Overview
We
seek to invest in companies with:
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defensible
barriers to entry, |
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proven
value propositions, |
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identifiable
growth opportunities or operational improvements, and |
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paths
to sustainable competitive advantages. |
We
expect to provide strategic guidance through a network of experienced executives with operational and industry expertise, as well as
financing support and other resources necessary to drive value.
Business
of OpenLocker
Established
on August 25, 2021, OpenLocker is dedicated to offering marketing solutions for collegiate and professional sports organizations and
athletes using non-fungible tokens (NFTs) to create more immersive experiences for fans. The OpenLocker platform is designed to offer
a seamless experience for users who have no prior experience buying or trading digital tokens. Utilizing the Flow blockchain, a fast,
scalable and reliable blockchain, OpenLocker is able to use less energy than some other blockchains including Ethereum.
OpenLocker
connects the digital and the physical worlds by offering real world utility and a physical token of ownership to fans who purchase a
digital collectible on its Web3 platform. The limited-edition Platinum Cards are wallet-sized, metal collectible cards that are hand-signed
by the athlete and feature the digital art on one side and QR code on the back which directs to the digital viewer. The digital and physical
collectibles will grant access to VIP experiences and enable fans to receive rewards from local, regional and national retailers.
The
fan communities in development will feature unique branding and strategic marketing campaigns to bolster fan awareness without the use
of university-licensed marks. For instance, the Radford University fan community has been dubbed the Rowdy Redz to pay homage to the
school’s rich history while incorporating a fun and edgy feel. OpenLocker collects feedback from student-athletes and die-hard
fans to create the collectibles, experiences and utility that will resonate with each fan base.
The
OpenLocker mission is to empower athletes to monetize their fan engagement with innovative digital collectibles and to create meaningful
experiences for fans by using OpenLocker’s technology to build communities. Each digital token is authenticated on the blockchain
with a unique serial number which is assigned to the buyer upon purchase. The selection and pricing of each collection is determined
by such factors as the size of the target audience, the athlete’s popularity, and associated utility and goals set forth by the
community manager. To further engage super fans and boosters, as well as increase athlete’s earning potential, a one-of-one NFT
may also be offered for sale by auction and includes autographed gear/ memorabilia and personalized experiences (meet-and-greet or customized
activity) with the athlete, arranged by OpenLocker with the athlete’s input and approval.
The
Bone Yard Huskyz Club (BYHC) was created by OpenLocker in January 2022 for the University of Connecticut using the Name, Image and Likeness
(NIL) of all 14 eligible members of the men’s basketball team as a proof of concept. The OpenLocker creative team designed a BYHC
logo and Huskyz avatar (a takeoff on the university’s Huskies mascot) in the likeness of each of the athletes which were used for
branding and promotional purposes. A website with a project roadmap outlining the perks and rewards of club membership was activated
two weeks prior to the NFT release date, which was strategically timed around the basketball team’s season schedule. OpenLocker’s
comprehensive marketing campaign included digital programmatic advertising, organic and paid social media strategy (including pre- and
post-drop Twitter conversations with fans, blockchain experts, athletes and parents of athletes), podcasts, email blasts and gorilla
marketing at several home basketball games. The OpenLocker athlete liaison also provided the athletes with graphics and talking points
they could use to leverage their social media followers and promote sales of their own NFTs by word-of-mouth.
A
majority of the revenue from the BYHC project was generated on the first day of sales of the NFTs. The first two hours were the busiest
as fans were incentivized by the free autographed “Platinum card” that was included with purchase for the first 25 NFTs sold
per athlete. This unique collectible is a metal, wallet-sized card hand-signed by the athlete with the digital art printed on the front
and quick response (QR) code that directs to the NFT viewer on the back. Another stream of revenue was generated in March 2022 as the
University of Connecticut basketball team wrapped up their regular season and played post-season tournaments.
