NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2018 AND 2017
(UNAUDITED)
NOTE
1 – ABOUT THE COMPANY
Organization
and Capitalization of the Company
The
Company was organized August 26, 2010 (Date of Inception) under the laws of the State of Nevada, as JA Energy. The Company was
incorporated as a subsidiary of Reshoot Production Company, a Nevada corporation. Reshoot Production Company was incorporated
October 31, 2007. In November 2014, Reshoot dividended its shares of JA Energy to the then stockholders of Reshoot. On November
21, 2016, the Company reincorporated in Delaware under the name UBI Blockchain Internet Ltd.
On
September 15, 2016, the Company, with the approval of the Board of Directors agreed to issue 30,000,000 shares of unregistered
restricted Class A Common Stock, 6,000,000 shares of unregistered restricted Class B Voting Common Stock, which carries a voting
weight equal to ten (10) Common Shares, and 40,000,000 shares of unregistered restricted Class C Common Stock to UBI Blockchain
Internet, LTD (“UBI Hong Kong”), a Hong Kong company, or assigns in exchange for $200,000. On September 26, 2016,
pursuant to NRS 78.1955, the Board of Directors approved the filing of a Certificate of Designation with the Nevada Secretary
of State to designate Class A, B and C common shares, par value $0.001. Concurrently with the filing of this Certificate of Designation,
all Common Stock issued and outstanding became Class A Common Stock. Class B Common Stock carries a voting weight equal to ten
(10) Common Shares. The Class B shares can be converted into fully paid and non-assessable Common Shares, on a one-to-one basis,
at the option of the holder at any time upon written notice to the Company and its authorized transfer agent. Class C Common Stock
has no voting rights. Upon the conversion or other exchange of all outstanding shares of Class B Common Stock into or for shares
of Class A Common Stock, all shares of Class C Common Stock shall be automatically, without further action by any holder thereof,
converted into an identical number of fully paid and non-assessable shares of Class A Common Stock on the date fixed therefore
by the Board of Directors that is no less than sixty-one days and no more than one hundred and eighty days following such conversion
or exchange.
On
October 7, 2016, the 30,000,000 Class A shares and 6,000,000 Class B shares were issued.
On
November 21, 2016, the Company reincorporated in Delaware under the name UBI Blockchain Internet Ltd. and increased the number
of authorized shares from 75,000,000 to 200,000,000 shares consisting of 130,000,000 authorized shares of Class A Common Stock,
6,000,000 authorized shares of Class B Common Stock and 64,000,000 authorized shares of Class C Common Stock. On March 1, 2017,
the 40,000,000 shares of Class C common stock were issued. All of the preceding shares were issued in reliance on the exemption
under Section 4(2) of the Securities Act of 1933, as amended (the “Act”) and were issued under Regulation S to one
(1) foreign entity who attested it is an accredited investor who is not a citizen or a resident of the USA.
On
January 3, 2017, the Company appointed four new directors, accepted the resignations of its two former directors and appointed
Tony Liu (who controls UBI Hong Kong) as Chief Executive Officer of the Company.
Commencing
in the three months ended February 28, 2017, the Company started research activities in Hong Kong relating to “blockchain”
technology planned to be provided for future customers.
On
March 1, 2017, the Company issued 40,000,000 shares of Class C common stock to our chief executive officer Tony Liu pursuant to
the September 15, 2016 agreement (see above).
On
April 3, 2017, the Company issued a total of 8.400,000 shares of Class C common stock to a total of 45 contractor employees and
nonemployees (see Note 7).
On
May 1, 2017, the Company issued 500,000 restricted shares of Class A common stock to an independent consultant for consulting
services to be performed for the Company (see Note 7).
On
May 24, 2017, the Company increased the number of authorized common shares from 200,000,000 shares to 2,000,000,000 shares (1,000,000,000
shares of Class A common stock, 500,000,000 shares of Class B common stock, and 500,000,000 shares of Class C common stock).
On
August 29, 2017, upon the approval of the acquisition by the related PRC authorities, the Company issued a total of 25,000,000
shares of Class C common stock to shareholders of Shenzhen Nova E-commerce, Ltd. (“Nova”) in exchange for control
of the business of Nova (see Notes 4 and 7). On April 7, 2018, Nova changed its name to UBI Shenzhen Cross Border E- Commerce
Co., Ltd. (“UBI Shenzhen”).
Current
Company Operations
UBI
Blockchain Internet Ltd. (“UBI Delaware”) was reincorporated in Delaware on November 21, 2016 for the purpose of entering
into the blockchain technology business. UBI Blockchain Internet, Ltd (“UBI Hong Kong”) was organized in the Hong
Kong Special Administrative Region (the “HKSAR”) in September 2016 to facilitate local financing participations, UBI
Delaware opened a bank account at Abacus Federal Savings Bank in New York City. This bank account is funded by Tony Liu and is
used to pay Company invoices from the U.S. UBI Hong Kong has a bank account at China Citic Bank International in Hong Kong, which
is also funded by Tony Liu; this account makes disbursements relating to UBI Delaware operations in Hong Kong (such as payroll,
rent, and other office expenses). UBI Hong Kong is owned and controlled by Tony Liu, CEO of UBI Delaware. UBI Hong Kong owns 30,000,000
(97%) of the 30,799,046 issued and outstanding shares of UBI Delaware Class A common stock at May 31, 2018. UBI Hong Kong has
no other assets and no business operations of its own.
In
December 2016, UBI Delaware engaged the services of 8 full time employees to principally work in its blockchain technology business.
