are in the process of completing our assessment and anticipate that ASU 2016-02 will have a material impact on our consolidated Balance Sheets, as we will record significant asset and liability balances in connection with our leased property. The Company is currently assessing the impact of this pronouncement.
Statement of Cash Flows (ASU 2016-18)
The Company adopted ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)” (ASU 2016-18), effective January 1, 2018. This update clarified that transfers between cash and restricted cash are not reported as cash flow activities in the statements of cash flows. As such, restricted cash amounts are included with cash and cash equivalents in the beginning-of-period and end-of-period total amounts on the statements of cash flows. The Company applied this update retrospectively, which resulted in an adjustment to the beginning-of-period and end-of-period total amounts on the condensed consolidated statement of cash flows for the year ended December 31, 2017 to include restricted cash balances from those periods. The adoption of this update had no material effect on our financial statements.
As at December 31, 2018, the Company had outstanding accounts receivable from a related party of $20,000 (2017 - $500,000).
The Company has convertible notes outstanding as at December 31, 2018 and are as follows:
Based upon the balances as of December 31, 2018, the convertible notes and the related interest will come due in the following years:
2019 $ - $ - $ -
2020 398,825 81,191 480,016
2021 71,500 25,168 96,668
2022 30,000 9,159 39,159
5. LOANS PAYABLE – RELATED PARTY
On March 13, 2018, the Company entered into a loan agreement with Michael Blum, our former Chief Financial Officer, whereby Mr. Blum advanced $100,000 to us. The principal amount of $100,000 was repayable on demand (but no longer than a term of six months) and bore simple interest at a rate of 12% per annum, which was payable upon repayment of the principal amount of $100,000. We were entitled to repay the whole or any portion of the principal amount of $100,000, plus accrued interest on the portion of the principal amount of $100,000 being repaid, at any time. The loan agreement provides that we must, within five days of the release of funds to us from our private placement of subscription receipts that closed in March 2018, repay the principal amount of $100,000 plus accrued interest in full. The loan agreement also provides that if we obtain any indebtedness on terms that are superior to the terms set forth in the loan agreement, then the terms under the loan agreement will be deemed to be amended, as of March 13, 2018, to match such superior terms in a manner and on terms as nearly equivalent as practicable to such superior terms. The loan was repaid on June 1, 2018 with interest of $2,630.
On March 27, 2018, we entered into a loan agreement with Greg Burnett, a member of our Advisory Board, whereby Mr. Burnett advanced $100,000 to us. The principal amount of $100,000 was repayable on demand (but no longer than a term of six months) and bore simple interest at a rate of 12% per annum, which was payable upon repayment of the principal amount of $100,000. We were entitled to repay the whole or any portion of the principal amount of $100,000, plus accrued interest on the portion of the principal amount of $100,000 being repaid, at any time. The loan agreement provides that we must, within five days of the release of funds to us from our private placement of subscription receipts that closed in March 2018, repay the principal amount of $100,000 plus accrued interest in full. The loan agreement also provides that if we obtain any indebtedness on terms that are superior to the terms set forth in the loan agreement, then the terms under the loan agreement will be deemed to be amended, as of March 27, 2018, to match such superior terms in a manner and on terms as nearly equivalent as practicable to such superior terms. The loan was repaid on June 4, 2018 with interest of $2,268.
On April 13, 2018, we entered into a loan agreement with a lender whereby the lender advanced $200,000 to us. The principal amount of $200,000 was repayable on demand (but no longer than a term of six months) and bore simple interest at a rate of 12% per annum, which was payable upon repayment of the principal amount of $200,000. We were entitled to repay the whole or any portion of the principal amount of $200,000, plus accrued interest on the portion of the principal amount of $200,000 being repaid, at any time. The loan was repaid on June 12, 2018 with interest of $3,090.
On July 9, 2018, we entered into a loan agreement with Ryde whereby we provided to Ryde a loan in the principal amount of $750,000. The principal amount of the loan bears interest at the rate of 2% per annum, provided, however, any amounts not paid when due will immediately commence accruing interest at the default rate of 10% per annum. The principal amount of the loan, any accrued and unpaid interest thereon, and any other amounts owing under the loan maters on the earlier of (i) March 9, 2019 and (ii) the closing by Ryde of a minimum of $3,000,000 in financings, in the aggregate, whether through the sale of KodakCoins, equity or otherwise. Ryde can prepay all outstanding amounts on 10 days’ notice to our company.