OpenLocker’s
plan is to take the exclusive fan club model (Bone Yard Huskyz Club), originally created for the University of Connecticut, to other
universities in partnership with independent groups working to provide college athletes with NIL opportunities. Since the National Collegiate
Athletic Association (NCAA) changed its policy to allow college athletes to benefit from their NIL, alumni and boosters are eager to
raise funds in a way that meets NCAA, state and university compliance requirements. OpenLocker anticipates expanding to four to six more
colleges in the third quarter of 2022 (prior to the start of the fall football season) and another four to six colleges in the fourth
quarter of 2022 (to coincide with basketball pre-season).
OpenLocker’s
current revenue model includes (i) profit sharing of primary sales on the OpenLocker platform with partners and athletes, (ii) collecting
transaction fees from transactions on OpenLocker’s trading portal, as well as (iii) service fees for additional creative design
work, development and product fulfillment services.
OpenLocker
has also negotiated deals with several professional lacrosse players to release an NFT collection leading into the 2022 Premier Lacrosse
League season. OpenLocker plans to open an online portal for individual athletes to create and sell their own NFT collections and physical
collectibles by the third quarter of 2022. While OpenLocker currently does not have licensing agreements with any professional sports
leagues, teams or institutions, OpenLocker anticipates finalizing one or more such deals by the end of 2022 and into 2023. However, there
can be no assurance that the foregoing can occur as planned, or at all. OpenLocker believes that licensing the NIL of athletes directly
with each athlete allows OpenLocker to retain more revenue, while giving the athlete a larger percentage of the profit, which is an important
differentiating factor for OpenLocker in the sports NFT space.
Moreover,
OpenLocker has been in discussions with athletes outside of the college sports arena, including related to golf and race car driving
and foresees opportunities in NASCAR, Ultimate Fighting Championship, and beyond.
OpenLocker
launched the OpenStable marketplace in April 2022 to engage the next generation of thoroughbred racing enthusiasts. Through its relationships
with owners, trainers and influencers in the racing industry, OpenStable aims to be able to give fans access to exclusive information,
real life experiences, and memorabilia so that they may engage in a truly immersive journey covering a racehorse’s career.
The
launch strategy for the OpenStable marketplace involved reaching the largest audience of racing fans (both casual and committed) by creating
a collection of NFTs featuring the leading contenders in the Kentucky Derby and Kentucky Oaks, as well as scheduling their release on
the weekend prior to each of those two prominent races. Per a Memorandum of Understanding (the “MOU”) dated April 15, 2022,
OpenLocker and Horse Races Now established terms for a marketing collaboration, whereby Horse Races Now agreed to drive traffic from
its app and e-mail marketing campaigns targeted at its existing user base of racing fans, in exchange for OpenLocker paying Horse Races
Now 12.5% of its retained revenues (after transaction fees) generated from sales of all NFT collections, on OpenStable.
The
MOU has provided OpenLocker with access to the Horse Races Now’s (horseracesnow.com) database of 600,000 users and placement in
the app. OpenLocker also executed a weeklong digital promotion in the Daily Racing Form and conducted media interviews, as well as social
media campaigns. While the racing season was at its height, OpenLocker benefited from significant traffic to its website and generated
some sales of gear, including apparel, hats, pins, and other items featuring each racehorse’s unique brand (also featuring the
OpenStable logo). Additional NFT releases are expected to be made over the course of summer 2022, in connection with various racehorses.
Finally,
the user-friendly interface that OpenLocker created for college sports fans and emphasis on fan community building is an important differentiator
for OpenStable as it seeks to position itself as the next-generation marketing solution within the thoroughbred racing space. As the
average fan is currently over 50 years old and likely unfamiliar with blockchain technology, simplifying NFTs is vital for piquing their
interest. Offering ownership of digital tokens along with rewards and experiences, both in the virtual and physical realms, also makes
OpenStable products attractive to a younger audience with a goal to develop a next generation younger fan engagement around the thoroughbred
racing sport.