In January 2018, UBI Hong Kong executed an agreement with the HKSAR and The Hong Kong Polytechnic University to complete a project
related to blockchain technology (see Note 12). To date, UBI Delaware has not received or earned any revenues in its blockchain
technology business.
NOTE
2 - GOING CONCERN
The
accompanying financial statements have been prepared in accordance with generally accepted accounting principles applicable to
a going concern which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal
course of business. At May 31, 2018, the Company had cash of $55,245 and current liabilities of $1,732,425. For the nine months
ended May 31, 2018, the Company incurred a net loss of $2,506,613. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern.
The
Company’s ability to continue as a going concern is contingent upon the successful completion of additional financing arrangements
and its ability to achieve and maintain profitable operations. Management plans to raise equity capital to finance the operating
and capital requirements of the Company. As described above, there was a change in control of the Company in October 2016.
The
accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded
asset amounts, or amounts and classification of liabilities that might result from the outcome of this uncertainty.
NOTE
3 - SIGNIFICANT ACCOUNTING POLICIES
The
relevant accounting policies are listed below.
Interim
Financial Statements
The
consolidated balance sheet for the Company at the end of the preceding fiscal year has been derived from the audited balance sheet
and notes thereto contained in the Company’s annual report on Form 10-K for the fiscal year ended August 31, 2017 and is
presented herein for comparative purposes. All other financial statements are unaudited. In the opinion of management, all adjustments,
which include only normal recurring adjustments necessary to present fairly the financial position, results of operations and
cash flows for all period presented, have been made. The results of operations for the interim periods presented are not necessarily
indicative of the operating results for the respective full years.
Certain
footnote disclosures normally included in the financial statements prepared in accordance with accounting principles
generally accepted in the United States (“US GAAP”) have been omitted in accordance with the published rules and
regulations of the Securities and Exchange Commission (“SEC”). These financial statements should be read in
conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for
the fiscal year ended August 31, 2017 filed with the SEC on December 7, 2017, for which notes to the financial statements
as of August 31, 2017 were enhanced to include disclosures concerning “Current Company Operations” (as discussed
in Note 1 above) and “Right of Rescission Contingency” (as discussed in Note 12 in below), pursuant to Post
Effective Amendment Nos. 2, 4, and 5 to Form S-1 respectively filed on April 4, 2018, May 11, 2018, and June 27,
2018.
Basis
of Accounting
The
basis is United States generally accepted accounting principles.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of UBI Blockchain Internet Ltd. and its wholly owned subsidiary
UBI Shenzhen Cross Border E-Commerce Co., Ltd, (“UBI Shenzhen”), formerly Shenzhen Nova E-commerce, Ltd. (“Nova”)
from the date of acquisition of Nova on August 29, 2017 (see Note 4). All intercompany accounts and transactions have been eliminated
in consolidation.
Earnings
per Share
The
basic earnings (loss) per share of Class A, Class B and Class C common stock is calculated by dividing the Company’s net
income (loss) available to Class A, Class B and Class C common shareholders by the weighted average number of Class A, Class B
and Class C common shares issued and outstanding during the period. The diluted earnings (loss) per share of Class A, Class B
and Class C common stock is calculated by dividing the Company’s net income (loss) available to Class A, Class B and Class
C common shareholders by the diluted weighted average number of Class A, Class B and Class C shares outstanding during the period.
The diluted weighted average number of Class A, Class B and Class C shares outstanding is the basic weighted average number of
Class A, Class B, and Class C shares adjusted as of the first of the period for any potentially dilutive debt or equity (none
for the periods presented).
Cash
and Cash Equivalents
The
Company considers all short-term investments with a maturity of three months or less at the date of purchase to be cash and cash
equivalents.
Use
of Estimates
In
preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from
those estimates.
Inventory
Inventory,
consisting of finished goods purchased from third parties, are stated at the lower of cost (first-in, first-out method) or market.
Property
and Equipment
Property
and equipment is stated at cost less accumulated depreciation. Depreciation is calculated on the straight-line basis over the
estimated useful lives of the respective assets. Expenditures for repairs and maintenance are expensed as incurred.
Intangible
Assets
Intangible
assets, including website development costs and software acquired to be marketed, are carried at cost less accumulated
amortization. Intangible assets are amortized using the straight-line method over the estimated economic lives of the respective
assets (5 years for website development costs and 5 years for the software acquired to be marketed).
Software
development costs include payments made to independent software developers under development agreements, as well as direct costs
incurred for internally developed products. Software development costs are capitalized once technological feasibility of a product
is established and such costs are determined to be recoverable. Technological feasibility of a product requires both technical
design documentation and game design documentation, or the completed and tested product design and a working model. Significant
management judgments and estimates are utilized in the assessment of when technological feasibility is established and the evaluation
is performed on a product-by-product basis. For products where proven technology exists, this may occur early in the development
cycle. Software development costs related to hosted service revenue arrangements are capitalized after the preliminary project
phase is complete and it is probable that the project will be completed and the software will be used to perform the function
intended. Prior to a product’s release, if and when we believe capitalized costs are not recoverable, we expense the amounts.
Capitalized costs for products that are canceled or are expected to be abandoned are expensed in the period of cancellation. Amounts
related to software development which are not capitalized are charged immediately to “Research and development”.
Foreign
Currency Translation
The
reporting currency and functional currency of the Company is the United States Dollar.
