LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
As
of December 31, 2019, the Company had approximately $143 thousand of cash and $253 thousand in Digital Assets.
We
will require significant additional capital to sustain short-term operations and make the investments needed to execute our longer-term
business plan and repay our existing debt of $200,000 which becomes due on August 7, 2020. Our existing liquidity is not sufficient
to fund operations and anticipated capital expenditures for the foreseeable future, and we will not have sufficient cash resources
to support our current operations for the next 12 months.
We
do not have sufficient capital to meet our expenses over the 12 months from the date of this report. Our current cash is not sufficient
to sustain operations. We will require significant additional capital to sustain short-term operations and make the investments
needed to execute our longer-term business plan. If we attempt to obtain additional debt or equity financing, we cannot provide
assurance that such financing will be available to us on favorable terms, if at all.
During
2019 through the date of this report, the Company received $1,479,410 in exchange for 8,603,986 shares of common stock (excluding
419,652 commitment and pro-rata commitment shares) in connection with the $10 million Purchase Agreement with Cavalry Fund I LP.
We
will require significant additional capital to sustain short-term operations and make the investments needed to execute our longer-term
business plan. Our existing liquidity is not sufficient to fund operations and anticipated capital expenditures for the foreseeable
future, and we do not have sufficient cash resources to support our current operations for the next 12 months, and will need additional
funding, whether through our $10 million Purchase Agreement or other sources. If we attempt to obtain additional debt or equity
financing or are unable to rely on the $10 million Purchase Agreement for any reason, we cannot provide assurance that such financing
will be available to us on favorable terms, if at all.
Because
of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about
our ability to continue as a going concern. The audited financial statements have been prepared assuming we will continue as a
going concern. We have not made adjustments to the accompanying audited financial statements to reflect the potential effects
on the recoverability and classification of assets or liabilities should we be unable to continue as a going concern.
We
continue to incur ongoing administrative and other expenses, including public company expenses, primarily accounting and legal
fees, in excess of corresponding (non-financing related) revenue. While we continue to implement its business strategy, it intends
to finance its activities through:
●
|
managing
current cash and cash equivalents on hand from the Company’s past equity offerings, and
|
●
|
seeking
additional funds raised through the sale of additional securities in the future.
|
GOING
CONCERN AND MANAGEMENT PLANS
The
audited financial statements for the year ended December 31, 2019, have been prepared on a going concern basis, which implies
that we will continue to realize our assets and discharge our liabilities and commitments in the normal course of business. We
have not generated revenues during the years ended December 31, 2019 and 2018 and have never paid any dividends and are unlikely
to pay dividends or generate substantial earnings in the immediate or foreseeable future. Our continuation as a going concern
is dependent upon the continued financial support from our shareholders, the ability of our company to obtain necessary financing
to achieve our operating objectives, and the attainment of profitable operations. As of December 31, 2019, we have an accumulated
deficit of $117.0 million since inception. As we do not have sufficient funds for our planned or new operations, we will need
to raise additional funds for operations. These factors, among others, raise substantial doubt about our ability to continue as
a going concern.
The
continuation of our business is dependent upon us raising additional financial support. The issuance of additional equity or convertible
debt securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial
loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
Subject
to additional financing, the Company plans to acquire additional Digital Assets to provide investors with indirect ownership of
Digital Assets that are not securities, such as bitcoin and ether. The Company intends to acquire Digital Assets through open
market purchases. Additionally, the Company may acquire Digital Assets by resuming its transaction verification services business
through outsourced data centers and earning rewards in Digital Assets by securing their respective blockchains. We are not limiting
our assets to a single type of Digital Asset and may purchase a variety of Digital Assets that appear to benefit our investors,
subject to the certain limitations regarding Digital Securities. The Company is also seeking to acquire controlling interests
in businesses in the blockchain industry. See “Risk Factors” at page 6.
Off
Balance Sheet Arrangements
As
of December 31, 2019, there were no off-balance sheet arrangements.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
We
believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management
discussion and analysis:
Accounting
Treatment of Digital Assets
Digital
Assets are included in current assets in the balance sheets. Digital Assets are recorded at cost less impairment.
An
intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when
events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired.
Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first
perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined
that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company
concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized,
the loss establishes the new cost basis of the asset that is amortized over the remaining useful life of that asset, if any. Subsequent
reversal of impairment losses is not permitted.
Realized
gain (loss) on sale of Digital Assets are included in other income (expense) in the statements of operations.
The
Company assesses impairment of Digital Assets quarterly if the fair value of digital assets was less than its cost basis on any
day during the quarter. The Company recognizes impairment losses on Digital Assets caused by decreases in fair value using the
average U.S. dollar spot price of the related Digital Asset as of each impairment date. Such impairment in the value of Digital
Assets are recorded as a component of costs and expenses in our statements of operations. There were no impairment losses related
to Digital Assets during the year ended December 31, 2018. The Company recorded an impairment loss of approximately $121 thousand
related to Digital Assets during the year ended December 31, 2019.
Recent
Accounting Pronouncements
See
Note 4 to the financial statements for a discussion of recent accounting standards and pronouncements.
RISK
FACTORS
There
are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually
occur, our business, financial condition or results of operation may be materially adversely affected. In such case, the trading
price of our common stock could decline and investors could lose all or part of their investment.
Risks
Related to Our Company
We
need to secure additional financing.
We
require additional funds since we have very limited operating capital and negative working capital. As of March 9, 2020, we had
approximately $247,500 in cash and the fair market value of our Digital Assets was approximately $349,346. Our cash as of the
date of this report is expected, to only be sufficient to cover our public company costs through August 2020 depending on expenses
which excludes: i) the repayment of the $200,000 convertible promissory note (the “2019 Promissory Note”), and ii)
the payment of accrued and unpaid compensation to our executives.
We
anticipate that we will incur operating losses for the foreseeable future.
Our
cash burn rate is approximately $80,000 per month, may increase as we continue to spend additional cash on legal and accounting
expenses in connection with our public reporting requirements. If we are not successful in securing additional financing including
toxic funding, we will likely be required to cease operations.
If
we do not raise additional debt or equity capital, we may not be able to pay all of our indebtedness.
In
May 2019, we signed a Purchase Agreement with Cavalry. We may direct Cavalry to purchase shares of our common stock up to $10,000,000
under the Purchase Agreement over a 36-month period assuming there is an effective registration statement covering the shares.
The
extent we rely on Cavalry as a source of funding will depend on a number of factors including, the prevailing market price of
our common stock and volume of trading and the extent to which we are able to secure working capital from other sources. If obtaining
sufficient funding from Cavalry does not occur for any reason including Cavalry suffering liquidity issues or failure of the Company
to keep the registration statement current, we will need to secure another source of funding in order to satisfy our working capital
needs. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we
require it, the consequences could be a material adverse effect on our business, operating results, financial condition and prospects.
If
we do not raise the necessary working capital, we will not be able to remain operational.
Our
auditors have issued a “going concern” audit opinion.
Our
independent auditors have indicated in their report on our December 31, 2019 and 2018 financial statements that there is substantial
doubt about our ability to continue as a going concern. A “going concern” opinion indicates that the financial statements
have been prepared assuming we will continue as a going concern and do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result if
we do not continue as a going concern. Therefore, you should not rely on our balance sheet as an indication of the amount of proceeds
that would be available to satisfy claims of creditors, and potentially be available for distribution to shareholders, in the
event of liquidation.
We
have a limited operating history and a history of operating losses, and expect to incur significant additional operating losses.
We
have a limited operating history. Therefore, there is limited historical financial information upon which to base an evaluation
of our performance. Our prospects must be considered in light of the uncertainties, risks, expenses, and difficulties frequently
encountered by companies in their early stages of operations. We have generated net losses of $1.7 million and $0.8 million for
the years ended December 31, 2019 and 2018, respectively. We expect to incur additional net losses over the next several years
as we seek to expand operations. The amount of future losses and when, if ever, we will achieve profitability are uncertain. If
we are unsuccessful at executing on our business plan, our business, prospects, and results of operations may be materially adversely
affected.
We
have an evolving business model.
As
Digital Assets and blockchain technologies become more widely available, we expect the services and products associated with them
to evolve. In 2017, the SEC issued a DAO Report that promoters that use initial coin offerings or token sales to raise capital
may be engaged in the offer and sale of securities in violation of the Securities Act and the Securities Exchange Act of 1934
(the “Exchange Act”). This may cause us to potentially change our future business in order to comply fully with the
federal securities laws as well as applicable state securities laws. As a result, to stay current with the industry, our business
model may need to evolve as well. From time to time we may modify aspects of our business model relating to our product mix and
service offerings. We cannot offer any assurance that these or any other modifications will be successful or will not result in
harm to the business. We may not be able to manage growth effectively, which could damage our reputation, limit our growth and
negatively affect our operating results.
The
loss of our executive officers Charles Allen, our Chairman, Chief Executive Officer and Chief Financial Officer, and Michal Handerhan,
our Chief Operating Officer, could have a material adverse effect on us.
Our
success depends solely on the continued services of our executive officers, particularly Charles Allen, our Chairman, Chief Executive
Officer and Chief Financial Officer, and Michal Handerhan, our Chief Operating Officer, who have extensive market knowledge and
long-standing industry relationships. In particular, our reputation among and our relationships with key Digital Asset industry
leaders are the direct result of a significant investment of time and effort by these individuals to build our credibility in
a highly specialized industry. The loss of services of either Charles Allen or Michal Handerhan, could diminish our business and
growth opportunities and our relationships with key leaders in the Digital Asset industry and could have a material adverse effect
on us.
In
the past as we suffered liquidity concerns, we were unable to pay these officers. Neither exercised their right to terminate their
employment agreement.
As
a result of the Company’s past inability to compensate its officers at generally accepted market levels and its historic
failure to either make payroll or make payroll on a timely basis, its officers choose to devote a substantial amount of their
time to involvement with other companies or on other projects. Although our officers are now receiving compensation for their
services, we can provide no assurances that we will not suffer liquidity issues in the near future as we implement our business
plan. If the Company is unable to pay our officers their compensation, they may again devote time to other projects which may
have a material adverse effect on us.
The
loss of Charles Allen, our Chairman, Chief Executive Officer and Chief Financial Officer, and Michal Handerhan, our Chief Operating
Officer, would have a material adverse effect on us.
The
simultaneous loss of services of both Charles Allen and Michal Handerhan, would result in the Company having no officers or employees
and would subsequently cease all operations which would have a material adverse effect on us. See the second risk factor below
on the loss of our executive officers and employees.
Michal
Handerhan our Chief Operating Officer has notified the Company that in the event of the departure of Charles Allen, our Chairman,
Chief Executive Officer and Chief Financial Officer from the Company he may terminate his employment and may resign as an officer
and director of the Company, which would have a material adverse effect on us.
We
have no other officers and only one other director. The simultaneous loss of Charles Allen, our Chairman, Chief Executive Officer
and Chief Financial Officer, and Michal Handerhan, our Chief Operating Officer, would have a material adverse effect on us. Their
Employment Agreements permit them to resign for Good Reason which includes non-payment of salaries. In the event both of officers
terminate their Employment Agreements for Good Reason, this would result in the Company owing them $585,200 and would leave the
Company without officers or employees which may have a material adverse effect upon us, your investment and the ability of the
Company to continue operations.
Any
inability to attract and retain additional personnel could affect our ability to successfully grow our business.