Also, as a condition for entering into the loan agreement, Ryde entered into the amendment no. 2, dated as of July 9, 2018, to the business service agreement dated December 29, 2017 as amended as of March 15, 2018, with our company. Pursuant to the amendment no. 2, our company and Ryde agreed that each party will be responsible for its respective expenses and agreed not to charge any out of pocket expenses to the other party unless expressly approved by the other party in advance in writing. As of December 31, 2018, interest of $7,192 has been accrued and earned.
On July 27, 2018, we entered into a loan agreement with Ryde whereby we provided to Ryde a loan in the principal amount of $500,000. This loan is unsecured, will mature on the earlier of eight (8) months from the date of issuance or the closing by Ryde of a minimum of $4,250,000 in financings, in the aggregate, whether through the sale of KodakCoins, equity, or otherwise and will bear interest at the rate of 12% interest per annum. However, any amounts not paid when due shall immediately commence accruing interest at the default rate of 18% per annum. As of December 31, 2018, interest of $23,474 has been accrued and earned.
The Company is in discussions with Ryde to amend the agreements as one of the notes has already matured and the second note is nearing maturity.
The following are the future minimum lease payments as at December 31, 2018:
2019 $ 198,000
Total $ 231,000
The Company’s office premises were provided to it at no cost by one of its directors until April 30, 2018. This director did not take any fees for serving as director during the year ended December 31, 2018.
In October 2017, the Company signed an agreement with a company in which the Company’s Chairman is a director, officer, and 30.5% shareholder, to provide strategic management services. The agreement is for a two-year term that will automatically be renewed unless: (i) mutually agreed to by Business Instincts Group Inc. (“BIG”) and us, or (ii) written notice of non-renewal is provided by the non-renewing party to the other at least 90 days prior to the end of the term. The agreement can be terminated by either party, without cause, at any time upon the provision of 90 days written notice to the other party. This agreement committed the Company to pay $35,000 a month and a signing bonus of $100,000 payable as follows: (i) $50,000 upon closing of up to $750,000 of equity financing and (ii) $50,000 payable on signing of the first client agreement which were paid in 2017 and 2018. On June 26, 2018, the agreement was amended to pay $105,000 a month as of June 1, 2018 and pay a bonus of $280,000. $140,000 of the bonus has been paid with the remaining portion to be paid upon signing of two additional clients. As of December 31, 2018, the Company had trade and other payables owing to this related party of $20,458.
2019 $ 1,050,000
Total $ 1,050,000
On December 4, 2018, the Company appointed Swapan Kakumanu as Chief Financial Officer. Previously, on October 9, 2017, the Company had signed an agreement with a company owned by Swapan Kakumanu to complete the accounting functions of the Company. As of December 31, 2018, the Company had trade and other payables owing to this related party of $14,000.
In connection with this private placement, the Company agreed with each subscriber who purchased shares to prepare and file a registration statement with respect to 50% of the shares issued with the United States Securities and Exchange Commission within 90 days following the closing of the private placement and agreed to use commercially reasonable efforts to have the registration statement declared effective by the United States Securities and Exchange Commission as soon as possible after filing. These securities were registered under the United States Securities Act of 1933, as amended, effective November 16, 2018.
On November 27, 2018, we completed private placements of an aggregate of 674,950 shares of common stock at a price of $1.00 per share for aggregate gross proceeds of $674,950. In connection with the closing of the private placements, we paid share issue costs of $18,485.