The
functional currency of UBI Shenzhen is the Chinese Renminbi (“RMB”). Assets and liabilities of UBI Shenzhen are translated
into United States dollars at period-end exchange rates ($1.00 = 6.4066 RMB at May 31, 2018 and $1.00=6.5876 RMB at August 31,
2017). UBI Shenzhen revenues and expenses are translated into United States dollars at weighted average exchange rates ($1.00
= 6.333 RMB for the three months ended May 31, 2018 and $1.00=6.528 RMB for the nine months ended May 31, 2018). Resulting translation
adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity.
Transactions
denominated in currencies other than the functional currency (principally the Hong Kong Dollar) are translated at the exchange
rates prevailing at the dates of the transactions. Exchange gains and losses, which were not significant for the three and nine
months ended May 31, 2018 and 2017 were reflected in income.
Income
Taxes
The
provision for income taxes is the total of the current taxes payable and the net of the change in the deferred income taxes. Provision
is made for the deferred income taxes where differences exist between the period in which transactions affect current taxable
income and the period in which they enter into the determination of net income in the financial statements.
Revenue
recognition
The
Company recognizes revenue from services and product sales once all the following criteria for revenue recognition have been met:
pervasive evidence that an agreement exists; the services or products have been delivered; the fee is fixed and determinable and
not subject to refund or adjustment; and collection of the amount due is reasonably assured. For the periods presented, the Company
had no revenues.
Stock-Based
Compensation
The
Company accounts for employee stock-based compensation in accordance with the guidance of FASB ASC Topic 718, “Compensation
- Stock Compensation,” which requires all share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values. The Company does not have an employee stock option plan.
The
Company follows ASC topic 505-50, formerly EITF 96-18, “
Accounting for Equity Instruments that are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling Goods and Services
,” for stock issued to consultants and other
non-employees. In accordance with ACS Topic 505-50, the stock issued as compensation for services provided to the Company are
accounted for based upon the fair value of the services provided or the estimated fair market value of the stock, whichever can
be more clearly determined. The fair value of the equity instrument is charged directly to expense over the period during which
services are rendered.
Year
end
The
Company’s fiscal year-end is August 31.
Recent
Accounting Pronouncements
Certain
accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective and
therefore have not yet been adopted by the Company. The impact on the Company’s financial position and results of operations
form adoption of these standards is not expected to be material.
NOTE
4 – ACQUISITION OF UBI SHENZHEN CROSS BORDER E-COMMERCE CO., LTD (FORMERLY NOVA E-COMMERCE, LTD.)
On
August 29, 2017, pursuant to an Acquisition Agreement dated May 16, 2017, the Company acquired 100% ownership of UBI Shenzhen
Cross Border E-Commerce Co., Ltd. (“UBI Shenzhen”), formerly Shenzhen Nova E-commerce, Ltd. (“Nova”),
in exchange for 25,000,000 shares of Company Class C common stock. UBI Shenzhen is a Shenzhen Chinese corporation which was incorporated
on May 26, 2016. UBI Shenzhen plans on operating an online store in China selling a wide range of products.
The
acquisition has been accounted for as a recapitalization transaction in the accompanying consolidated financial statements. Accordingly,
the financial position and results of operations of UBI Shenzhen prior to the August 29, 2017 date of acquisition have been excluded
from the accompanying consolidated financial statements.
The
carrying values of the assets and liabilities of UBI Shenzhen at the August 29, 2017 date of acquisition consisted of:
Cash
|
|
$
|
-
|
|
Office equipment, net
|
|
|
13,628
|
|
Website development costs
|
|
|
92,035
|
|
Total assets
|
|
|
105,663
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
24,651
|
|
Due to related party
|
|
|
135,865
|
|
Total liabilities
|
|
|
160,516
|
|
|
|
|
|
|
Excess of liabilities over assets
|
|
$
|
54,853
|
|
The
following proforma information (unaudited) summarizes the results of operations for the three and nine months ended May 31, 2017
as if UBI Shenzhen was acquired on May 26, 2016 (UBI Shenzhen’s date of inception). The pro forma information is not necessarily
indicative of the results that would have been reported had the transaction actually occurred on May 26, 2016, not is it intended
to project results of operations for any future period.