Our
future success depends on our ability to identify, attract, hire, train, retain and motivate other highly-skilled technical, managerial,
editorial, merchandising, marketing and customer service personnel. Competition for such personnel is intense. Our failure to
retain and attract the necessary technical, managerial, editorial, merchandising, marketing, and customer service personnel could
harm our business.
We
may need to implement additional finance and accounting systems, procedures and controls as we grow our business and organization
and to satisfy new reporting requirements.
We
are required to comply with a variety of reporting, accounting and other rules and regulations. Compliance with existing requirements
is expensive. We may need to implement additional finance and accounting systems, procedures and controls to satisfy our reporting
requirements and such further requirements may increase our costs and require additional management time and resources. Our internal
control over financial reporting is determined to be ineffective. Such failure could cause investors to lose confidence in our
reported financial information, negatively affect the market price of our common stock, subject us to regulatory investigations
and penalties, and adversely impact our business and financial condition.
Changes
in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters
could significantly affect our financial results.
Generally
accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard
to a wide range of matters that are relevant to our business, including but not limited to revenue recognition, estimating valuation
allowances and accrued liabilities (including allowances for returns, credit card chargebacks, doubtful accounts and obsolete
and damaged inventory), internal use software and website development (acquired and developed internally), accounting for income
taxes, valuation of long-lived and intangible assets and goodwill, stock-based compensation and loss contingencies, are highly
complex and involve many subjective assumptions, estimates and judgments by our management. Changes in these rules or their interpretation
or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected
financial performance.
Natural
disasters and geo-political events could adversely affect our business.
Natural
disasters, including hurricanes, cyclones, typhoons, tropical storms, floods, earthquakes and tsunamis, weather conditions, including
winter storms, droughts and tornados, whether as a result of climate change or otherwise, and geo-political events, including
civil unrest or terrorist attacks, that affect us or other service providers could adversely affect our business.
Since
there has been limited precedence set for financial accounting of Digital Assets other than Digital Securities, it is unclear
how we will be required to account for Digital Asset transactions in the future.
Since
there has been limited precedence set for the financial accounting of Digital Assets other than Digital Securities, it is unclear
how we will be required to account for Digital Asset transactions or assets. Furthermore, a change in regulatory or financial
accounting standards could result in the necessity to restate our financial statements. Such a restatement could negatively impact
our business, prospects, financial condition and results of operation.
We
are subject to the information and reporting requirements of the Exchange Act), and other federal securities laws, including compliance
with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”).
The
costs of preparing and filing annual and quarterly reports and other information with the SEC and furnishing audited reports to
shareholders will cause our expenses to be higher than they would have been if we were privately held. It may be time consuming,
difficult and costly for us to develop, implement and maintain the internal controls and reporting procedures required by the
Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance personnel in order
to develop and implement appropriate internal controls and reporting procedures.
If
we fail to establish and maintain an effective system of internal control, we may not be able to report our financial results
accurately or to prevent fraud. Any inability to report and file our financial results accurately and timely could harm our reputation
and adversely impact the trading price of our Common Stock. During our assessment of the effectiveness of internal control over
financial reporting as of December 31, 2018, management identified a significant deficiency in our disclosure controls and procedures
which may lead to a failure to prevent or detect misstatements.
Effective
internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial
reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment
existed, and our business and reputation with investors may be harmed. As a result, our small size and any current internal control
deficiencies may adversely affect our financial condition, results of operation and access to capital. During our assessment of
the effectiveness of internal control over financial reporting as of December 31, 2018, management identified a significant deficiency
related to presence of weakness in our disclosure control and procedure resulting from limited internal audit functions. Because
of our inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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 any policies and procedures may deteriorate.
Because
we lack effective internal controls and disclosure controls we erroneously accounted for Digital Assets using a fair value methodology
which was not consistent with United States generally accepted accounting principles (“US GAAP”) and required us to
restate our financial statements for the year ended December 31, 2017 and the three and six months ended March 31, 2018 and June
30, 2018, our failure to establish and maintain effective internal control over financial reporting could result in material misstatements
in our financial statements and a failure to meet our reporting and financial obligations which could have a material adverse
effect on our financial condition.
Maintaining
effective internal control over financial reporting is necessary for us to produce reliable financial statements. As discussed
in this report, our internal controls and disclosure controls were not effective as of December 31, 2018. Because of our ineffective
controls and material weaknesses, we did not account for our Digital Assets correctly in our financial statements and restated
our audited financial statements for the year ended December 31, 2017 and the unaudited financial statements for the quarters
ended March 31, 2018 and June 30, 2018.
A
material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis.
While
the Company is now following US GAAP in accounting for its Digital Assets, it has not remediated its material weaknesses. There
can be no assurance as to when these material weaknesses will be remediated or that additional material weaknesses will not arise
in the future. Any failure to remediate the material weaknesses, or the development of new material weaknesses in our internal
control over financial reporting, could result in material misstatements in our financial statements and cause us to fail to meet
our reporting and financial obligations, which in turn could have a material adverse effect on our financial condition and the
trading price of our Common Stock.
Public
company compliance may make it more difficult to attract and retain officers and directors.
The
Sarbanes-Oxley Act and rules implemented by the Securities and Exchange Commission have required changes in corporate governance
practices of public companies. As a public company, we expect these rules and regulations to increase our compliance costs in
2019 and beyond and to make certain activities more time consuming and costly. The impact of the SEC’s July 25, 2017 report
on Digital Securities (the “DAO Report”) as well as recent enforcement actions and speeches made by the SEC’s
Chairman will increase our compliance and legal costs. More recently, the SEC’s Chairman commented that most initial coin
offerings (a type of Digital Asset) involve the offer of a Digital Security. As a public company, we also expect that these rules
and regulations will make it more difficult and expensive for us to obtain director and officer liability insurance in the future
and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or
similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of
directors or as executive officers, and to maintain insurance at reasonable rates, or at all.
Our
stock price may be volatile.
The
market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors,
many of which are beyond our control, including the following:
●
|
changes
in our industry including changes which adversely affect bitcoin and other Digital Assets;
|
●
|
sales
by Cavalry;
|
●
|
competitive
pricing pressures;
|
●
|
continued
volatility in the stock prices of Digital Assets issuers;
|
●
|
continued
volatility in the price of bitcoin and other Digital Assets;
|
●
|
our
ability to obtain working capital financing;
|
●
|
additions
or departures of key personnel including our executive officers;
|
●
|
sales
of our common stock;
|
●
|
conversion
of our Series C-1 Convertible Preferred Stock and the subsequent sale of the underlying common stock;
|
●
|
conversion
of our convertible notes and the subsequent sale of the underlying common stock;
|
●
|
exercise
of our warrants and the subsequent sale of the underlying common stock;
|
●
|
our
ability to execute our business plan;
|
●
|
operating
results that fall below expectations;
|
●
|
loss
of any strategic relationship;
|
●
|
regulatory
developments; and
|
●
|
economic
and other external factors.
|
In
addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market
price of our common stock. As a result, you may be unable to resell your shares at a desired price.
We
have not paid cash dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited
to the value of our Common Stock.
We
have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends
on our common stock will depend on earnings, financial condition and other business and economic factors affecting us at such
time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because
a return on your investment will only occur if our stock price appreciates.
There
is currently a limited trading market for our Common Stock and we cannot ensure that one will be sustained.
Our
shares of common stock are not traded on a national securities exchange, and the price, may not reflect our actual or perceived
value. There can be no assurance that there will be an active market for our shares of common stock in the future. The market
liquidity will be dependent on the perception of our operating business, among other things. We may, in the future, take certain
steps, including utilizing investor awareness campaigns, press releases, road shows and conferences to increase awareness of our
business and any steps that we might take to bring us to the awareness of investors may require we compensate consultants with
cash and/or stock. There can be no assurance that there will be any awareness generated or the results of any efforts will result
in any impact on our trading volume. Consequently, investors may not be able to liquidate their investment at a price that reflects
the value of the business and trading may be at an inflated price relative to the performance of our company due to, among other
things, availability of sellers of our shares. The price of our common stock has been highly volatile. Because there may be a
low price for our shares of common stock and because of our involvement in the Digital Asset business, many brokerage firms or
clearing firms may not be willing to effect transactions in the securities or accept our shares for deposit in an account. Even
if an investor finds a broker willing to effect a transaction in the shares of our common stock, the combination of brokerage
commissions, transfer fees, taxes, if any, and any other selling costs may exceed the selling price. Further, many lending institutions
will not permit the use of low priced shares of common stock as collateral for any loans.
Because
our Common Stock does not trade on a national securities exchange, the prices of our Common Stock may be more volatile and lower
than if we were listed.
Our
common stock trades on the OTCQB operated by OTC Markets Group Inc. This market is not a national securities exchange. While our
common stock trading has been relatively active, generally the OTCQB does not have the same level of activity as a national securities
exchange like Nasdaq. Most institutions will not purchase a security unless it is on a national securities exchange. In addition,
they do not purchase stocks that trade below $5 per share. We may, in the future, take certain steps, including utilizing investor
awareness campaigns, press releases, road shows and conferences to increase awareness of our business and any steps that we might
take to bring us to the awareness of investors may require we compensate consultants with cash and/or stock. There can be no assurance
that there will be any awareness generated or the results of any efforts will result in any impact on our trading volume. Consequently,
investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business and
trading may be at an inflated price relative to the performance of our company due to, among other things, availability of sellers
of our shares.
Our
Common Stock is deemed a “penny stock,” which would make it more difficult for our investors to sell their shares.
Our
common stock is subject to the “penny stock” rules adopted under Section 15(g) of the Exchange Act. The penny stock
rules generally apply to companies whose common stock is not listed on the Nasdaq Stock Market or other national securities exchange
or trades at less than $5.00 per share. These rules require, among other things, that brokers who trade penny stock to persons
other than “established customers” complete certain documentation, make suitability inquiries of investors and provide
investors with certain information concerning trading in the security, including a risk disclosure document and quote information
under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock
rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain
subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities.
Because our common stock is subject to the penny stock rules, investors will find it more difficult to dispose of our securities.
Our
articles of incorporation allow for our board to create new series of preferred stock without further approval by our shareholders,
which could adversely affect the rights of the holders of our Common Stock.
Our
board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of
directors also has the authority to issue preferred stock without further shareholder approval. As a result, our board of directors
could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon
liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right
to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our board
of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or
that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution
to our existing shareholders.
Substantial
future sales of our Common Stock by us or by our existing shareholders could cause our stock price to fall.
Additional
equity financings (in addition to the shares issued under the Purchase Agreement) or other share issuances by us, including shares
issued in connection with strategic alliances and corporate partnering transactions, and shares issued on the conversion of outstanding
notes, could adversely affect the market price of our Common Stock. Sales by existing shareholders of a large number of shares
of our Common Stock in the public market or the perception that additional sales could occur could cause the market price of our
Common Stock to drop.
We
may be accused of infringing intellectual property rights of third parties.
We
may be subject to legal claims of alleged infringement of the intellectual property rights of third parties. The ready availability
of damages, royalties and the potential for injunctive relief has increased the defense litigation costs of patent infringement
claims, especially those asserted by third parties whose sole or primary business is to assert such claims. Such claims, even
if not meritorious, may result in significant expenditure of financial and managerial resources, and the payment of damages or
settlement amounts. Additionally, we may become subject to injunctions prohibiting us from using software or business processes
we currently use or may need to use in the future, or requiring us to obtain licenses from third parties when such licenses may
not be available on financially feasible terms or terms acceptable to us or at all. In addition, we may not be able to obtain
on favorable terms, or at all, licenses or other rights with respect to intellectual property we do not own in providing ecommerce
services to other businesses and individuals under commercial agreements.