Pursuant to the sponsorship agreement dated October 30, 2018 with Mackie Research Capital Corporation, on December 4, 2018, we issued 30,000 shares of our common stock to Mackie Research Capital Corporation at a deemed price of $0.60 per share, which were payable upon the listing of shares of our common stock on the TSX Venture Exchange in Canada. We issued these shares to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933, as amended) in an offshore transaction relying on Regulation S and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
The Company has adopted the 2017 Equity Incentive Plan (“the Plan”) under which non-transferable options to purchase common shares of the Company may be granted to directors, officers, employees, or consultants of the Company. The terms of the Plan provide that our board of directors may grant options to acquire common shares of the Company at not less than 100% of the greater of: (i) the fair market value of the shares underlying the options on the grant date and (ii) the fair market value of the shares underlying the options on the date preceding the grant date at terms of up to ten years. No amounts are paid or payable by the recipient on receipt of the options. As of December 31, 2017, the maximum number of options available for grant was 3,000,000 shares. On January 22, 2018, the maximum number of options available for grant was increased to 3,900,000 shares. As of December 31, 2018, there are 3,400,000 stock options issued (December 31, 2017 – 2,900,000) and 500,000 stock options unissued (December 31, 2017 – 100,000).
On October 15, 2017, the Company granted a total of 1,400,000 stock options to its directors and officers. The stock options are exercisable at the exercise price of $0.10 per share for a period of ten years from the date of grant. The stock options are exercisable as follows:
The Company has also granted stock options to non-employees. These stock options were granted to consultants who have provided their services for cash compensation below cost, with the stock options providing additional compensation in lieu of cash.
On October 15, 2017, the Company granted a total of 1,325,000 stock options to its consultants. The stock options are exercisable at the exercise price of $0.10 per share for a period of ten years from the date of grant. Of the stock options granted, 800,000 are exercisable as follows:
The remaining 525,000 stock options are exercisable as follows:
On November 10, 2017, the Company granted a total of 175,000 stock options to its directors and officers. The stock options are exercisable at the exercise price of $0.10 per share for a period of ten years from the date of grant. The stock options are exercisable as follows:
Stock-based compensation expense recognized for the years ended December 31, 2018 and 2017 were $236,388 and $211,434, respectively. Stock options granted are valued at the fair value calculation based off the Black-Scholes valuation model. The weighted average assumptions used in the calculation are as follows:
Share price $ 0.60 $ 0.10
Exercise price $ 0.60-1.00 $ 0.10
Time to maturity (years) 2-10 10
Risk-free interest rate 2.61%-3.11 % 2.28%-2.40 %
Expected volatility 50.48%-192.68 % 191.12%-191.75 %
Number of Options Weighted Average Grant-Date Fair Value ($) Weighted Average Exercise Price ($) Weighted Average Remaining Life (Yrs)
Options outstanding, December 31, 2016 - - - -
Granted 2,900,000 0.10 0.10 8.8
Options outstanding, December 31, 2017 2,900,000 0.10 0.10 8.8
Granted 500,000 0.55 0.64 8.5
Options outstanding, December 31, 2018 3,400,000 0.17 0.18 8.8
Options exercisable, December 31, 2018 1,863,882 0.13 0.15 8.6
For the fiscal years 2018 and 2017, there was no provision for income taxes and deferred tax assets have been entirely offset by valuation allowances.
As of December 31, 2018 and 2017, the Company had net operating loss carry forwards of approximately $4,712,862 and $693,008, respectively. The carry forwards expire through the year 2037. The Company’s net operating loss carry forwards may be subject to annual limitations, which could reduce or defer the utilization of the losses as a result of an ownership change as defined in Section 382 of the Internal Revenue Code.
The Tax Cuts and Jobs Act was enacted on December 22, 2017 which reduced the U.S. corporate statutory tax rate from 35% to 21% beginning on January 1, 2018. We used 21% as an effective rate. The Company’s tax expense differs from the “expected” tax expense for Federal income tax purposes (computed by applying the United States Federal tax rate of 21% to loss before taxes (2017 – 21%)), as follows:
Net operating loss before taxes $ (4,019,854 ) $ (467,058 )
Federal income tax rate 21 % 21 %
Tax expense (benefit) at the statutory rate (844,169 ) (98,082 )
Tax effect of stock-based compensation (non-qualifying options) 49,641 44,401
Change in valuation allowance 794,528 53,681
The tax effects of the temporary differences between reportable financial statement income and taxable income are recognized as deferred tax assets and liabilities. The tax effect of significant components of the Company’s deferred tax assets at December 31, 2018 and 2017, respectively, are as follows:
Net operating loss carry forwards $ 940,060 $ 101,110
Total gross deferred tax assets 940,060 101,110
Less: Deferred tax asset valuation allowance (940,060 ) (101,110 )
The returns filed from the year 2014 going-forward are subject to examination by the IRS.