|
|
Three Months
Ended
May 31, 2017
|
|
|
Nine Months
Ended
May 31, 2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Employee compensation (including stock - based compensation of $72,500 and $120,833, respectively)
|
|
|
211,880
|
|
|
|
433,807
|
|
Consulting fees (including stock - based compensation of $409,167 and $640,834, respectively)
|
|
|
409,167
|
|
|
|
665,834
|
|
Professional fees
|
|
|
53,652
|
|
|
|
93,168
|
|
Marketing
|
|
|
57,762
|
|
|
|
173,286
|
|
Occupancy
|
|
|
18,580
|
|
|
|
55,741
|
|
Other
|
|
|
15,714
|
|
|
|
43,083
|
|
Total operating expenses
|
|
|
766,755
|
|
|
|
1,464,919
|
|
Loss from Operations
|
|
|
(766,755
|
)
|
|
|
(1,464,919
|
)
|
Other Income (expenses):
|
|
|
|
|
|
|
|
|
Gain on settlement of accounts payable and accrued liabilities
|
|
|
-
|
|
|
|
47,003
|
|
Gain on settlement of bank overdraft
|
|
|
-
|
|
|
|
572
|
|
Net Loss
|
|
$
|
(766,755
|
)
|
|
$
|
(1,417,344
|
)
|
Net Loss per share of Class A, Class B, and Class C common stock - basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
Weighted average number of Class A, Class B, and Class C Common Shares outstanding - basic and diluted
|
|
|
100,635,494
|
|
|
|
66,287,304
|
|
NOTE
5 – PREPAID STOCK BASED SALARIES AND CONSULTING FEES
Prepaid
stock-based salaries and consulting fees at May 31, 2018 and August 31, 2017 consist of:
|
|
Fair value of stock issuance (Note 6)
|
|
|
Prepaid balance at May 31, 2018
|
|
|
Prepaid balance at August 31, 2017
|
|
1,450,000 shares of Class C common stock issued to 7 employees on April 3, 2017 pursuant
to service agreements between UBI Delaware and the respective employees with a service term of one year which expired
December 31, 2017
|
|
$
|
290,000
|
|
|
$
|
-
|
|
|
$
|
96,667
|
|
6,950,000 shares of Class C common stock issued to 38 consultants on April 3, 2017 pursuant to
service agreements between UBI Delaware and the respective consultants with a service term of one year which expired
December 31, 2017
|
|
|
1,390,000
|
|
|
|
-
|
|
|
|
463,333
|
|
500,000 shares of Class A common stock issued to a consultant on May 1, 2017 pursuant to Consulting Agreement dated April 28, 2017 between UBI Delaware and the respective consultant with a service term of two years expiring April 30, 2019
|
|
|
1,480,000
|
|
|
|
678,333
|
|
|
|
1,233,333
|
|
Total
|
|
$
|
3,160,000
|
|
|
|
678,333
|
|
|
|
1,793,333
|
|
Current portion
|
|
|
|
|
|
|
(678,333
|
)
|
|
|
(1,300,000
|
)
|
Non-current portion
|
|
|
|
|
|
$
|
-
|
|
|
$
|
493,333
|
|
At
May 31, 2018, there was $678,333 of unrecognized compensation costs related to shares of Class A common stock issued to a consultant
pursuant to a Consulting Agreement dated April 28, 2017 with a service term of two years expiring April 30, 2019. These costs
are expected to be recognized as expense in the three months ended August 31, 2018 ($185,000) and in the year ending August 31,
2019 ($493,333).
NOTE
6 – INTANGIBLE ASSETS
Intangible
assets at May 31, 2018 and August 31, 2017 consist of:
|
|
May 31, 2018
|
|
|
August 31, 2017
|
|
Website development costs
|
|
$
|
94,652
|
|
|
$
|
92,035
|
|
Accumulated amortization
|
|
|
(4,149
|
)
|
|
|
-
|
|
Website development costs, net
|
|
|
90,503
|
|
|
|
92,035
|
|
|
|
|
|
|
|
|
|
|
Software acquired to be marketed
|
|
|
20,292
|
|
|
|
-
|
|
Accumulated amortization
|
|
|
-
|
|
|
|
-
|
|
Software acquired to be marketed, net
|
|
|
20,292
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets - net
|
|
$
|
110,795
|
|
|
$
|
92,035
|
|
At
May 31, 2018, the expected future amortization expense of the intangible assets was:
|
|
Amount
|
|
Three months ending August 31, 2018
|
|
$
|
4,733
|
|
Year ending August 31, 2019
|
|
|
22,988
|
|
Year ending August 31, 2020
|
|
|
22,988
|
|
Year ending August 31, 2021
|
|
|
22,988
|
|
Year ending August 31, 2022
|
|
|
22,988
|
|
Year ending August 31, 2023
|
|
|
14,110
|
|
Total
|
|
$
|
110,795
|
|
Website
Development Costs
In
January 2018, UBI Shenzhen changed the domain name for its website from
www.oyamall.com
to
www.hihealth8.com
. The
change was made to, among other things, correct certain technical problems which we experienced in testing potential transactions
involving Chinese currency. UBI Shenzhen’s website became operational on March 12, 2018.
UBI
Shenzhen has yet to generate any revenues, and management does not expect UBI Shenzhen will generate any revenues for the next
few months, until such time as the Company actively markets its website. In the meantime, in order for UBI Shenzhen to begin its
business operations, UBI Shenzhen will be selling third party products. In the future, management plans to develop its own products
for sale. UBI Shenzhen became a wholly owned subsidiary of the Company. It was a management decision to acquire UBI Shenzhen for
primarily two business reasons: 1) as a separate subsidiary, once UBI Shenzhen is fully operational, management anticipates it
should generate revenues and profit for the Company; and 2) this acquisition provides a test model to utilize the blockchain technology
the Company is developing to track drug products sold by UBI Shenzhen. As a test model, this will allow the Company to see if
the products sold through its website are substituted with counterfeit products before they reach the final consumer. In other
words, products sold through a third-party consumer will be tracked using the Company’s blockchain technology to see if
there is a break in the supply chain. This will take place once the Company develops its blockchain digital tracking system. The
Company will be able to monitor UBI Shenzhen shipments to the final consumer, to determine if there has been any tampering with
shipments in the supply chain.
UBI
Shenzhen employs two people principally involved in website related creation/maintenance activities. UBI Shenzhen’s expenses
are being funded by loans from Tony Liu.
Software
Acquired to be Marketed
On
November 24, 2017, January 17, 2018 and March 15, 2018, UBI Shenzhen executed agreements with a third-party vendor to produce customized game software called Farmer Game for a total of RMB 285,000 ($44,485 using the May 31, 2018 exchange
rate). UBI Shenzhen expects to use the Farmer Game to attract more visitors to its website and to potentially earn revenues from
users’ use of game points to purchase products sold on the website. Farmer Game is expected to be introduced to website
visitors in August 2018.