Any
current or future outbreak of a health epidemic or other adverse public health developments, such as the pneumonia caused by the
COVID-19 coronavirus, could disrupt our operations and may affect the price of digital assets and adversely affect our business.
Our
business could be adversely affected by the effects of health epidemics. For example, we rely on our limited staff for our continued
operations and have no contingency plans and limited resources if anyone was to be affected by the coronavirus. Further consequences
of the COVID-19 outbreak may have a material affect on the digital asset market. Our business could be adversely affected to the
extent that the COVID-19 outbreak evolves into a worldwide health crises.
Risks
Related to the Bitcoin Network and Bitcoins
The
following risks relate to our proposed business and the effects upon us assume we obtain financing in a sufficient amount to re-enter
this business.
The
further development and acceptance of the Bitcoin Network and other Digital Asset systems, which represent a new and rapidly changing
industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance
of the Bitcoin Network may adversely affect an investment in our Company.
Digital
Assets such as bitcoins that may be used, among other things, to buy and sell goods and services are a new and rapidly evolving
industry of which the Bitcoin Network is a prominent, but not unique, part. The growth of the Digital Assets industry in general,
and the Bitcoin Network in particular, is subject to a high degree of uncertainty. The factors affecting the further development
of the Digital Assets industry, as well as the Bitcoin Network, include:
●
|
continued
worldwide growth in the adoption and use of bitcoins and other Digital Assets;
|
|
|
●
|
government
and quasi-government regulation of bitcoins and other Digital Assets and their use, or restrictions on or regulation of access
to and operation of the Bitcoin Network or similar Digital Assets systems;
|
|
|
●
|
the
maintenance and development of the open-source software protocol of the Bitcoin Network;
|
|
|
●
|
changes
in consumer demographics and public tastes and preferences;
|
|
|
●
|
the
availability and popularity of other forms or methods of buying and selling goods and services, including new means of using
fiat currencies;
|
|
|
●
|
general
economic conditions and the regulatory environment relating to Digital Assets; and
|
|
|
●
|
the
impact of regulators focusing on Digital Assets and Digital Securities and the costs associated with such regulatory oversight.
|
|
|
|
A
decline in the popularity or acceptance of the Bitcoin Network could adversely affect an investment in us.
|
Because
Digital Assets may be determined to be Digital Securities, we may inadvertently violate the 1940 Act and incur large losses as
a result and potentially be required to register as an investment company or terminate operations.
Digital
Assets we may own in the future may be determined to be Digital Securities by the SEC or a court. If a Digital Asset we were to
hold was later determined to be a Digital Security, we could inadvertently become an investment company, as defined by the 1940
Act, if the value of the Digital Securities we owned exceeded 40% of our assets excluding cash. We are subject to the following
risks:
●
|
Contrary
to legal advice, the SEC or a court may conclude that bitcoin, ether, or other Digital
Assets we later acquire to be securities;
|
|
|
●
|
based
on legal advice, we may acquire other Digital Assets which we have been advised are not securities but later are held to be
securities;
|
|
|
●
|
we
may knowingly acquire Digital Assets that are securities and acquire minority investments in businesses which investments
are securities; and
|
|
|
●
|
regardless
of the internal procedures we take to avoid surpassing the 40% threshold, future volatility during the course of a day may
cause use to exceed the 40% threshold.
|
If
we exceed the test, we will have one-year to reduce our holdings of securities below the 40% threshold. However, that can only
occur once during a three-year period. Accordingly, if changes in the classification of Digital Assets causes us to exceed the
40% threshold, we may experience large losses when we liquidate securities as a result of continued volatility. Further, if we
elect to sell a private investment, not only may it be difficult to find a buyer but we could incur a significant loss on the
sale of a private investment due to not only the lack of liquidity but also the entity’s poor performance. If we are able
to come below the 40% threshold and again face the same problem, it is likely we will be forced to terminate operations, sell
all assets and distribute cash to our shareholders who will likely suffer very large losses. Further, the cost of distributing
cash to our shareholders may exceed the amount of cash on hand in which case we would use our remaining funds to wind down the
Company.
If
We Acquire Digital Securities, Even Unintentionally, We May Violate the Investment Company Act and Incur Potential Third-Party
Liabilities
We
expect that if we obtain sufficient financing, we will acquire a portfolio of Digital Assets including bitcoins, ether and Digital
Securities. There is an increased regulatory examination of Digital Assets and Digital Securities. This has led to regulatory
and enforcement activities. In order to limit our acquisition of Digital Securities to stay within the 40% threshold, we will
examine the manner in which Digital Assets were initially marketed to determine if they may be deemed Digital Securities and subject
to federal and state securities laws. Even if we conclude that a particular Digital Asset is not a security under the Securities
Act, certain states including California take a stricter view of the term “investment contract” which means the Digital
Asset may have violated applicable state securities laws. This will result in increased compliance costs and legal fees. If our
examination of a Digital Asset is incorrect, we may incur regulatory penalties and private investor liabilities since Section
5 of the Securities Act is a strict liability statute much like selling spoiled milk and state securities laws generally impose
liability for negligence for misrepresentations.
Currently,
there is relatively small use of bitcoins in the retail and commercial marketplace in comparison to relatively large use by speculators,
thus contributing to price volatility that could adversely affect an investment in us.
As
relatively new products and technologies, bitcoins and the Bitcoin Network have only recently become widely accepted as a means
of payment for goods and services by many major retail and commercial outlets, and use of bitcoins by consumers to pay such retail
and commercial outlets remains limited. Conversely, a significant portion of bitcoin demand is generated by speculators and investors
seeking to profit from the short- or long-term holding of bitcoins. A lack of expansion by bitcoins into retail and commercial
markets, or a contraction of such use, may result in increased volatility or a reduction in the price of bitcoin, either of which
could adversely impact an investment in us.
Because
Facebook is seeking to develop a cryptocurrency, it may adversely affect the value of bitcoins and Digital Assets.
In
May 2019, Facebook announced its plans for a cryptocurrency called Libra. The massive social network and 27 other partners are
touting the Libra digital coin and Facebook’s corresponding digital wallet, Calibra, as a way to make sending payments around
the world as easy as it is to send a photo. Because Facebook is a leader in social media, when and if it launches its coins, it
could adversely affect the value of bitcoins and Digital Assets. In July 2019, Facebook announced that Libra will not launch until
all regulatory concerns have been met. In October 2019, many partners left the Libra Association including Paypal, eBay, Mastercard,
Stripe, and Visa.
Significant
Bitcoin Network contributors could propose amendments to the Bitcoin Network’s protocols and software that, if accepted
and authorized by the Bitcoin Network, could adversely affect an investment in us.
A
small group of individuals contribute to the Bitcoin Core project on Github. This group of contributors is currently headed by
Wladimir J. van der Laan, the current lead maintainer. These individuals can propose refinements or improvements to the Bitcoin
Network’s source code through one or more software upgrades that alter the protocols and software that govern the Bitcoin
Network and the properties of bitcoin, including the irreversibility of transactions and limitations on the mining of new bitcoin.
Proposals for upgrades and discussions relating thereto take place on online forums. For example, there is an ongoing debate regarding
altering the Blockchain by increasing the size of blocks to accommodate a larger volume of transactions. Although some proponents
support an increase, other market participants oppose an increase to the block size as it may deter miners from confirming transactions
and concentrate power into a smaller group of miners. To the extent that a significant majority of the users and miners on the
Bitcoin Network install such software upgrade(s), the Bitcoin Network would be subject to new protocols and software that may
adversely affect an investment in the Shares. In the event a developer or group of developers proposes a modification to the Bitcoin
Network that is not accepted by a majority of miners and users, but that is nonetheless accepted by a substantial plurality of
miners and users, two or more competing and incompatible Blockchain implementations could result. This is known as a “hard
fork.” In such a case, the “hard fork” in the Blockchain could materially and adversely affect the perceived
value of bitcoin as reflected on one or both incompatible Blockchains, which may adversely affect an investment in us.
Bitcoin
has recently forked and additional forks may occur in the future which may affect the value of bitcoin held by the Company.
Since
August 1, 2017, bitcoin’s blockchain was forked three times creating Bitcoin Cash, Bitcoin Gold and Bitcoin SV. The forks
resulted in a new blockchain being created with a shared history, and a new path forward. The value of the newly created Bitcoin
Cash, Bitcoin Gold and Bitcoin SV may or may not have value in the long run and may affect the price of bitcoin if interest is
shifted away from bitcoin to the newly created Digital Assets. The value of bitcoin after the creation of a fork is subject to
many factors including the value of the fork product, market reaction to the creation of the fork product, and the occurrence
of forks in the future. As such, the value of bitcoin could be materially reduced if existing and future forks have a negative
effect on bitcoin’s value.
The
open-source structure of the Bitcoin Network protocol means that the contributors to the protocol are generally not directly compensated
for their contributions in maintaining and developing the protocol. A failure to properly monitor and upgrade the protocol could
damage the Bitcoin Network and an investment in us.
The
Bitcoin Network operates based on an open-source protocol maintained by contributors, largely on the Bitcoin Core project on GitHub.
As an open source project, Bitcoin is not represented by an official organization or authority. As the Bitcoin Network protocol
is not sold and its use does not generate revenues for contributors, contributors are generally not compensated for maintaining
and updating the Bitcoin Network protocol. Although the MIT Media Lab’s Digital Currency Initiative funds the current maintainer
Wladimir J. van der Laan, among others, this type of financial incentive is not typical. The lack of guaranteed financial incentive
for contributors to maintain or develop the Bitcoin Network and the lack of guaranteed resources to adequately address emerging
issues with the Bitcoin Network may reduce incentives to address the issues adequately or in a timely manner. This may adversely
affect an investment in us.
If
a malicious actor or botnet obtains control in excess of 50 percent of the processing power active on the Bitcoin Network, it
is possible that such actor or botnet could manipulate the Blockchain in a manner that adversely affects an investment in us.
If
a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions
of the computers) obtains a majority of the processing power dedicated to mining on the Bitcoin Network, it may be able to alter
the Blockchain on which the Bitcoin Network and all bitcoin transactions rely by constructing alternate blocks if it is able to
solve for such blocks faster than the remainder of the miners on the Bitcoin Network can add valid blocks. In such alternate blocks,
the malicious actor or botnet could control, exclude or modify the ordering of transactions, though it could not generate new
bitcoins or transactions using such control. Using alternate blocks, the malicious actor could “double-spend” its
own bitcoins (i.e., spend the same bitcoins in more than one transaction) and prevent the confirmation of other users’ transactions
for so long as it maintains control. To the extent that such malicious actor or botnet does not yield its majority control of
the processing power on the Bitcoin Network or the bitcoin community does not reject the fraudulent blocks as malicious, reversing
any changes made to the Blockchain may not be possible. Such changes could adversely affect an investment in us.