OpenLocker
believes that it has found a unique and attractive market for the application of NFTs by focusing on the college athlete market. For
example, pursuant to a Statista survey published on April 8, 2022, in a survey conducted in March 2022, 11 percent of respondents stated
that they were avid fans of NCAA men’s college basketball in the United States, whereas 26 percent of respondents stated they were
casual fans. The NCAA men’s basketball is the college level of basketball played in the United States and is seen as the final
step up before the NBA.
OpenLocker
Proprietary Marketplace & Platform
OpenLocker
has designed an NFT platform for sports fans with no prior experience with cryptocurrency or digital wallets. The primary marketplace
accepts both fiat and cryptocurrency with a variety of payment method options. By operating on the Flow blockchain, OpenLocker is energy-efficient
and therefore does not charge minting or gas fees. The platform also supports token-gated access to exclusive information, virtual experiences
and gear shops.
To
further enhance customer adoption of the technology, OpenLocker provides online documentation and promptly responds to inquiries submitted
via email and social media 7 days a week. A step-by-step instruction guide on how to set up a Blocto wallet and claim an NFT after purchase
is available on openlocker.io. OpenLocker also publishes information for sports fans about the benefits of NFT ownership and how to navigate
the OpenLocker platform.
OpenLocker
offers a secondary marketplace for peer-to-peer transactions of only those NFTs that it mints. By creating its own ecosystem for fans
to buy, sell and trade NFTs, OpenLocker is able to offer rewards and incentives for fan engagement. A 7.5% fee is collected by OpenLocker,
which covers the cost of the blockchain transaction and development while also enabling OpenLocker to pay athletes an additional royalty
on residual sales.
Customers
To
date OpenLocker’s customers primarily include existing team, athlete, and horse fans such as students, alumni, parents and friends
of the athletes as well as new fans that wish to support community engagement. As the NIL market grows and expands, potential customers
include any person interested in purchasing an NFT and exploring the burgeoning Web3 environment.
Industry
Overview and Market Opportunity
We
believe one of the most notable developments in financial markets during 2021 was the rally in digital assets and the changing of the
public perspective on digital assets, as well as increased institutional interest. In April 2021, CNBC reported that the total market
capitalization of the cryptocurrency space had eclipsed $2 trillion for the first time. We believe this evidences that the digital asset
phenomenon has deeper roots and, not withstanding its unpredictability, we expect it is here to stay for the long run.
In
our opinion, the issue is no longer whether digital assets will survive, but rather how they will evolve. While the cryptocurrency market
is often volatile at this time, we believe this could be a phase preceding broader acceptance of a fairly new asset class.
We
believe many digital assets are built on a technological foundation that grants them a unique and lasting advantage over traditional
assets. However, we believe it is far too early to predict which cryptocurrencies will actually survive the ongoing shifts that are likely
to redefine the future digital asset landscape. Therefore, we plan for our Company not to be structured based on any one cryptocurrency
to succeed. Instead, we plan to provide our stockholders the opportunity to diversify their digital asset portfolio with an investment
in our Company.
2021
was a significant year for digital assets and as the market continues to develop, the world’s financial institutions, policymakers,
and investors are watching carefully. Whatever the future holds for digital assets, we believe that we will be the digital asset investment
platform that many investors are looking for.
OpenLocker
Industry Overview and Market Opportunity
Deloitte
Global predicts that NFTs for sports media will generate more than $2 billion in transactions in 2022, approximately double the figure
for 2021. By the end of 2022, it is expected that 4 to 5 million sports fans globally will have purchased or been gifted an NFT sports
collectible. Interest in sports NFTs is likely to be spurred by activity in the wider NFT market, including that for digital art. In
fact, the top five most valuable sales of sports NFTs generated over $100 million by August 2021, and sales figures for the top five
most valuable sales are predicted to grow by the end of 2022.