Through
May 31, 2018, UBI Shenzhen has paid the Farmer Game vendor a total of RMB 160,000 ($24,974), of which RMB 30,000 ($4,682) has
been expensed as “Research and development” and RBM 130,000 ($20,992) has been capitalized. On June 25, 2018,
UBI Shenzhen paid RMB 105,000 ($16,389) of the remaining contract balance of RMB 125,000 ($19,511) due the vendor.
NOTE
7 - STOCKHOLDERS’ EQUITY
Pursuant
to the September 15, 2016 change in control agreement (see Note 1), a representative of UBI paid into an attorney trust account
$150,000 on September 14, 2016 and $67,500 on October 11, 2016, for a total of $217,500. The $217,500 consisted of $200,000 for
the newly issued shares of Class A, Class B Voting, and Class C Common Stock and $17,500 for the payment of specific expenses.
Starting
in December 2016, the Company engaged the services of a total of 45 employees and non-employees to perform certain marketing,
research and development and investor relations services. The related agreements, which were executed in March 2017, provided
for the contractors to work for the Company for terms ranging from September 2016 to January 1, 2017 to December 31, 2017 for
compensation including the issuance of a total of 8,400,000 shares of Class C common stock (which occurred April 3, 2017). Of
the 8,400,000 shares, 5,000,000 shares were issued to Star Bright International Investment Enterprises, 100,000 shares were issued
to the Company’s chief financial officer and 500,000 shares were issued to an independent Director of the Company.
The
$1,680,000 estimated fair value of the 8,400,000 shares of Class C common stock (using a price of $0.20 per share) was recorded
as prepaid expenses and was expensed evenly over the year ended December 31, 2017 (see Note 5). For the nine months ended May
31, 2018, we recognized stock-based salaries expense of $96,668 and recognized stock-based consulting fees expense of $463,333
from these agreements.
On
May 1, 2017, the Company issued 500,000 restricted shares of Class A common stock to a consultant pursuant to a Consulting Agreement
dated April 28, 2017 with a service term of two years expiring April 30, 2019. The $1,480,000 estimated fair value of the 500,000
shares of Class A common stock (using a price of $2.96 per share based on a $3.95 closing trading price on April 28, 2017 less
a 25% restricted stock discount) was recorded as a prepaid expense and is being expensed evenly over the 2-year service period
expiring April 30, 2019. For the nine months ended May 31, 2018, we recognized stock-based consulting fees expense of $555,000
from this agreement.
On
August 29, 2017, upon the regulatory approval of the transfer of Nova’s Hong Kong business license to the Company, the Company
acquired 100% ownership of Nova in exchange for the Company’s issuance of a total of 25,000,000 shares of Class C common
stock to the 130 owners of Nova.
On
October 2, 2017, the Company issued a total of 82,000 restricted shares of Class A common stock to 4 individuals associated with
the Company’s law firm for legal services rendered. The $335,872 estimated fair value of the 82,000 shares of Class A common
stock (using a price of $4.10 per share based on a $5.12 closing trading price on October 2, 2017 less a 20% restricted stock
discount) was expensed in the three months ended November 30, 2017.
On
December 26, 2017, the Company’s Board of Directors approved a 3 for 1 common stock dividend of the Company’s issued
and outstanding Class A and Class B common stock. On January 2, 2018, the Company was advised by FINRA to resubmit its request
as a forward stock split instead of a stock dividend.
On
January 4, 2018, the Company’s Board of Directors approved a 4 for 1 forward stock split for holders of record on January
10, 2018 of the Company’s issued and outstanding shares of Class A and Class B common stock. For each share of Class A common
stock held, stockholders were to receive an additional 3 shares of Class A common stock, For each share of Class B common stock
held, stockholders were to receive an additional 3 shares of Class B common stock. On January 18, 2018, the Company’s Board
of Directors decided to cancel the proposed 4-for-1 forward stock split.
On
January 5, 2018, the Securities and Exchange Commission announced the temporary suspension of trading in the Company’s securities
from January 8, 2018 to January 22, 2018 because of (i) questions regarding the accuracy of assertions, since at least September
2017, by the Company in filings with the Commission regarding the Company’s business operations; and (ii) concerns about
recent, unusual and unexplained market activity in the Company’s Class A common stock since at least November 2017.
NOTE
8 - RELATED PARTY TRANSACTIONS
As
described in Note 10, the Company was obligated to Mr. Mark DeStefano (“DeStefano”) for a $50,000 note payable and
$26,981 for payments made on behalf of the Company. Subsequently, Mr. DeStefano advanced $1,285 to the Company. During the three
months ended November 30, 2016 the Company satisfied these obligations. DeStefano had voting control of the Company from June
2014 (see Note 10) to October 24, 2016 (when the Company purchased from DeStefano the 1,000,000 shares of Preferred Stock for
$33,735) through his ownership of the 1,000,000 shares of Voting Preferred Stock issued and outstanding (equivalent to 50,000,000
votes).
For
the three months ended November 30, 2016, consulting fees paid to former related parties consists of a total of $15,000 paid to
the two then directors of the Company and $10,000 paid to an entity controlled by DeStefano.
Commencing
March 2017, the Company has been using office space provided by an affiliate of UBI Blockchain Internet, LTD. (Hong Kong) (“UBI
Hong Kong”) at a monthly rent of 22,100 Hong Kong Dollars (approximately $2,816 at the May 31, 2018 exchange rate) per month.
For expediency reasons, the Company also uses bank accounts in the name of UBI Hong Kong to collect cash receipts and expend cash
disbursements relating to Company operations. UBI Hong Kong owns 30,000,000 shares of the Company’s Class A common stock.