In
late May and early June 2014, a mining pool known as GHash.io approached and, during a 24- to 48-hour period in early June may
have exceeded, the threshold of 50% of the processing power on the Bitcoin Network. To the extent that GHash.io did exceed 50%
of the processing power on the network, reports indicate that such threshold was surpassed for only a short period, and there
are no reports of any malicious activity or control of the Blockchain performed by GHash.io. Furthermore, the processing power
in the mining pool appears to have been redirected to other pools on a voluntary basis by participants in the GHash.io pool, as
had been done in prior instances when a mining pool exceeded 40% of the processing power on the Bitcoin Network. The approach
to and possible crossing of the 50% threshold indicate a greater risk that a single mining pool could exert authority over the
validation of bitcoin transactions. To the extent that the bitcoin ecosystem, including the Core Developers and the administrators
of mining pools, do not act to ensure greater decentralization of bitcoin mining processing power, the feasibility of a malicious
actor obtaining in excess of 50% of the processing power on the Bitcoin Network (e.g., through control of a large mining pool
or through hacking such a mining pool) will increase, which may adversely impact an investment in us.
If
the award of bitcoin for solving blocks and transaction fees for recording transactions are not sufficiently high to incentivize
miners, miners may cease expending hashrate to solve blocks and confirmations of transactions on the Blockchain could be slowed
temporarily. A reduction in the hashrate expended by miners on the Bitcoin Network could increase the likelihood of a malicious
actor obtaining control in excess of 50%) of the aggregate hashrate active on the Bitcoin Network or the Blockchain, potentially
permitting such actor to manipulate the Blockchain in a manner that adversely affects an investment in us.
As
the award of new bitcoin for solving blocks declines, and if transaction fees are not sufficiently high, miners may not have an
adequate incentive to continue mining and may cease their mining operations. The current fixed reward for solving a new block
is 12.5 bitcoin per block; the reward decreased from 25 bitcoin in July 2016. It is estimated that it will halve again in about
four years. This reduction may result in a reduction in the aggregate hashrate of the Bitcoin Network as the incentive for miners
will decrease. Moreover, miners ceasing operations would reduce the aggregate hashrate on the Bitcoin Network, which would adversely
affect the confirmation process for transactions (i.e., temporarily decreasing the speed at which blocks are added to the Blockchain
until the next scheduled adjustment in difficulty for block solutions) and make the Bitcoin Network more vulnerable to a malicious
actor obtaining control in excess of 50% of the aggregate hashrate on the Bitcoin Network. Periodically, the Bitcoin Network has
adjusted the difficulty for block solutions so that solution speeds remain in the vicinity of the expected ten minute confirmation
time targeted by the Bitcoin Network protocol. The Company believes that from time to time there will be further considerations
and adjustments to the Bitcoin Network regarding the difficulty for block solutions. More significant reductions in aggregate
hashrate on the Bitcoin Network could result in material, though temporary, delays in block solution confirmation time. Any reduction
in confidence in the confirmation process or aggregate hashrate of the Bitcoin Network may negatively impact the value of bitcoin,
which will adversely impact an investment in us.
To
the extent that the profit margins of Bitcoin mining operations are not high, operators of Bitcoin mining operations are more
likely to immediately sell bitcoins earned by mining in the Bitcoin Exchange Market, resulting in a reduction in the price of
bitcoins that could adversely impact an investment in us.
Over
the past three years, Bitcoin Network mining operations have evolved from individual users mining with computer processors, graphics
processing units and first-generation ASIC servers. Currently, new processing power brought onto the Bitcoin Network is predominantly
added by incorporated and unincorporated “professionalized” mining operations. Professionalized mining operations
may use proprietary hardware or sophisticated ASIC machines acquired from ASIC manufacturers. They require the investment of significant
capital for the acquisition of this hardware, the leasing of operating space (often in data centers or warehousing facilities),
incurring of electricity costs and the employment of technicians to operate the mining farms. As a result, professionalized mining
operations are of a greater scale than prior Bitcoin Network miners and have more defined, regular expenses and liabilities. These
regular expenses and liabilities require professionalized mining operations to more immediately sell bitcoins earned from mining
operations on the Bitcoin Exchange Market, whereas it is believed that individual miners in past years were more likely to hold
newly mined bitcoins for more extended periods. The immediate selling of newly mined bitcoins greatly increases the supply of
bitcoins on the Bitcoin Exchange Market, creating downward pressure on the price of bitcoins.
The
extent to which the value of bitcoin mined by a professionalized mining operation exceeds the allocable capital and operating
costs determines the profit margin of such operation. A professionalized mining operation may be more likely to sell a higher
percentage of its newly mined bitcoin rapidly if it is operating at a low profit margin-and it may partially or completely cease
operations if its profit margin is negative. In a low profit margin environment, a higher percentage could be sold into the Bitcoin
Exchange Market more rapidly, thereby potentially reducing bitcoin prices. Lower bitcoin prices could result in further tightening
of profit margins, particularly for professionalized mining operations with higher costs and more limited capital reserves, creating
a network effect that may further reduce the price of bitcoin until mining operations with higher operating costs become unprofitable
and remove mining power from the Bitcoin Network. The network effect of reduced profit margins resulting in greater sales of newly
mined bitcoin could result in a reduction in the price of bitcoin that could adversely impact an investment in us.
To
the extent that any miners cease to record transactions in solved blocks, transactions that do not include the payment of a transaction
fee will not be recorded on the Blockchain until a block is solved by a miner who does not require the payment of transaction
fees. Any widespread delays in the recording of transactions could result in a loss of confidence in the Bitcoin Network, which
could adversely impact an investment in us.
To
the extent that any miners cease to record transactions in solved blocks, such transactions will not be recorded on the Blockchain.
Currently, there are no known incentives for miners to elect to exclude the recording of transactions in solved blocks; however,
to the extent that any such incentives arise (e.g., a collective movement among miners or one or more mining pools forcing bitcoin
users to pay transaction fees as a substitute for or in addition to the award of new bitcoins upon the solving of a block), actions
of miners solving a significant number of blocks could delay the recording and confirmation of transactions on the Blockchain.
Any systemic delays in the recording and confirmation of transactions on the Blockchain could result in greater exposure to double-spending
transactions and a loss of confidence in the Bitcoin Network, which could adversely impact an investment in us.
The
acceptance of Bitcoin Network software patches or upgrades by a significant, but not overwhelming, percentage of the users and
miners in the Bitcoin Network could result in a “fork” in the Blockchain, resulting in the operation of two separate
networks until such time as the forked Blockchains are merged. The temporary or permanent existence of forked Blockchains could
adversely impact an investment in us.
Bitcoin
is an open source project and, although there is an influential group of leaders in the Bitcoin Network community including the
Core Developers, there is no official developer or group of developers that formally controls the Bitcoin Network. Any individual
can download the Bitcoin Network software and make any desired modifications, which are proposed to users and miners on the Bitcoin
Network through software downloads and upgrades, typically posted to the bitcoin development forum on GitHub.com. A substantial
majority of miners and bitcoin users must consent to those software modifications by downloading the altered software or upgrade
that implements the changes; otherwise, the changes do not become a part of the Bitcoin Network. Since the Bitcoin Network’s
inception, changes to the Bitcoin Network have been accepted by the vast majority of users and miners, ensuring that the Bitcoin
Network remains a coherent economic system; however, a developer or group of developers could potentially propose a modification
to the Bitcoin Network that is not accepted by a vast majority of miners and users, but that is nonetheless accepted by a substantial
population of participants in the Bitcoin Network. In such a case, and if the modification is material and/or not backwards compatible
with the prior version of Bitcoin Network software, a fork in the Blockchain could develop and two separate Bitcoin Networks could
result, one running the pre-modification software program and the other running the modified version (i.e., a second “Bitcoin”
network). Such a fork in the Blockchain typically would be addressed by community-led efforts to merge the forked Blockchains,
and several prior forks have been so merged. This kind of split in the Bitcoin Network could materially and adversely impact an
investment in us and, in the worst case scenario, harm the sustainability of the Bitcoin Network’s economy.
Intellectual
property rights claims may adversely affect the operation of the Bitcoin Network.
Third
parties may assert intellectual property claims relating to the holding and transfer of Digital Assets and their source code.
Regardless of the merit of any intellectual property or other legal action, any threatened action that reduces confidence in the
Bitcoin Network’s long-term viability or the ability of end-users to hold and transfer bitcoins may adversely affect an
investment in us. Additionally, a meritorious intellectual property claim could prevent us and other end-users from accessing
the Bitcoin Network or holding or transferring their bitcoins. As a result, an intellectual property claim against us or other
large Bitcoin Network participants could adversely affect an investment in us.
The
Bitcoin Exchanges on which bitcoins trade are relatively new and, in most cases, largely unregulated and may therefore be more
exposed to fraud and failure than established, regulated exchanges for other products. To the extent that the Bitcoin Exchanges
representing a substantial portion of the volume in bitcoin trading are involved in fraud or experience security failures or other
operational issues, such Bitcoin Exchanges’ failures may result in a reduction in the price of bitcoin and can adversely
affect an investment in us.
The
Bitcoin Exchanges on which the bitcoins trade are new and, in most cases, largely unregulated. Furthermore, many Bitcoin Exchanges
(including several of the most prominent US Dollar denominated Bitcoin Exchanges) do not provide the public with significant information
regarding their ownership structure, management teams, corporate practices or regulatory compliance. As a result, the marketplace
may lose confidence in, or may experience problems relating to, Bitcoin Exchanges, including prominent exchanges handling a significant
portion of the volume of bitcoin trading.
Over
the past four years, a number of Bitcoin Exchanges have been closed due to fraud, failure or security breaches. In many of these
instances, the customers of such Bitcoin Exchanges were not compensated or made whole for the partial or complete losses of their
account balances in such Bitcoin Exchanges. While smaller Bitcoin Exchanges are less likely to have the infrastructure and capitalization
that make larger Bitcoin Exchanges more stable, larger Bitcoin Exchanges are more likely to be appealing targets for hackers and
“malware” (i.e., software used or programmed by attackers to disrupt computer operation, gather sensitive information
or gain access to private computer systems). Further, the collapse of the largest Bitcoin Exchange in 2014 suggests that the failure
of one component of the overall Bitcoin ecosystem can have consequences for both users of a Bitcoin Exchange and the Bitcoin industry
as a whole.
In
2018, China shut down Bitcoin Exchanges and other virtual currency trading platforms. A Wall Street Journal article reported that
China accounted for the bulk of global bitcoin trading as of early 2018. Further, in late January 2018, the Wall Street Journal
reported that $530 million of cryptocurrency was missing from a Japanese exchange. On May 7, 2019, Coindesk reported that approximately
$41 million in Bitcoin was stolen from crypto exchange Binance.
It
has been reported that Bithumb, a South Korea exchange was hacked, resulting in a $180 million loss. This followed its reported
loss of $350 million in 2018. In 2019, the Chief Executive Officer of Quadriga, the largest exchange in Canada, died without providing
for an alternative way to access its systems causing a reported $200 million loss.
A
lack of stability in the Bitcoin Exchange Market and the closure or temporary shutdown of Bitcoin Exchanges due to fraud, business
failure, hackers or malware, or government-mandated regulation may reduce confidence in the Bitcoin Network and result in greater
volatility in bitcoin value. These potential consequences of a Bitcoin Exchange’s failure could adversely affect an investment
in us.
Political
or economic crises may motivate large-scale sales of Bitcoins, which could result in a reduction in Bitcoin value and adversely
affect an investment in us.