NFTs
and NFT marketplaces specifically devoted to college athletes have played an increasingly important role in the rising popularity of
digital tokens among sports fans. Our business model has been enabled by the recent change in NCAA policy, effective July 1, 2021, which
now allows college athletes to profit from their NIL. A majority of the general public and close to three quarters of college sports
fans believe that athletes should be compensated for their NIL, with stronger support among those between the ages of 18 and 34. The
younger demographic are also interested in the digital tools enabled by blockchain technology, as well as being part of an exclusive
like-minded community. Millennials use social media to connect with peers and others around them; therefore, they are more likely to
desire ownership of digital art that they can display online and use as a profile picture.
Principal
Products and Services
We
plan to: (i) own, develop, consult on, and provide funding for new and existing digital assets; (ii) hold digital assets for the benefit
of our stockholders; and (iii) be founders of new digital assets.
We
believe that our value will grow if the digital assets we invest in succeed. We live in a world that is increasingly global - digital
natives control a growing share of the world’s wealth, and each year we see more commerce happening online. We feel that with proper
execution of our business plan and the success of our digital asset portfolio, we will provide value to our stockholders. More importantly,
we feel we have a tremendous opportunity to actively drive our business by:
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By
expanding the depth and breadth of our digital asset portfolio: We plan to purchase coins/tokens in the open market or to
invest in the company that creates the digital asset. Our investments in these digital assets may be in the form of cash or newly
issued shares of our stock. |
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By
launching/developing innovative digital assets: We plan to innovate by: |
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Developing,
launching and/or providing funding for new and exciting digital assets which we will retain majority ownership of. Partnering with
developers of exciting digital assets which we will retain majority ownership over. |
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Providing
consulting services to the developers of digital assets. |
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Through
secure handling and storage of digital assets: All digital assets will be stored via cold storage wallets, as well as through
top tier exchanges such as Coinbase and Gemini. |
OpenLocker
Principal Products and Services
OpenLocker
aims to provide a comprehensive suite of NFT products and services, adopting a hybrid flexible model creating products both licensed
and non-licensed with colleges, professional sports teams, leagues, brands, etc.
OpenLocker
creates and sells non-fungible tokens with a license to use an athlete’s NIL. NFTs for each individual athlete are minted on the
Flow blockchain in limited edition series to create verifiable digital scarcity and store metadata of value to collectors. Each digital
token also includes other benefits such as access to exclusive information, collectibles, memorabilia and experiences.
OpenLocker
also plans to pursue partnerships and licensing opportunities with universities, amateur and professional sports organizations, as well
as brands.
| ● | Autographed
Physical Collectibles (Authenticated Physical Tokens) |
Each
NFT which OpenLocker sells comes with a Platinum Card autographed by the athlete. This metal, wallet-sized card has the digital art print
sublimated on one side and a QR code printed on the other side which directs to the NFT viewer. The serial number is laser engraved on
the card and there is space reserved for the athlete to hand-sign. The physical collectible connects the digital asset to the physical
world for fans new to the technology and provides a canvas for the athlete’s authentic signature to be delivered to customers.
OpenLocker
also sells exclusive gear, including t-shirts, sweatshirts, hats and pins, in its token-gated gear shops for NFT holders.
| ● | OpenLocker
NFT Marketplace |
The
OpenLocker NFT Marketplace provides a user-friendly shopping experience for sports fans to purchase NFTs of their favorite athletes using
fiat or cryptocurrency. To reduce friction and expedite the checkout process, first-time customers connect their non-custodial digital
wallet (Blocto) to the OpenLocker NFT viewer after purchase. Once connected, the customer can then “claim” the NFT purchased
to his/her wallet and gain access to utility and rewards program.