In
the nine months ended May 31, 2018, Tony Liu, chief executive officer of the Company, advanced or paid a total of $1,047,943 of
expenditures on behalf of the Company. As of May 31, 2018, the total amount due to Tony Liu was $1,555,341. The amount due to
Tony Liu for these expenditures is interest bearing at a rate of 7% per annum. $24,024 and $52,869 interest expense was accrued
for the three and nine months ended May 31, 2018, respectively. As of May 31, 2018, accrued interest amounted to $63,201. The
advances and related accrued interest are due on demand.
NOTE
9 - PROVISION FOR INCOME TAXES
The
Company accounts for income taxes under FASB Accounting Standard Codification ASC 740 “Income Taxes”. ASC 740 requires
use of the liability method. ASC 740 provides that deferred tax assets and liabilities are recorded based on the differences between
the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary
differences. Deferred tax assets and liabilities at the end of each period are determined using the currently enacted tax rates
applied to taxable income in the periods in which the deferred tax assets and liabilities are expected to be settled or realized.
As
of May 31, 2018, and August 31, 2017, the Company had net operating loss carry forwards of approximately $2,500,000 and $1,444,000,
respectively, as follows:
Tax Jurisdiction
|
|
May 31, 2018
|
|
|
August 31, 2017
|
|
United States
|
|
$
|
1,225,000
|
|
|
$
|
1,126,000
|
|
Hong Kong
|
|
|
947,000
|
|
|
|
2,000
|
|
China (UBI Shenzhen)
|
|
|
328,000
|
|
|
|
316,000
|
|
Total
|
|
$
|
2,500,000
|
|
|
$
|
1,444,000
|
|
United
States net operating losses prior to 2018 may be carried forward to reduce future years taxable income for 20 years; United States
net operating losses after 2017 may be carried forward indefinitely. Hong Kong net operating losses may be carried forward indefinitely.
China net operating losses may be carried forward for 5 years. Future tax benefits which may arise as a result of these losses
have not been recognized in these financial statements as their realization has not been determined likely to occur. Also, due
to the change in control, there are annual limitations on future United States net operating loss carry forward deductions.
At
May 31, 2018 and August 31, 2017, deferred tax assets consisted of:
|
|
May 31, 2018
|
|
|
August 31, 2017
|
|
Net operating loss carry forwards
|
|
$
|
495,505
|
|
|
$
|
473,511
|
|
Valuation allowance
|
|
|
(495,505
|
)
|
|
|
(473,511
|
)
|
Deferred tax assets - net
|
|
$
|
-
|
|
|
$
|
-
|
|
As
a result of the tax Cuts and Jobs Act enacted on December 22, 2017, the United States corporate income tax rate was reduced from
35% to 21% effective January 1, 2018. Accordingly, we reduced our deferred income tax asset relating to our United States net
operating loss carryforward (and the valuation allowance thereon) by approximately $166,000 on December 31, 2017.
All
tax years remain subject to examination by the respective tax authorities.
NOTE
10 - NOTES PAYABLE – Former Related Party
On
April 4, 2014, the Company issued a One-year Promissory Note (“the Note”) in the amount of $50,000 to Mark DeStefano
(“DeStefano) (see Note 8). The Note bore interest at 12% percent per annum with interest due each month. In the event that
interest was not paid within three days from the time it was due the Note was to be considered in default and was to be fully
due and payable. Additional consideration for the Note included the Chief Executive Officer of the Company giving the note holder
his voting proxy for all of the shares he held with the exception of voting on a tender offer or a sale of the Company’s
assets. As of May 8, 2014, the Note was in default.
On
May 5, 2014, the Company issued a second One-Year Promissory Note (“the Second Note”) in the amount of $20,000 to
the same stockholder noted above. The Second Note was issued with the restriction that the funds be used specifically to pay the
Company’s Patent Counsel for fees to finalize certain patent filings and was secured by all patents and patent applications
held by the Company. The Second Note was to bear interest at 12% percent per annum with interest due each month. In the event
that interest was not paid within three days from the time it was due, the Second Note would be considered in default and would
be fully due and payable.
On
June 6, 2014, the Company received notices that it was in default of the two Promissory Notes described above. Rather than default
on the Notes, the Company issued 1,000,000 shares of $0.001 par value Voting Preferred Stock in exchange for Notes Payable totaling
$20,000 plus forgiveness of interest totaling $1,900. Additionally, the Company agreed to designate with the State of Nevada Secretary
of State that each share of preferred carries the voting power of 50 common shares. Finally, the shareholder agreed to cancel
the shares upon full payment of the $50,000 Note, without accrued interest and the sale of five units of the MDU.
In
October 2016, the $50,000 note payable was satisfied.
NOTE
11 – OTHER INCOME AND EXPENSE
During
the three months ended November 30, 2016, the Company settled a bank overdraft of $942 for $370. This settlement resulted in income
of $572.
On
January 27, 2017, the Company entered into a Settlement Agreement with a former landlord satisfying a $35,868 accrued liability
for $4,100. This settlement, along with an arrangement with another vendor, resulted in other income of $47,003.