As
an alternative to fiat currencies that are backed by central governments, Digital Assets such as bitcoins, which are relatively
new, are subject to supply and demand forces based upon the desirability of an alternative, decentralized means of buying and
selling goods and services, and it is unclear how such supply and demand will be impacted by geopolitical events. Nevertheless,
political or economic crises may motivate large-scale acquisitions or sales of bitcoins either globally or locally. Large-scale
sales of bitcoins would result in a reduction in bitcoin value and could adversely affect an investment in us.
Demand
for bitcoin is driven, in part, by its status as the most prominent and secure Digital Asset. It is possible that a Digital Asset
other than bitcoins could have features that make it more desirable to a material portion of the Digital Asset user base, resulting
in a reduction in demand for bitcoins, which could have a negative impact on the price of bitcoins and adversely affect an investment
in us.
The
Bitcoin Network and bitcoins, as an asset, hold a “first-to-market” advantage over other Digital Assets. This first-to-market
advantage is driven in large part by having the largest user base and, more importantly, the largest combined mining power in
use to secure the Blockchain and transaction verification system. Having a large mining network results in greater user confidence
regarding the security and long-term stability of a Digital Asset’s network and its block chain; as a result, the advantage
of more users and miners makes a Digital Asset more secure, which makes it more attractive to new users and miners, resulting
in a network effect that strengthens the first-to-market advantage.
As
of March 9, 2020, there were over 2,400 alternate Digital Assets (or altcoins) tracked by CoinMarketCap, having a total market
capitalization (including the market capitalization of bitcoin) of approximately $223 billion, using market prices and total outstanding
supply of each Digital Asset. This included altcoins using a “proof of work” mining structure similar to Bitcoin,
and those using a “proof of stake” transaction verification system that is different than Bitcoin’s mining system
(e.g., Peercoin, Bitshares and NXT). As of March 9, 2020, bitcoin’s $142 billion market capitalization was approximately
6.5 times the size of the $22 billion market cap of ETH, the second largest Digital Asset. Despite the marked first-mover advantage
of the Bitcoin Network over other Digital Assets, it is possible that another Digital Asset could become materially popular due
to either a perceived or exposed shortcoming of the Bitcoin Network protocol that is not immediately addressed by the Bitcoin
contributor community or a perceived advantage of an altcoin that includes features not incorporated into Bitcoin. If a Digital
Asset obtains significant market share (either in market capitalization, mining power or use as a payment technology), this could
reduce bitcoin’s market share as well as other Digital Assets we may become involved in and have a negative impact on the
demand for, and price of, such Digital Assets and could adversely affect an investment in us.
Our
ability to adopt technology in response to changing security needs or trends poses a challenge to the safekeeping of our Digital
Assets.
The
history of the Bitcoin Exchange Market has shown that Bitcoin Exchanges and large holders of bitcoins must adapt to technological
change in order to secure and safeguard their bitcoins and other Digital Assets. We rely on Bitgo Inc.’s multi-signature
enterprise storage solution to safeguard our bitcoins from theft, loss, destruction or other issues relating to hackers and technological
attack. We believe that it may become a more appealing target of security threats as the size of our bitcoin holdings grow. To
the extent that either Bitgo Inc. or we are unable to identify and mitigate or stop new security threats, our bitcoins may be
subject to theft, loss, destruction or other attack, which could adversely affect an investment in us.
Security
threats to us could result in, a loss of Company’s Digital Assets, or damage to the reputation and our brand, each of which
could adversely affect an investment in us.
Security
breaches, computer malware and computer hacking attacks have been a prevalent concern in the Bitcoin Exchange Market since the
launch of the Bitcoin Network. Any security breach caused by hacking, which involves efforts to gain unauthorized access to information
or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment,
and the inadvertent transmission of computer viruses, could harm our business operations or result in loss of our bitcoins and
other Digital Assets. Any breach of our infrastructure could result in damage to our reputation which could adversely affect an
investment in us. Furthermore, we believe that, as our assets grow, it may become a more appealing target for security threats
such as hackers and malware.
We
will primarily rely on the exchanges we hold our digital assets at and Bitgo Inc.’s multi-signature enterprise storage solution
to safeguard our bitcoins and other digital assets from theft, loss, destruction or other issues relating to hackers and technological
attack. Nevertheless, the exchanges we utilize or Bitgo Inc.’s security system may not be impenetrable and may not be free
from defect or immune to acts of God, and any loss due to a security breach, software defect or act of God will be borne by us.
In January 2018, the Japanese cryptocurrency exchange Coincheck reported that hackers breached Coincheck’s security and
stole approximately $530 million worth of cryptocurrency. Our bitcoins and other Digital Assets are also stored with exchanges
such as Itbit, Kraken and Coinbase and others prior to selling them.
On
February 1, 2019, a 20 year old hacker pled guilty to stealing more than $5,000,000 worth of crypto currency from 40 victims through
SIM swapping. The hacker is the first individual convicted of a crime for SIM swapping, which is growing increasingly popular
with criminals as a way to steal crypto currency. In SIM swapping, hackers call a telecoms company posing as their target and
claim that their SIM card has been lost, and that they would like their number to be ported to a new card. The criminals can convince
phone companies that they are who they claim to be by providing social security numbers or addresses. Once the telecoms company
transfers the number to a new SIM, hackers can bypass two-step authentication measures for accounts by using the phone as a recovery
method. By using this method and acquiring someone’s phone number, a hacker can get into every account the person owns within
minutes and that person cannot do anything about it.
The
security system and operational infrastructure may be breached due to the actions of outside parties, error or malfeasance of
an employee of ours, or otherwise, and, as a result, an unauthorized party may obtain access to our, private keys, data or bitcoins.
Additionally, outside parties may attempt to fraudulently induce employees of ours to disclose sensitive information in order
to gain access to our infrastructure. As the techniques used to obtain unauthorized access, disable or degrade service, or sabotage
systems change frequently, or may be designed to remain dormant until a predetermined event and often are not recognized until
launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. If an
actual or perceived breach of our security system occurs, the market perception of the effectiveness of our security system could
be harmed, which could adversely affect an investment in us.
In
the event of a security breach, we may be forced to cease operations, or suffer a reduction in assets, the occurrence of each
of which could adversely affect an investment in us.
A
loss of confidence in our security system, or a breach of our security system, may adversely affect us and the value of an investment
in us.
We
will take measures to protect us and our bitcoins and other Digital Assets from unauthorized access, damage or theft; however,
it is possible that the security system may not prevent the improper access to, or damage or theft of our bitcoins. A security
breach could harm our reputation or result in the loss of some or all of our bitcoins. A resulting perception that our measures
do not adequately protect our Digital Assets could result in a loss of current or potential shareholders, reducing demand for
our common stock and causing our shares to decrease in value.
Bitcoin
transactions are irrevocable and stolen or incorrectly transferred bitcoins may be irretrievable. As a result, any incorrectly
executed Bitcoin transactions could adversely affect an investment in us.
Bitcoin
(and other Digital Asset) transactions are not, from an administrative perspective, reversible without the consent and active
participation of the recipient of the transaction or, in theory, control or consent of a majority of the processing power on the
Bitcoin Network. Once a transaction has been verified and recorded in a block that is added to the Blockchain, an incorrect transfer
of Digital Assets or a theft of Digital Assets generally will not be reversible and we may not be capable of seeking compensation
for any such transfer or theft. Although our transfers of bitcoins will regularly be made to or from vendors, consultants, services
providers, etc. it is possible that, through computer or human error, or through theft or criminal action, our bitcoins could
be transferred from us in incorrect amounts or to unauthorized third parties. To the extent that we are unable to seek a corrective
transaction with such third party or is incapable of identifying the third party which has received our bitcoins through error
or theft, we will be unable to revert or otherwise recover incorrectly transferred Company Digital Assets. To the extent that
we are unable to seek redress for such error or theft, such loss could adversely affect an investment in us.
Our
Digital Assets may be subject to loss, damage, theft or restriction on access.
There
is a risk that part or all of our digital assets could be lost, stolen or destroyed. We believe that our Digital Assets will be
an appealing target to hackers or malware distributors seeking to destroy, damage or steal our Digital Assets. Although we utilize
the exchanges we hold our Digital Assets at and Bitgo Inc.’s enterprise multi-signature storage solution for our bitcoins,
to minimize the risk of loss, damage and theft, we cannot guarantee that it will prevent such loss, damage or theft, whether caused
intentionally, accidentally or by act of God. Access to our Digital Assets could also be restricted by natural events (such as
an earthquake or flood) or human actions (such as a terrorist attack). Any of these events may adversely affect our operations
and, consequently, an investment in us.
The
limited rights of legal recourse against us, and our lack of insurance protection expose us and our shareholders to the risk of
loss of our bitcoins and other Digital Assets for which no person is liable.
The
bitcoins and other Digital Assets held by us are not insured. Therefore, a loss may be suffered with respect to our bitcoins which
is not covered by insurance and for which no person is liable in damages which could adversely affect our operations and, consequently,
an investment in us.
Bitcoins
and other Digital Assets held by us are not subject to FDIC or SIPC protections.
We
will not hold our bitcoins and other Digital Assets with a banking institution or a member of the Federal Deposit Insurance Corporation
(“FDIC”) or the Securities Investor Protection Corporation (“SIPC”) and, therefore, our Digital Assets
are not subject to the protections enjoyed by depositors with FDIC or SIPC member institutions.
We
may not have adequate sources of recovery if our bitcoins and other Digital Assets are lost, stolen or destroyed.
If
our bitcoins or other Digital Assets are lost, stolen or destroyed under circumstances rendering a party liable to us, the responsible
party may not have the financial resources sufficient to satisfy our claim. For example, as to a particular event of loss, the
only source of recovery for us might be limited, to the extent identifiable, other responsible third parties (e.g., a thief or
terrorist), any of which may not have the financial resources (including liability insurance coverage) to satisfy a valid claim
of ours.
The
sale of our bitcoins or other Digital Assets to pay expenses at a time of low prices could adversely affect an investment in us.
We
may sell bitcoins or other Digital Assets to pay expenses on an as-needed basis, irrespective of then-current prices. The extreme
volatility of bitcoin and other Digital Assets could mean that prices are low when we need to sell. Consequently, our Digital
Assets may be sold at a time when the prices are low, which could adversely affect an investment in us.
Intellectual
property rights claims may adversely affect an investment in us.
We
are not aware of any intellectual property claims that may prevent us from operating and holding bitcoins or other Digital Assets;
however, third parties may assert intellectual property claims relating to the operation of us and the mechanics instituted for
the investment in, holding of and transfer of bitcoins or other Digital Assets. Regardless of the merit of an intellectual property
or other legal action, any legal expenses to defend or payments to settle such claims would be extraordinary expenses and be borne
by us through the sale of our bitcoins and other Digital Assets. Additionally, a meritorious intellectual property claim could
prevent us from operating and force us to liquidate our bitcoins and other Digital Assets. As a result, an intellectual property
claim against us could adversely affect an investment in us.
Regulatory
changes or actions may restrict the use of Digital Assets or the operation of trading markets in a manner that adversely affects
an investment in us.
Until
a few years ago, little or no regulatory attention has been directed toward bitcoin, other Digital Assets and the markets where
they trade by U.S. federal and state governments, foreign governments and self-regulatory agencies. As bitcoin has grown in popularity
and in market size and initial coin offerings which tend to be Digital Securities, the SEC, Federal Reserve Board, U.S. Congress
and certain other U.S. agencies (e.g., the CFTC, FinCEN and the Federal Bureau of Investigation) have begun to examine the operations
of the initial coin offerings, Bitcoin Network, bitcoin users and the Bitcoin Exchange Market.