| ● | OpenLocker
NFT Trading Portal |
The
OpenLocker Trading Portal allows peer-to-peer transactions on the Flow blockchain. NFT holders can list their tokens for sale in USD
with FUSD, a USD-backed stablecoin, issued as the fungible token for transactions. To purchase
an NFT, customers can easily purchase FUSD through the Blocto wallet app in just a few clicks.
| ● | Sports
Branding Services |
OpenLocker
also provides branding services for individual athletes, university collectives, horse owners/trainers, and other entities interested
in creating a distinctive identity, building their fan base, and maximizing revenue. From logo creation and styling to social media messaging
and activation campaigns, OpenLocker’s team can provide enhanced support to collaborating colleges and athletes.
Competition
Our
competitors include other companies focused on investments in, development of, and provision of consulting services to, digital assets
and digital asset companies. Venture funds such as Pantera Capital, Blockchain Capital and Union Square Ventures invest in and advise
the cryptocurrency space in similar ways that we intend to do, and have significantly greater resources than us for such endeavors. However,
we believe we have a number of key strengths that will allow us to compete effectively against other participants in this space. We believe
the following advantages set us apart from our competitors:
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Narrow
Focus: We plan to be exclusively focused on the cryptoeconomy. We plan to remain solely focused on investments in, development
of, and providing consulting services to, digital assets and digital asset companies. We believe our focus will allow us to adapt
quickly to shifting trends and support the growth of the industry. We believe that, as the digital assets we focus on grow, our value
will grow. |
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Inclusive
Approach: We hope to be the go to destination for inexperienced digital asset investors as well as sophisticated investors. The
digital asset space is confusing and we plan to be the “go to” investment in the digital asset space. Instead of consumers
needing to purchase multiple coins/tokens/assets that each carry their own inherent risk, we believe our vetting process and knowledge
will allow purchasers of our shares to more comfortably participate in the digital asset space with less risk and more reward. |
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Vetting
Process: We plan to extensively vet every digital asset we invest in. We plan to provide top-tier vetting to help protect our
stockholders from scams. Additionally, our plan is to make future investments of our time and funds in properly vetted digital assets
to provide our investors with the full spectrum of exposure to the space. |
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Experienced
Management Team: Our founders have invested in numerous successful digital assets and blockchain companies. Their early investments
in digital assets are now firmly in the top 50 tokens by market capitalization. We believe our management team has the talent and
experience to be able to compete successfully in our field. |
Competition—OpenLocker
There
are several companies that have launched NFT marketplaces featuring college athletes and sports and entertainment in general. Several
of those companies are backed by celebrities, venture capital funds and other larger funding sources. In addition, numerous others create
digital art for minting and list tokens for sale on OpenSea. OpenSea is the largest NFT marketplace which allows users to both buy and
sell NFTs minted on the Ethereum and Polygon blockchains and supports numerous digital wallets. To date, however, there are very few
sports focused marketplaces.
The
following advantages set OpenLocker apart from its competitors:
OpenLocker’s
user-friendly platform empowers athletes to monetize their fan engagement with innovative digital collectibles. In addition to designing
and minting NFTs with the athlete’s NIL, OpenLocker also invests in helping athletes build their “digital currency”
with branding support services and integrated marketing strategies. OpenLocker facilitates the distribution of autographed collectibles,
gear and any memorabilia that athletes wish to deliver to fans, along with experiences or appearances agreed to by the athlete.
Even
in the digital age, the value of an authentic autographed or game-worn jersey is significant for sports fans of all ages. OpenLocker
also offers a physical, hand-signed platinum card with the purchase of an NFT on its platform. This metal wallet-sized card is intended
to mimic the look and feel of an American Express Black Card so that the fan can feel like a member of an exclusive club.
The
release of each NFT collection is designed to target an athlete’s, group of athletes’ or team’s fan base and community.
A combination of organic and paid social media campaigns, public relations, advertising and campus activation strategies are used to
drive sales. Scheduling drops around peak interest and special events is also critical to maximize the impact of sales and marketing
efforts, the most effective times being just prior to the start of a season.