NOTE
12 – COMMITMENTS AND CONTINGENCIES
The
Hong Kong Polytechnic University Project
On
January 10, 2018, the Company announced that the Hong Kong Special Administrative Region (“HKSAR”) approved in principle
a grant of up to HK$3,018,750 (approximately $385,000) to assist in financing a project entitled “Blockchain-Based Food
and Drug Counterfeit Detection and Regulatory System” (“the HKPU Project”) to be jointly developed by UBI Hong
Kong and The Hong Kong Polytechnic University (“HKPU”). The related agreement also provides for UBI Hong Kong to contribute
up to HK $3,018,750 (approximately $385,000) to the project cost in installments with the first installment of HK$561,198 (approximately
$72,000) due upon HKSAR’s signing of the agreement (which occurred on January 5, 2018). UBI Hong Kong, owned and controlled
by Tony Liu, is the largest shareholder of UBI Blockchain Internet, Ltd., (Delaware). Although the Company does not own or control
UBI Hong Kong, UBI Hong Kong, our principal stockholder, entered into an Assignment Agreement with UBI Delaware on May 1, 2018,
whereby UBI Hong Kong assigned all of its rights, plans, ideas, tangible assets, intangible assets and intellectual property under
the HKPU Project agreement to UBI Delaware, in order for UBI Delaware to commercialize the technology being developed. The project
is expected to be completed by November 14, 2019. In a series of two payments made by UBI Hong Kong on January 12, 2018 and January
16, 2018, UBI Hong Kong paid its first installment of a total of HK$561,198 (approximately $71,000) to HKPU. On February 1, 2018,
HKSAR paid its first installment of HK $561,198 (approximately $71,000) to HKPU. At this point, the project is progressing on
track, and the parties believe the established budget will be sufficient to complete the project.
The
agreement also provides for UBI Hong Kong to pay the remaining HK $2,457,552 (approximately $314,000) of its installments as follows:
HK $687,934 (approximately $88,000) by April 1, 2018; HK$687,934 (approximately $88,000) by October 1, 2018; HK $687,934 (approximately
$88,000) by April 1, 2019 and HK$393,750 (approximately $50,000) within three months of the completion of the HKPU Project. On
May 11, 2018, UBI Hong Kong paid HKPU a second installment of HK $643,647 (approximately $82,000). On May 24, 2018, HKSAR also
paid HKPU a second installment of HK $643,647 (approximately $82,000). While UBI Hong Kong does not have the financial wherewithal
to pay current installments under the agreement as due, Tony Liu has personally agreed and been able to provide funding as necessary
for both operations of the Company and obligations due under the agreement.
The
agreement also provides for the HKSAR to pay the remaining HK $2,457,522 (approximately $314,000) of its installments periodically
within 30 days after the acceptance by the Commissioner of Innovation and Technology (“CIT”), an agency of the HKSAR,
of certain Progress Reports to be submitted periodically by HKPU. The agreement provides that HKPU should provide CIT the first
written Progress Report in a format acceptable to CIT covering from the Commencement Date to August 31, 2018 to be submitted on
or before September 30, 2018. While no written Progress Reports have yet been required or provided to CIT, periodic telephone
conversations with CIT have occurred between CIT, HKPU, and the Company from time to time concerning HKPU Project’s progress.
The agreement imposes no penalties on UBI Hong Kong should it fail to make any of its installment contributions except that HKSAR
principally has the right to cease their installment contributions if UBI Hong Kong fails to make its installment contributions.
HKSAR may terminate the agreement if UBI Hong Kong fails to make any of its installment contributions. Further, if any of the
parties are in breach of the terms of the agreement or fail in a material way to progress in accordance with the Project Proposal,
HKPU shall on demand by the government pay to the Government an amount equivalent to the funds or portion thereof released for
the Project.
Project
Summary
The
goal of this project is to provide a comprehensive solution to the worldwide problem of counterfeit medicines. Leveraging latest
techniques the team want to develop a low-cost, scalable, secure system for: (1) Manufacturers to record necessary data of the
drugs during their production and transportation; (2) Distributors to trace the drugs; (3) Auditors to inspect all data; and finally
(4) Consumers to verify the authenticity of the purchased product. This platform will provide suppliers of food and drug products
a safety control system to determine if there was a break in the supply chain. It will identify if a product was substituted with
a counterfeit or inferior product. It will help suppliers of perishable food products, reduce spoilage by tracking food shipments
in the supply chain to the final consumer.
In
February 2018, UBI Hong Kong performed a test at the offices of Guangxi Houde Mega Health Enterprise (“Guangxi”),
a medical products company, of the e-commerce “alpha” platform (using simulated test data provided by Guangxi). Guangxi
is owned 70% by Star Bright International Enterprise Ltd. Star Bright is a stockholder offering 5,000,000 resale Class C common
shares in this registration statement. The test identified some technical issues that need to be addressed; the team is currently
preparing for a second test, the second test, originally scheduled for June 2018, will not be scheduled until the team believes
the test will be successful. The e-commerce platform will provide a digital shared accounting ledger that would make it possible
to trace back a product to the very origin of the raw material used.
Once
a working model of a platform is successfully operational, the Company plans to license the technology to larger food and drug
third party customers, in which case the licensee can use it in accordance with the license agreement; and the Company also intends
to provide the technology, when commercial ready, to third party suppliers as a paid service.
The
agreement provides that the equipment acquired from the HKPU Project will belong to HKPU, who is also identified as the Beneficiary
of the grant for the project and is required to provide CIT with interim and a final accounting for the proceeds of the grant
as well as monies advanced by UBI Hong Kong whether the project is successful or not. While HKPU, as the Beneficiary, is provided
discretion on how income arising from the intellectual property rights from the Project Materials (including among other things
computer software/programs, technical materials, models, documents and materials compiled developed, produced or created by or
on behalf of the Beneficiary – the “platform”) and Project Result is to be allocated, UBI Hong Kong is the sole
and absolute beneficial owner (has title to) of all of the intellectual property rights which would include the platform if successfully
completed under the project.