On
July 25, 2017, the SEC issued its DAO Report which concluded that Digital Assets or tokens issued for the purpose of raising funds
may be securities within the meaning of the federal securities laws. The DAO Report focused on the activities of a virtual organization
which offered tokens in exchange for ether which is the second largest reported digital currency. The DAO Report emphasized that
whether Digital Asset is a security is based on the facts and circumstances. Although the Company’s activities are not focused
on raising capital or assisting others that do so, the federal securities laws are very broad, and there can be no assurances
that the SEC will not take enforcement action against the Company in the future including for the sale of unregistered securities
in violation of the Securities Act or acting as an unregistered investment company in violation of the Investment Company Act.
The SEC has taken various actions against persons or entities misusing bitcoin in connection with fraudulent schemes (i.e., Ponzi
scheme), inaccurate and inadequate publicly disseminated information, and the offering of unregistered securities. More recently,
the SEC suspended trading in three Digital Asset public companies. Since issuing the DAO Report the SEC Chairman has stated that
the SEC is carefully examining initial coin offerings and similar areas involving Digital Assets for their compliance with the
Securities Act. On November 16, 2018, the SEC announced its first civil penalties solely targeting ICO securities registration
violators in reference to settled charges against ICO issuers CarrierEQ, Inc., (“Airfox”) and Paragon Coin, Inc. (“Paragon”).
Stephanie Avakian, Co-Director of the SEC’s Enforcement Division, stated that “we have made it clear that companies
who issue securities through ICOs are required to comply with existing statutes and rules governing the registration of securities.”
Unlike Slock.It, which faced no penalty, Airfox and Paragon were each ordered to: 1) pay $250,000 in penalties, 2) register their
tokens pursuant to the Exchange Act, and 2) to file periodic reports with the SEC for at least a year.
Very
recently, it has been publicly reported that the SEC staff has been issuing subpoenas seeking information about initial coin offerings.
Although we have never invested in initial coin offering, lawsuits filed by the SEC claiming that initial coin offering issuers
and cryptocurrency public companies violate the Securities Act and the Exchange Act and the resulting publicity may have a material
adverse effect on the prices of Digital Assets we own and otherwise adversely affect opportunities in the Blockchain industry,
which in turn will have an adverse impact on our business and prospects.
The
CFTC has determined that bitcoin and other virtual currencies are commodities and the sale of derivatives based on digital currencies
must be done in accordance with the provisions of the CEA and CFTC regulations. Also of significance, is that the CFTC appears
to have taken the position that bitcoin is not encompassed by the definition of currency under the CEA and CFTC regulations. The
CFTC defined bitcoin and other “virtual currencies” as “a digital representation of value that functions as
a medium of exchange, a unit of account, and/or a store of value, but does not have legal tender status in any jurisdiction. Bitcoin
and other virtual currencies are distinct from ‘real’ currencies, which are the coin and paper money of the United
States or another country that are designated as legal tender, circulate, and are customarily used and accepted as a medium of
exchange in the country of issuance.” To the extent that bitcoin itself is determined to be a security, commodity future
or other regulated asset, or to the extent that a US or foreign government or quasi-governmental agency exerts regulatory authority
over the Bitcoin Network or bitcoin trading and ownership, trading or ownership in bitcoin or an investment in us may be adversely
affected.
The
CFTC affirmed its approach to the regulation of bitcoin and bitcoin-related enterprises on June 2, 2016, when the CFTC settled
charges against Bitfinex, a Bitcoin Exchange based in Hong Kong. In its Order, the CFTC found that Bitfinex engaged in “illegal,
off-exchange commodity transactions and failed to register as a futures commission merchant” when it facilitated borrowing
transactions among its users to permit the trading of bitcoin on a “leveraged, margined or financed basis” without
first registering with the CFTC. In 2017 the CFTC stated that it would consider bitcoin and other virtual currencies as commodities
or derivatives depending on the facts of the offering. In December 2017, bitcoin futures trading commenced on two CFTC regulated
futures markets. In 2018 two federal district courts determined that Digital Assets were commodities and can be regulated by the
CFTC as such.
Local
state regulators such as the NYSDFS have also initiated examinations of bitcoin, the Bitcoin Network and the regulation thereof.
The NYSDFS began requiring New York based companies to have a “BitLicense” in June 2015. The “BitLicense”
regulates the conduct of businesses that are involved in “virtual currencies” in New York or with New York customers,
and prohibits any person or entity involved in such activity to conduct activities without a license. Out of concern of over regulating
cryptocurrency, New York has formed a task force to further study the scope of its regulation.
Additionally,
a U.S. federal magistrate judge in the U.S. District Court for the Eastern District of Texas has ruled that “Bitcoin is
a currency or form of money,” a Florida circuit court judge determined that bitcoin did not qualify as money or “tangible
wealth,” and an opinion from the U.S. District Court for the Northern District of Illinois identified bitcoin as “virtual
currency.” Additionally, two CFTC commissioners publicly expressed a belief that derivatives based on bitcoin are subject
to the same regulation as those based on commodities, and the IRS released guidance treating bitcoin as property that is not currency
for U.S. federal income tax purposes. Taxing authorities of a number of U.S. states have also issued their own guidance regarding
the tax treatment of bitcoin for state income or sales tax purposes. On June 28, 2014, the Governor of the State of California
signed into law a bill that removed state-level prohibitions on the use of alternative forms of currency or value (including bitcoin).
The bill indirectly authorizes bitcoin’s use as an alternative form of money in the state. In February 2015, a bill was
introduced in the California State Assembly to establish a licensing regime for businesses engaging in “virtual currencies.”
In September 2015, the bill was ordered to become an inactive file and as of the date of this report there hasn’t been further
consideration by the California State Assembly. As of August 2016, the bill was withdrawn from consideration for vote for the
remainder of the year. In March of 2019, California Assembly Majority Leader Ian Calderon introduced Assembly Bill 1489, which
would govern virtual currency business activity that takes place with or on behalf of California residents. The bill proposes
to require companies to go through a regulatory approval process to conduct crypto-related activities in the state by requiring
licensure with stipulations on net worth, security, and reserves. Entities would be subject to examination, consolidations and
data sharing to maintain compliance. As presently drafted, Bill 1489 does not consider virtual currencies (also known as cryptocurrencies
and digital assets) to be legal tender, whether or not it is denominated in legal tender. It states that virtual currency is a
representation of value for exchange, storage of value, or unit of account.
Bitcoin
currently faces an uncertain regulatory landscape in not only the United States but also in many foreign jurisdictions such as
the European Union, China and Russia. While certain governments such as Germany, where the Ministry of Finance has declared bitcoin
to be “Rechnungseinheiten” (a form of private money that is recognized as a unit of account, but not recognized
in the same manner as fiat currency), have issued guidance as to how to treat bitcoin, most regulatory bodies have not yet issued
official statements regarding intention to regulate or determinations on regulation of bitcoin, the Bitcoin Network and bitcoin
users.
Among
those for which preliminary guidance has been issued in some form, Canada and Taiwan have labeled bitcoin as a digital or virtual
currency, distinct from fiat currency, while Sweden and Norway are among those to categorize bitcoin as a form of virtual asset
or commodity. In Australia, a GST (similar to the European value added tax (“VAT”)) is currently applied to bitcoin,
forcing a ten (10) percent markup on top of market price, essentially preventing the operation of any Bitcoin Exchange. This may
be undergoing a change, however, since the Senate Economics References Committee and the Productivity Commission recommended that
digital currency be treated as money for GST purposes to remove the double taxation. The United Kingdom determined that the VAT
will not apply to bitcoin sales. Since December 2013, China, Iceland, Vietnam and Russia have taken a more restrictive stance
toward bitcoin and, thereby, have reduced the rate of expansion of bitcoin use in each country. In May 2014, the Central Bank
of Bolivia banned the use of bitcoin as a means of payment. In the summer and fall of 2014, Ecuador announced plans for its own
state-backed electronic money, while passing legislation that prohibits the use of decentralized Digital Assets such as bitcoin.
In July 2016, economists at the Bank of England advocated that central banks issue their own digital currency, and the House of
Lords and Bank of England started discussing the feasibility of creating a national virtual currency, the BritCoin. As of July
2016, Iceland was studying how to create a system in which all money is created by a central bank, and Canada was beginning to
experiment with a digital version of its currency called CAD-COIN, intended to be used exclusively for interbank payments. On
August 24, 2017, Canada issued guidance stating the sale of cryptocurrency may constitute an investment contract in accordance
with Canadian law for determining if an investment constitutes a security. In July 2016, the Russian Ministry of Finance indicated
it supports a proposed law that bans bitcoin domestically but allows for its use as a foreign currency. Russia recently issued
several releases indicating they may begin regulating bitcoin and licensing miners and entities engaging in initial coin offerings.
Conversely, regulatory bodies in some countries such as India and Switzerland have declined to exercise regulatory authority when
afforded the opportunity. In April 2015, the Japanese Cabinet approved proposed legal changes that would reportedly treat bitcoin
and other Digital Assets as included in the definition of currency. These regulations would, among other things, require market
participants, including exchanges, to meet certain compliance requirements and be subject to oversight by the Financial Services
Agency, a Japanese regulator. In September 2017 Japan began regulating Bitcoin Exchanges and registered several such exchanges
to operate within Japan. In July 2016, the European Commission released a draft directive that proposed applying counter-terrorism
and anti-money laundering regulations to virtual currencies, and, in September 2016, the European Banking authority advised the
European Commission to institute new regulation specific to virtual currencies, with amendments to existing regulation as a stopgap
measure. Various foreign jurisdictions may, in the near future, adopt laws, regulations or directives that affect the Bitcoin
Network and its users, particularly Bitcoin Exchanges and service providers that fall within such jurisdictions’ regulatory
scope. Such laws, regulations or directives may conflict with those of the United States and may negatively impact the acceptance
of bitcoin by users, merchants and service providers outside of the United States and may therefore impede the growth of the bitcoin
economy. On September 4, 2017, reports were published that China may begin prohibiting the practice of using cryptocurrency for
capital fundraising. Additional reports have surfaced that China is considering regulating Bitcoin Exchanges by enacting a licensing
regime wherein Bitcoin Exchanges may legally operate. In April 2019, China’s National Development Reform Commission listed
crypto-mining among a variety of industries it intends to eliminate. In October 2018, The Shenzhen Court of International Arbitration
of China published a case analysis on contract disputes between parties to a share transfer agreement involving cryptocurrencies
and held that cryptocurrency was protected as property in China. In September 2017, the Financial Services Commission of South
Korea released a statement that initial coin offerings would be prohibited as a fundraising tool. In December of 2018, the South
Korea’s Financial Services Commission, the country’s top financial regulator, stated that six bills related to the
regulation of cryptocurrencies had been submitted to the National Assembly. One of the bills would require all persons in charge
of a cryptocurrency transfer business - including trading, brokerage and management – to register with the Financial Services
Commission. In June 2017, India’s government ruled in favor of regulating bitcoin. In December 2017, India’s finance
minister told the media that the government does not consider bitcoin a legal tender. In April 2018, the Reserve Bank of India
issued a statement to all entities regulated by the Reserve Bank, stating that they must cease all activities related to cryptocurrency.