While
digital collectibles and Web3 applications are gaining attention and wider use among mainstream brands, OpenLocker strives to remove
obstacles to the adoption of blockchain technology. The OpenLocker development team has designed its proprietary NFT platform to be user-friendly,
accepting credit and debit cards.
In
addition to a searchable NFT marketplace, the OpenLocker and OpenStable platforms support community engagement features such as a token-gated
information portal and gear shops. The creative design team and project manager also collaborate on the development of social media and
additional digital domains for community building initiatives.
The
OpenLocker Business Development team leverages its relationships with college coaches and athletic departments to explore potential partnerships,
school licensing opportunities and gain direct access to athletes. OpenLocker is in negotiations with several university-specific collectives
established to help college athletes sign NIL deals.
| ● | Holistic
Product Offering |
The
OpenLocker platform differentiates itself from other NFT platforms by being a one-stop shop for sports fans to purchase both digital
and physical collectibles, as well as gear and memorabilia. The varied product offering is particularly attractive to fans who are not
familiar with NFTs, less technologically savvy and more inclined to purchase gear and memorabilia.
Government
Regulation
Our
anticipated business activities are not currently subject to any particular regulation by government agencies other than those routinely
imposed on corporate and/or publicly traded businesses.
Notwithstanding
the above, as digital assets have grown in both popularity and market size, the U.S. Congress and a number of U.S. federal and state
agencies (including FinCEN, SEC, CFTC, FINRA, the Consumer Financial Protection Bureau (CFPB), the Department of Justice, the Department
of Homeland Security, the Federal Bureau of Investigation, the IRS and state financial institution regulators) have been examining the
operations of digital asset networks, digital asset users and the digital asset exchange markets, with particular focus on the extent
to which digital assets can be used to launder the proceeds of illegal activities or fund criminal or terrorist enterprises and the safety
and soundness of exchanges or other service-providers that hold digital assets for users. Many of these state and federal agencies have
issued consumer advisories regarding the risks posed by digital assets to investors. In addition, federal and state agencies, and other
countries, have issued rules or guidance about the treatment of digital asset transactions or requirements for businesses engaged in
digital asset activity.
In
addition, the SEC, U.S. state securities regulators and several foreign governments have issued warnings that digital assets sold in
initial coin offerings (“ICOs”) may be classified as securities and that both those digital assets and ICOs may be subject
to securities regulations. Ongoing and future regulatory actions may alter, perhaps to a materially adverse extent, the nature of an
investment in us or our ability to continue to operate. Additionally, U.S. state and federal, and foreign regulators and legislatures
have taken action against virtual currency businesses or enacted restrictive regimes in response to adverse publicity arising from hacks,
consumer harm, or criminal activity stemming from virtual currency activity.
Law
enforcement agencies have often relied on the transparency of blockchains to facilitate investigations. Europol, the European Union’s
law enforcement agency, released a report in October 2017 noting the increased use of privacy-enhancing digital assets like Zcash and
Monero in criminal activity on the internet and in May 2018 it was reported that Japan’s Financial Service Agency has been pressuring
Japanese digital asset exchanges to delist privacy-enhancing digital assets. Although no regulatory action has been taken to treat Zcash
or other privacy-enhancing digital assets differently, this may change in the future.