While
HKPU receives full legal and equitable title and interest in any and all of the equipment procured by the Beneficiary, the agreement
does not discuss whether HKPU can discontinue its own performance in the event that either HKSAR or UBI Hong Kong fail to make
the required payments. However, without funding no one would expect that HKPU would be obligated to continue its performance.
The
agreement also has a provision whereby the HKSAR can terminate the grant under certain conditions. These conditions include, among
other things, ethical misuse of funds received under the grant or violations of other requirements under the grant. This would
include UBI Hong Kong’s failure to meet its general financial obligations as due or go into liquidation. In the event of
termination, the HKSAR has the right to suspend payment under the grant or require that amounts previously paid by it be refundable
under the grant.
The
Company expects to use the technology learned from the HKPU Project to help it develop and market a platform system for application
to control and manage the safety of food and drugs. Pursuant to an understanding with UBI Hong Kong, the Company is responsible
for the installments due and other costs relating to the HKPU Project paid by UBI Hong Kong. These costs are expected to be paid
by UBI Hong Kong from loans received from the Company’s CEO Tony Liu. The Company expects to record these costs as research
and development expenses and increases in amounts due to Tony Liu until such time as a “technologically feasible”
working model of the platform has been successfully produced.
The
Company plans to commercialize our blockchain technology, by selling suppliers of food and drug products a blockchain technology
platform to track the shipping of their products from it source to the final consumer with tamper-resistant digital records that
replaces the current related shipping paperwork. There are two ways we plan to commercialize the technology: 1) to license the
technology to third parties, in which case the licensee can use it in accordance with the license agreement; and 2) UBI to provide
the technology to third party suppliers (the supplier will pay for each use). The goal is to license our blockchain technology
to streamline record-keeping for the food and drug supply chain. We also plan to provide blockchain technology, when commercial
ready, to suppliers as a paid service. Our goal is to design a blockchain tracking system that eliminates counterfeit drug products
being substituted in the supply chain. And, with regards to food products where lost or delayed shipments causes perishable goods
lying in wait to spoil, our blockchain tracking is being designed to help expedite and monitor physical transportation. It is
management’s goal to have this technology ready for commercialization soon after the fiscal year ending August 31, 2019.
Management
believes that blockchain technology along with the capabilities of tamper resistance products can help bring about new safety
standards for the health industry. This makes blockchain technology worthy of our research and investment. It is for this reason
management made a decision then to establish a company to research and develop blockchain technology. In order to achieve its
goals, management is working to design a product tracking system, where every step a product takes in its supply chain is recorded,
time-stamped and monitored to protect the integrity of the product(s) being shipped from it source to the final consumer. This
is being accomplished by tracing the movement of the product from its origin to its final consumer. Utilizing blockchain technology,
every time the product moves, its location is recorded and time-stamped, and a shared accounting ledger can be reviewed to determine
if there was a break in the supply chain, to see if the product was substituted with a counterfeit or inferior product.
UBI’s
business strategy is to incorporate the research and application of blockchain technology, Internet of Things (“IoT”),
pharmaceutical and food products, which together, we refer to as IBSH platform. We have hired professional and technical personnel
to develop a working platform. With the development and research on the platform, we plan to build a blockchain based safety control
system, tentatively named “UBI Security Shield”, with its first application to be used for food and drug safety
Lease
Commitments
In
September 2017, UBI Shenzhen entered into two lease agreements for office space in Shenzhen China. The first lease provides for
monthly rent of RMB 12,353, or approximately $1,928 per month, and expires September 2020. The second lease provides for monthly
rent of RMB 8,964, or approximately $1,399 per month, and expires September 2019.
As
of May 31, 2018, the future minimum lease payments under non-cancelable operating leases were:
Three months ending August 31, 2018
|
|
$
|
9,981
|
|
Year ending August 31, 2019
|
|
|
39,924
|
|
Year ending August 31, 2020
|
|
|
24,535
|
|
Year ending August 31, 2021
|
|
|
1,928
|
|
Total
|
|
$
|
76,368
|
|
For
the three and nine months ended May 31, 2018, total rent expense was $25,359 and $65,049, respectively.
Right
of Rescission Contingency
The
offer and sale of the 25,000,000 Class C Common Shares for the acquisition of UBI Shenzhen may have been in violation of the rules
and regulations under the Securities Act and the interpretations of the SEC. The possible violation involves whether the Company
conducted a public offering without providing the former UBI Shenzhen shareholders with a registration statement declared effective
by the SEC. If a violation of the Section 5 of the Securities Act did in fact occur, anyone who acquired Class C Common Shares
at a price based on an evaluation of $0.20 per share would have a right to rescind the purchase. The Securities Act generally
requires that any claim brought for a violation of Section 5 of the Securities Act be brought within one year of the violation.
If all the shareholders who acquired Class C Common Shares for their exchange in the ownership of UBI Shenzhen demanded rescission
within that one-year period, we would be obligated to repay approximately $5,000,000.
In
the opinion of management and company counsel, the likelihood of any of the former UBI Shenzhen shareholders making a claim for
a violation of Section 5 of the Securities Act is remote because the effected shareholders are all Chinese citizens who have a
close knit relationship with each other and who all voted in favor of the Company’s acquisition of UBI Shenzhen. None of
these effected shareholders have made any claim to date and the one year period that they have to bring a claim expires August
29, 2018.