The Internet and Mobile Association of India challenged the ban via petition to the Supreme Court of India, which ordered the
Reserve Bank of India to devise a clear regulation regarding cryptocurrency. The Supreme Court of India will resume hearing the
case in July 2019. In 2018, Australia passed legislation which requires digital currency exchange providers to register with AUSTRAC
(the Australian Transaction Reports and Analysis Centre). In its budget summary for 2017-2018, the Australian government stated
that, as part of its plan to make it easier for digital currency businesses to operate in the country, purchases of digital currency
will no longer be subject to the general sales tax.
The
effect of any future regulatory change on us, bitcoins, or other Digital Assets is impossible to predict, but such change could
be substantial and adverse to us and could adversely affect an investment in us.
It
may be illegal now, or in the future, to acquire, own, hold, sell or use bitcoins or other Digital Assets in one or more countries,
and ownership of, holding or trading in our Company’s securities may also be considered illegal and subject to sanction.
Although
currently bitcoins and other Digital Assets are not regulated or are lightly regulated in most countries, including the United
States, one or more countries such as China and Russia may take regulatory actions in the future that severely restricts the right
to acquire, own, hold, sell or use bitcoins or other Digital Assets or to exchange Digital Assets for currency. Such an action
may also result in the restriction of ownership, holding or trading in our securities. Such restrictions may adversely affect
an investment in us.
If
we become an inadvertent investment company in violation of the 1940 Act, our failure to register under the 1940 Act will adversely
affect us and you will likely lose your entire investment.
Under
the 1940 Act, a company may be deemed an investment company under if the value of its investment securities is more than 40% of
its total assets (exclusive of government securities and cash items) on a consolidated basis.
In
the event that the Digital Assets held by us exceed 40% of our total assets, exclusive of cash, we may inadvertently become an
investment company. While we are putting in place policies that we expect will work to keep the investment securities held by
us at less than 40% of our total assets, which may include actively monitoring the value of our investment securities, acquiring
assets bitcoin with our cash, or liquidating our investment securities.
The
Rules under the 1940 Act permit a company to breach the 40% threshold once every three years assuming it reduces its investment
securities below 40% within one year. Otherwise registration under the 1940 Act would be required.
The
40% requirement may limit our ability to make certain investments or enter into joint ventures that could otherwise have a positive
impact on our earnings. In any event, we do not intend to become an investment company engaged in the business of investing and
trading securities. The failure to register when required would likely make our common stock worthless.
If
we become an investment company and fail to register, we would have to stop doing almost all business. Registration is time consuming
and restrictive and would require a restructuring of our operations, and we would be very constrained in the kind of business
we could do as a registered investment company. Further, we would become subject to substantial regulation concerning management,
operations, transactions with affiliated persons and portfolio composition, and would need to file reports under the 1940 Act
regime. The cost of such compliance would result in the Company incurring substantial additional expenses, and the failure to
register if required would have a materially adverse impact to conduct our operations.
If
regulatory changes or interpretations of our activities require our registration as a MSB under the regulations promulgated by
FinCEN under the authority of the U.S. Bank Secrecy Act, we may be required to register and comply with such regulations. If regulatory
changes or interpretations of our activities require the licensing or other registration of us as a money transmitter (or equivalent
designation) under state law in any state in which we operate, we may be required to seek licensure or otherwise register and
comply with such state law. In the event of any such requirement, to the extent the Company decides to continue, the required
registrations, licensure and regulatory compliance steps may result in extraordinary, non-recurring expenses to us. We may also
decide to cease the Company’s operations. Any termination of certain Company operations in response to the changed regulatory
circumstances may be at a time that is disadvantageous to investors.
To
the extent that the activities of the Company cause it to be deemed a MSB under the regulations promulgated by FinCEN under the
authority of the U.S. Bank Secrecy Act, the Company may be required to comply with FinCEN regulations, including those that would
mandate the Company to implement anti-money laundering programs, make certain reports to FinCEN and maintain certain records.
To
the extent that the activities of the Company cause it to be deemed a “money transmitter” (or equivalent designation)
under state law in any state in which the Company operates, the Company may be required to seek a license or otherwise register
with a state regulator and comply with state regulations that may including the implementation of anti-money laundering programs,
maintenance of certain records and other operational requirements. Currently, the NYSDFS has finalized its “BitLicense”
framework for businesses that conduct “virtual currency business activity,” the Conference of State Bank Supervisors
has proposed a model form of state level “virtual currency” regulation and additional state regulators including those
from California, Idaho, Virginia, Kansas, Texas, South Dakota and Washington have made public statements indicating that virtual
currency businesses may be required to seek licenses as money transmitters. In July 2016, North Carolina updated the law to define
“virtual currency” and the activities that trigger licensure in a business friendly approach that encourages companies
to use virtual currency and blockchain technology. Specifically, the North Carolina law does not require miners or software providers
to obtain a license for multi-signature software, smart contract platforms, smart property, colored coins and non-hosted, non-custodial
wallets. Starting January 1, 2016, New Hampshire requires anyone exchanges a digital currency for another currency must become
a licensed and bonded money transmitter. In numerous other states, including Connecticut and New Jersey, legislation is being
proposed or has been introduced regarding the treatment of bitcoin and other Digital Assets. The Company will continue to monitor
for developments in such legislation, guidance or regulations.
Such
additional federal or state regulatory obligations may cause the Company to incur extraordinary expenses, possibly affecting an
investment in the Resale Shares in a material and adverse manner. Furthermore, the Company and its service providers may not be
capable of complying with certain federal or state regulatory obligations applicable to MSBs and MTs. If the Company is deemed
to be subject to and determines not to comply with such additional regulatory and registration requirements, we may act to dissolve
and liquidate the Company. Any such action may adversely affect an investment in us.
Current
interpretations require the regulation of bitcoins and other Digital Assets under the CEA by the CFTC, we may be required to register
and comply with such regulations. To the extent that we decide to continue operations, the required registrations and regulatory
compliance steps may result in extraordinary, non-recurring expenses to us. We may also decide to cease certain operations. Any
disruption of our operations in response to the changed regulatory circumstances may be at a time that is disadvantageous to investors.
Current
and future legislation, CFTC and other regulatory developments, including interpretations released by a regulatory authority,
may impact the manner in which bitcoins and other Digital Assets are treated for classification and clearing purposes. In particular,
derivatives on these assets are not excluded from the definition of “commodity future” by the CFTC. We cannot be certain
as to how future regulatory developments will impact the treatment of bitcoins and other Digital Assets under the law.
Bitcoins
have been deemed to fall within the definition of a commodity and, we may be required to register and comply with additional regulation
under the CEA, including additional periodic report and disclosure standards and requirements. Moreover, we may be required to
register as a commodity pool operator and to register us as a commodity pool with the CFTC through the National Futures Association.
Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting
an investment in us. If we determine not to comply with such additional regulatory and registration requirements, we may seek
to cease certain of our operations. Any such action may adversely affect an investment in us. No CFTC orders or rulings are applicable
to our business.
If
regulatory changes or interpretations require the regulation of bitcoins and other Digital Assets (in contrast to Digital Securities)
under the Securities Act and Investment Company Act by the SEC, we may be required to register and comply with such regulations.
To the extent that we decide to continue operations, the required registrations and regulatory compliance steps may result in
extraordinary, non-recurring expenses to us. We may also decide to cease certain operations. This would likely have a material
adverse effect on us and investors may lose their investment.
Current
and future legislation and SEC rulemaking and other regulatory developments, including interpretations released by a regulatory
authority, may impact the manner in which bitcoins are treated for classification and clearing purposes. The SEC’s July
25, 2017 DAO Report expressed its view that Digital Assets may be securities depending on the facts and circumstances. As of the
date of this report, we are not aware of any rules that have been proposed to regulate the Digital Assets we hold as securities.
We cannot be certain as to how future regulatory developments will impact the treatment of bitcoins and other Digital Assets under
the law. Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting
an investment in us. If we determine not to comply with such additional regulatory and registration requirements, we may seek
to cease certain of our operations. Any such action may adversely affect an investment in us.
To
the extent that Digital Assets including bitcoins are deemed by the SEC to fall within the definition of a security, we may be
required to register and comply with additional regulation under the Investment Company Act, including additional periodic reporting
and disclosure standards and requirements and the registration of our Company as an investment company. Additionally, one or more
states may conclude bitcoins are a security under state securities laws which would require registration under state laws including
merit review laws which would adversely impact us since we would likely not comply. As stated earlier in this report, some states
including California define the term “investment contract” more strictly than the SEC. Such additional registrations
may result in extraordinary, non-recurring expenses of our Company, thereby materially and adversely impacting an investment in
our Company. If we determine not to comply with such additional regulatory and registration requirements, we may seek to cease
all or certain parts of our operations. Any such action would likely adversely affect an investment in us and investors may suffer
a complete loss of their investment.
The
Company does not currently have any mining operations but may resume its mining operations through outsourced data centers if
it receives additional capital. To the extent that the Company resumes mining operations and acquires Digital Assets as a result
of mining, we do not intend to trade the Digital Assets until we determine, with the assistance of legal counsel, that the Digital
Assets are not securities, the Digital Assets would only be used for our own account.
We
do not believe that bitcoin and ether are securities. As such, we do not intend to acquire securities in amounts that are equal
to or greater than 40% of our assets. Should the total value of securities which we hold rise to more than 40% of our assets (exclusive
of cash) we note that SEC Rule 3a-2 under the 1940 Act allows an issuer to prevent itself from being deemed an investment company
if it reduces its holdings of securities to less than 40% of its assets (exclusive of cash) and does not go above the 40% threshold
more than once every three years. In order to comply with the 1940 Act, we anticipate having increased management time and legal
expenses in order to analyze which Digital Assets are securities and periodically analyze our total holdings to ensure that we
do not maintain more than 40% of our total assets (exclusive of cash) as securities. If our view that ether is not a security
is challenged by the SEC and courts uphold the challenge, we may inadvertently violate the 1940 Act and incur substantial legal
fees in defending our position. In such case the legal fees may exceed our available assets which could adversely affect an investment
in us.
If
federal or state legislatures or agencies initiate or release tax determinations that change the classification of bitcoins or
other Digital Assets as property for tax purposes (in the context of when such Digital Assets are held as an investment), such
determination could have a negative tax consequence on our Company or our shareholders.
Current
IRS guidance indicates that Digital Assets such as bitcoins should be treated and taxed as property, and that transactions involving
the payment of bitcoins for goods and services should be treated as barter transactions. While this treatment creates a potential
tax reporting requirement for any circumstance where the ownership of a bitcoin passes from one person to another, usually by
means of bitcoin transactions (including off-Blockchain transactions), it preserves the right to apply capital gains treatment
to those transactions which may have adversely affect an investment in our Company.
On
December 5, 2014, the New York State Department of Taxation and Finance issued guidance regarding the application of state tax
law to Digital Assets such as bitcoins. The agency determined that New York State would follow IRS guidance with respect to the
treatment of Digital Assets such as bitcoins for state income tax purposes. Furthermore, they defined Digital Assets such as bitcoin
to be a form of “intangible property,” meaning the purchase and sale of bitcoins for fiat currency is not subject
to state income tax (although transactions of bitcoin for other goods and services maybe subject to sales tax under barter transaction
treatment). It is unclear if other states will follow the guidance of the IRS and the New York State Department of Taxation and
Finance with respect to the treatment of Digital Assets such as bitcoins for income tax and sales tax purposes. If a state adopts
a different treatment, such treatment may have negative consequences including the imposition of greater a greater tax burden
on investors in bitcoin or imposing a greater cost on the acquisition and disposition of bitcoins, generally; in either case potentially
having a negative effect on prices in the Bitcoin Exchange Market and may adversely affect an investment in our Company.