Fair value is an exit price representing the amount that would be received to sell an asset or aid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
A three-tier fair value hierarchy is established as a base for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
● Level 2: Observable inputs that reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
● Level 3: unobservable inputs reflecting our own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participants assumptions that are reasonably available.
Investment in related party $ 37 $ 37
On January 8, 2019, the holder of our $75,000 convertible note exercised their option to convert. Per the agreement, 750,000 shares were issued at a conversion rate of $0.10 per share. The accrued interest will be paid in cash.
On January 29, 2019, the Company announced FreedomCoin, a new regulatory compliant corporate currency. FreedomCoin will allow the users of GunBroker.com, the world’s largest online marketplace for hunting, outdoor sports, and firearm products with over 4.7 million customers and $600,000,000 in yearly transactions, the ability to pay for purchases using an easy to use digital wallet. GunBroker.com users can purchase FreedomCoins with U.S. dollars and store them in a personal, secure blockchain wallet until needed. Buyers and sellers can choose to accept and use FreedomCoins for transactions leveraging blockchain technology to replace the need for other costly and time-consuming payment options.
ICOx through its subsidiary ICOx USA, Inc. has been contracted by FreedomCoin, LLC, to design and build the FreedomCoin for use by the GunBroker.com Network. The FredomCoin is a stable coin pegged to the U.S. dollar. Users can buy FreedomCoins with U.S. dollars and store them in personal, secure blockchain wallet until needed. Users can quickly convert funds though an easy-to-use app. The platform provides simple, trusted transactions and is designed to meet the demands of the current regulatory environment through KYC (know your client) and AML (anti-money laundering) compliance and money transmitter licensing.
ICOx USA, Inc. will charge up to $2,000,000 for the design and development of the FreedomCoin. In addition, the parties agreed that FreedomCoin, LLC will issue warrants to ICOx USA, Inc. allowing it to acquire up to 20% of ownership of FreedomCoin, LLC for total consideration of US$1, which warrants may be exercised by ICOx USA at any time in the future.
13. SUBSEQUENT EVENTS (CONT’D)
On February 1, 2019, we, through our wholly-owned subsidiary, ICOx USA, Inc. (“ICOx USA”), entered into a master services agreement dated effective January 21, 2019 with FreedomCoin, LLC to develop a stable coin cryptocurrency named FreedomCoin to be used as a currency for purchasing goods and services.
On November 19, 2018, we incorporated a fully owned subsidiary sBetOne Inc. (“sBetOne”). sBetOne’s goal is to provide blockchain technology opportunities to the sports and entertainment industry by working with large and well established brands. During February 2019, sBetOne initiated a private placement offering (“Financing”) to issue Convertible Promissory Notes (“Notes”) The terms of the Notes are as follows – 1) 15% simple interest per annum, 2) up to $1.5 million of Financing 3) Closing – in one or more closings 4) Principle and interest payable in 18 months 5) Conversion – If sBetOne issues equity securities in a transaction or series of transactions resulting in aggregate gross proceeds of $2.5 million including the conversion of the Notes and any other indebtedness (a “Qualified Financing”), then the Notes and any accrued but unpaid interest thereon, will automatically convert into the equity securities issued in such financings, at a conversion price equal to 70% of the lowest per share price paid by the purchasers of such equity securities in such financings for the first $0.5 million Notes issued and to 75% of the lowest per share price for Notes issued over the first $0.5 million. To date sBetOne has received $325,000 through this Financing.
Our management conducted an evaluation, with the participation of our principal executive officer and our principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this annual report on Form 10-K. Based upon that evaluation, our principal executive officer and our principal financial officer concluded that as a result of the material weaknesses in our internal control over financial reporting described below, our disclosure controls and procedures were not effective as of December 31, 2018.
Our principal executive officer and our principal financial officer are responsible for establishing and maintaining adequate internal control over financial reporting. Our principal executive officer and our principal financial officer have assessed the effectiveness of our internal control over financial reporting as of the end of the period covered by this annual report on Form 10-K based on the criteria for effective internal control described Internal Control-Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission 2013. Based on this assessment, our principal executive officer and our principal financial officer have concluded our internal control over the financial reporting is not effective due to the following material weaknesses, which existed as of December 31, 2018:
● Financial Reporting Systems : We did not maintain a fully integrated financial reporting system throughout the period and as a result, extensive manual analysis, reconciliation and adjustments were required in order to produce financial statements for external reporting purposes; and
● Segregation of Duties : We do not currently have a sufficient complement of technical accounting and external reporting personal commensurate to support standalone external financial reporting under U.S. generally accepted accounting principles ( “U.S. GAAP” ) or SEC requirements. Specifically, we did not effectively segregate certain accounting duties due to the small size of our accounting staff, and inability to maintain a sufficient number of adequately trained personnel who have the knowledge and experience with U.S. GAAP and SEC reporting necessary to anticipate and identify risks critical to financial reporting and the closing process. In addition, there were inadequate reviews and approvals by our personnel of certain reconciliations and other processes in day-to-day operations due to the lack of a full complement of accounting staff.
We believe that our material weaknesses in internal control over financial reporting and our disclosure controls and procedures relate in part to the fact that we are an emerging business with limited personnel. Management and our board of directors believe that we must allocate additional human and financial resources to address these matters. Throughout the year, we have been continuously improving our monitoring of current reporting systems and our personnel. We intend to continue to make improvements in our internal control over financial reporting and disclosure controls and procedures until our material weaknesses are remediated.
Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In light of the material weaknesses described above, additional procedures were performed by our management to ensure that the consolidated financial statements included in this report were prepared in accordance with U.S. GAAP.
Changes in Internal Control over Financial Reporting during the Fourth Quarter of 2018
Except as disclosed below, during the fourth quarter ended December 31, 2018, there were no changes to our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Bruce Elliott President 55 October 15, 2017
Michael Blum Chief Operating Officer, Secretary, Treasurer and Director 42 October 9, 2017
Swapan Kakumanu Chief Financial Officer 49 December 4, 2018
Cameron Chell Chairman and Director 50 August 21, 2017
James P. Geiskopf Lead Director 59 August 28, 2014
Edmund C. Moy Director 61 February 9, 2018
James M. Carter Director 73 May 17, 2018
Alphonso Jackson Director 73 June 22, 2018
On October 15, 2017, Bruce Elliott was appointed as the president of our company. From April 2012 to October 2017, Mr. Elliott served as director of Boston Limited, Isle of Man, a regulated fiduciary and corporate service provider. From January 2013 to October 2017, Mr. Elliott served as director of Boston Ventures Limited, Isle of Man. From December 2017 to February 2018, Mr. Elliott served as the chief marketing officer of Ryde.
Mr. Elliott is a 25-year eCommerce veteran having held senior leadership roles in privately held and listed companies in online payments, gaming, venture capital and trust and corporate service sectors in North America and Europe. Mr. Elliott is a recognized international conference speaker on entrepreneurship, venture capital and emerging technology trends and has also led venture capital investments into clean tech, gaming, blockchain and fintech companies. Career highlights include Executive Vice President Marketing and Sales of AIM listed Neteller plc, Director of Boston Group Limited and Managing Director of Boston Ventures Limited.
On October 9, 2017, Michael Blum was appointed as the chief financial officer, secretary, treasurer and a director of our company. On December 4, 2018, we removed Michael Blum as our chief financial officer in order to accommodate the appointment of Swapan Kakumanu as our chief financial officer in connection with our application to list our common stock on the TSX Venture Exchange.
On December 4, 2018, Swapan Kakumanu was appointed as the chief financial officer of our company. Mr. Kakumanu had been the controller of our company since October 2017.
Mr. Kakumanu has over 20 years of senior finance and operations experience. He has served at the executive levels in both public and private companies including senior roles as president, chief executive officer, chief financial officer and company secretary, as well as director roles on boards. Mr. Kakumanu has extensive experience in public company reporting, investor relations, ERP implementations, mergers and acquisitions, internal controls and general overall financial, strategic and operations management. His diverse industry experience spans commercializin