Foreign
jurisdictions may also elect to treat Digital Assets such as bitcoins differently for tax purposes than the IRS or the New York
State Department of Taxation and Finance. To the extent that a foreign jurisdiction with a significant share of the market of
bitcoin users imposes onerous tax burdens on bitcoin users, or imposes sales or value added tax on purchases and sales of bitcoins
for fiat currency, such actions could result in decreased demand for bitcoins in such jurisdiction, which could impact the price
of bitcoins and negatively impact an investment in our Company.
Risks
Related to Our Digital Assets Holdings
The
loss or destruction of a private key required to access a Digital Assets such as bitcoin may be irreversible. Our loss of access
to our private keys or our experience of a data loss relating to our Company’s Digital Assets could adversely affect an
investment in our Company.
Bitcoins
are controllable only by the possessor of both the unique public key and private key relating to the local or online digital wallet
in which the bitcoins are held. We are required by the operation of the Bitcoin Network to publish the public key relating to
a digital wallet in use by us when it first verifies a spending transaction from that digital wallet and disseminates such information
into the Bitcoin Network. We safeguard and keep private the private keys relating to our bitcoins not held at exchanges by utilizing
Bitgo Inc.’s enterprise multi-signature storage solution; to the extent a private key is lost, destroyed or otherwise compromised
and no backup of the private key is accessible, we will be unable to access the bitcoins held by it and the private key will not
be capable of being restored by the Bitcoin Network. Any loss of private keys relating to digital wallets used to store our bitcoins
could adversely affect an investment in us.
To
the extent that any of our Digital Assets are held by Exchanges, we may face heightened risks from cybersecurity attacks and financial
stability of the Exchanges.
The
Company will use Digital Asset exchanges to hold certain of the its Digital Assets; the Company’s bitcoin will either be
held directly by the Company in a bitcoin wallet utilizing Bitgo Inc.’s enterprise multi-signature storage solution or at
Digital Asset exchanges. All Digital Assets not held in the Company’s Bitgo wallets will be subject to the risks encountered
by a Digital Asset exchange including a DDoS Attack or other malicious hacking, a sale of the Digital Asset exchange, loss of
the Digital Assets by the Digital Asset exchange and other risks similar to those described on page 16 in a risk factor
entitled “Security threats to us could result in, a loss of Company’s Digital Assets, or damage to the reputation
and our brand, each of which could adversely affect an investment in us.” The Company may not maintain a custodian agreement
with the Digital Asset exchange that holds the Company’s Digital Assets. Exchange typically do not provide insurance and
may lack the resources to protect against hacking and theft. In the future we may acquire other Digital Assets that are held by
Exchanges. If a material amount of our Digital Assets are held by Exchanges, we may be materially and adversely affected if the
Exchanges suffer cyberattacks or incur financial problems.
Risks
Related to Our Digital Asset Data Analytics Platform Development
There
is substantial doubt that we will be able to develop or commercialize our Digital Asset Data Analytics Platform.
We
are currently developing a digital asset data analytics platform with the ultimate goal of consolidating users’ information
so that it can be more easily accessed and reviewed by users. We may not successfully develop this platform in a cost-efficient
manner or at all. If we fail to develop a digital asset data analytics platform as intended, it could have a material adverse
effect on our business, especially to the extent that we allocate significant capital, labor and other resources to this endeavor
rather than focusing on other business opportunities which may prove to have been more lucrative in hindsight.
Even
if we do successfully develop our platform and bring it to the marketplace, there is no guarantee that we will attract a sufficient
number of users to generate revenue or become profitable. Our competitors, most of whom have greater capital and human resources
than we do, may develop technologies that are superior to our platform or commercialize comparable technologies before us, in
which case our ability to attract users and generate revenue therefrom could be rendered unlikely or even impossible. If we fail
to obtain users for our platform or find an alternative means of commercializing our platform to recoup our investment therein,
it will have a material adverse effect on our financial condition.
Even
if we develop and commercialize our Digital Asset Data Analytics Platform, we may not be able to generate material revenues.
The
digital asset data analytics platform that we are currently developing will require significant time and capital. Even if we do
develop this platform and acquire a sufficient number of users to generate revenue, we cannot guarantee the revenue would be material
or sufficient to justify the costs we anticipate incurring to develop the platform. Our ability to capitalize on any platform
we do develop will depend on a variety of factors and uncertainties beyond our control, including the competition we face and
similar or superior services that may already exist by the time we begin marketing our platform, the volatile nature of the blockchain
industry generally and the unknown demand for the services we plan to offer through our platform as it is currently envisioned,
and the advancement of new technologies which could arise in the future and render our platform partially or completely obsolete.
If any of these or other risks come to fruition to prevent our platform from generating material revenue to justify its costs
of production, it would have a material adverse effect on our business.
The
development of our Digital Asset Data Analytics Platform will depend on the successful efforts of our employees.
Our
platform development effort is completely dependent on our infrastructure. We use internally developed systems for the platform.
Any future difficulties developing aspects of our platform may cause delays in bringing our platform to market. If the location
where all of our computer and communications hardware is located is compromised, our platform, prospects, could be harmed. We
do not currently have a disaster recovery plan which could result in a loss of the platform software. Despite our implementation
of network security measures, our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions,
the occurrence of any of which could lead to interruptions, delays, loss of critical data or the inability launch our platform.
The occurrence of any of the foregoing risks could harm our business.
We
are subject to cyber security risks and may incur delays in platform development in an effort to minimize those risks and to respond
to cyber incidents.
Our
digital asset data analytics platform will be entirely dependent on the secure operation of our website and systems as well as
the operation of the Internet generally. The platform involves reading user data, and storage of user data, and security breaches
could expose us to a risk of loss or misuse of this information, litigation, and potential liability. A number of large Internet
companies have suffered security breaches, some of which have involved intentional attacks. From time to time we and many other
Internet businesses also may be subject to a denial of service attacks wherein attackers attempt to block customers’ access
to our Website. If we are unable to avert a denial of service attack for any significant period, we could sustain delays in the
development of the platform and when launched risk losing future users and have user dissatisfaction. We may not have the resources
or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Cyber attacks may target us, our
users, or exchanges we read data from in general or the communication infrastructure on which we depend. If an actual or perceived
attack or breach of our security occurs, user perception of the effectiveness of our security measures could be harmed and we
could lose our future user. Actual or anticipated attacks and risks may cause us to incur increasing costs, and delay development.
A person who is able to circumvent our security measures might be able to misappropriate our or our users’ proprietary information,
cause interruption in our operations, damage our computers or those of our users, or otherwise damage our reputation and platform.
Any compromise of our security could result in a violation of applicable privacy and other laws, significant legal and financial
exposure, damage to our reputation, and a loss of confidence in our security measures, which could harm our business.
Risks
Related to the Purchase Agreement with Cavalry
The
sale or issuance of our common stock to Cavalry may cause dilution and the sale of the shares of common stock acquired by Cavalry,
or the perception that such sales may occur, could cause the price of our common stock to fall.
On
May 13, 2019, we entered into the Purchase Agreement with Cavalry, pursuant to which Cavalry has committed to purchase up to $10,000,000
of our common stock. As of March 9, 2020, Cavalry has purchased 8,603,986 shares (excluding 419,652 commitment and pro-rata commitment
shares) for $1,479,410 under the Purchase Agreement. The purchase shares that may be sold pursuant to the Purchase Agreement may
be sold by us to Cavalry at our discretion from time to time over a 36-month period commencing after the SEC has declared effective
a registration statement covering the respective shares. The purchase price for the shares that we may sell to Cavalry under the
Purchase Agreement will fluctuate based on the price of our common stock. Depending on market liquidity at the time, sales of
such shares may cause the trading price of our common stock to fall. Additionally, the amount that we may sell to Cavalry will
be limited to the Daily Trading Dollar Volume on the day of, or day before, the Put. If the trading volume and/or price of our
common stock is low, our ability to raise capital under the Purchase Agreement will be limited and/or take an extensive time to
raise capital.
We
generally have the right to control the timing and amount of any sales of our shares to Cavalry, except that, pursuant to the
terms of our agreements with Cavalry, we would be unable to sell shares to Cavalry on any day when the closing sale price of our
common stock is below $0.005 per share, subject to adjustment as set forth in the Purchase Agreement. Cavalry may ultimately purchase
all, some or none of the shares of our common stock that may be sold pursuant to the Purchase Agreement in connection with our
rights to direct Cavalry’s purchases at our discretion and, after it has acquired shares, Cavalry may sell all, some or
none of those shares. Therefore, sales to Cavalry by us could result in substantial dilution to the interests of other holders
of our common stock. Additionally, the sale of a substantial number of shares of our common stock to Cavalry, or the anticipation
of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at
a price that we might otherwise wish to effect sales.
We
may not be able to access sufficient funds under the Purchase Agreement with Cavalry when needed.
Our
ability to sell shares to Cavalry and obtain funds under the Purchase Agreement is limited by the terms and conditions in the
Purchase Agreement, including restrictions on when we may sell shares to Cavalry, restrictions on the amounts we may sell to Cavalry
at any one time, and a limitation on our ability to sell shares to Cavalry to the extent that it would cause Cavalry to beneficially
own more than 4.99% of our outstanding common stock. In addition, any amounts we sell under the Purchase Agreement may not satisfy
all of our funding needs, even if we are able and choose to sell all $10,000,000 under the Purchase Agreement. If
we elect to issue and sell more than the shares offered under any one prospectus to Cavalry, which we have the right, but not
the obligation, to do, we must first register for resale under the Securities Act any such additional shares on a subsequent prospectus.
We
elected to enter into the Purchase Agreement with Cavalry as we expect that amount of capital over the next 12 months will be
required for us to fully implement our business, operating and development plans. The extent we rely on Cavalry as a source of
funding will depend on a number of factors including, the prevailing market price and trading volume of our common stock and the
extent to which we are able to secure working capital from other sources. If obtaining sufficient funding from Cavalry were to
prove unavailable or prohibitively dilutive, we will need to secure another source of funding in order to satisfy our working
capital needs. Should the financing we require to sustain our working capital needs be unavailable
or prohibitively expensive when we require it, the consequences could be a material adverse effect on our business, operating
results, financial condition and prospects.
The
sale of our common stock to Cavalry will cause dilution and the sale of the shares by Cavalry could cause the price of our common
stock to decline.
The
number of shares ultimately offered for sale by Cavalry is dependent upon the number of shares sold to Cavalry under the Purchase
Agreement. The purchase price for the common stock to be sold to Cavalry pursuant to the Purchase Agreement will fluctuate based
on the price of our common stock. Depending upon market liquidity at the time, a sale of shares by Cavalry at any given time could
cause the trading price of our common stock to decline. After it has acquired such shares, Cavalry may sell all, some or none
of such shares. Therefore, sales to Cavalry by us under the Purchase Agreement will result in substantial dilution to the interests
of other holders of our common stock. The sale of a substantial number of shares of our common stock, or anticipation of such
sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price
that we might otherwise wish to effect sales. However, we have the right to control the timing and amount of any sales of our
shares to Cavalry.