Various
foreign jurisdictions have, and may continue to, in the near future, adopt laws, regulations or directives that affect the digital asset
markets and their users, particularly digital assets and their service providers that fall within such jurisdictions’ regulatory
scope. For example, on March 5, 2020, South Korea voted to amend its Financial Information Act to require virtual asset service providers
to register and comply with its AML and CFT framework. These measures also provide the government with the authority to close digital
asset exchanges that do not comply with specified processes. The Chinese and South Korean governments have also banned ICOs and there
are reports that Chinese regulators have taken action to shut down a number of China-based digital asset exchanges. Further, on January
19, 2018, a Chinese news organization reported that the People’s Bank of China had ordered financial institutions to stop providing
banking or funding to “any activity related to cryptocurrencies.” Similarly, in April 2018, the Reserve Bank of India banned
the entities it regulates from providing services to any individuals or business entities dealing with or settling digital assets. On
March 5, 2020, this ban was overturned in the Indian Supreme Court, although the Reserve Bank of India is currently challenging this
ruling. There remains significant uncertainty regarding the South Korean, Indian and Chinese governments’ future actions with respect
to the regulation of digital assets and digital asset exchanges. Such laws, regulations or directives may conflict with those of the
United States and may negatively impact the acceptance of digital assets by users, merchants and service providers outside the United
States and may therefore impede the growth or sustainability of the digital asset economy in the European Union, China, Japan, Russia
and the United States and globally, or otherwise negatively affect the value of digital assets.
In
July 2019, the United Kingdom’s Financial Conduct Authority (the “FCA”) proposed rules to address harm to retail consumers
deriving from the sale of derivatives and exchange traded notes (“ETNs”) that reference certain types of digital assets,
contending that they are “ill-suited” to retail investors citing extreme volatility, valuation challenges and association
with financial crime. In addition to ETNs, the proposed ban would affect financial products including contracts for difference, options
and futures. Public consultation on the proposed restriction closed in October 2019. As of November 15, 2021, the FCA has not yet finalized
its proposed ruling.
In
January 2021, the United Kingdom’s Financial Conduct Authority (the “FCA”) banned the sale, marketing and distribution
to all retail consumers of any derivatives (i.e. contract for difference – CFDs, options and futures) and exchange traded notes
that reference unregulated transferable cryptoassets by firms acting in, or from, the UK. The FCA stated that the products cannot be
reliably valued as these have a history of market abuse and financial crime, extreme volatility in cryptoasset price movements. The FCA
also maintains that there is an inadequate understanding of cryptoassets by retail consumers and lack of legitimate investment need for
retail consumers to invest.
The
effect of any future regulatory change on us is impossible to predict, but such change could be substantial and adverse.
Securities
Act of 1933
Certain
regulatory considerations may exist under the Securities Act with respect to the digital assets we acquire. We have adopted a facts and
circumstances-based policy for determining whether or not the digital assets considered for investment by our Company are securities,
as the determination of an asset’s status as a security is a highly fact-specific determination.
1.
First, we consider the facts and circumstances relative to each digital asset we are considering investing in.
2.
Second, we will apply the Howey test when reviewing those unique facts and circumstances. Each of the prongs of Howey will result in
discussion of the facts, depending on the level of complexity related to making the determination.
If
this does not produce a result we feel confident in, we may also apply and consider each of the unique facts and circumstances questions
related to each digital asset as described in the remarks of William Hinman, the Director of the SEC’s Division of Corporation
Finance at the Yahoo Finance All Markets Summit: Crypto in June 2018.
Because
an “investment contract,” pursuant to the terms of Howey, must satisfy all of the prongs of the test in order to be deemed
to be an “investment contract,” if we think any digital asset fails one of the prongs of the Howey Test, the further tests
need not be applied.
As
of November 15, 2021, we do not yet hold any digital assets. Once we have invested in digital assets, in the event we invest in assets
that are deemed securities, we may become subject to additional regulatory requirements, including under the Securities Act. For example,
typically, offerings of securities in the United States are required to register under the Securities Act with the SEC and, in compliance
with state law, with applicable state regulators, and to the extent any digital assets we invest in was originally distributed in connection
with an illegal securities offering, those assets may lose value. In addition, our plans to make purchases and sales of digital assets
may be substantially constrained or prohibited with respect to transactions if determined to be a security. We may need to find a suitable
exemption from registration for these sales. As a result, we may not be permitted to operate our business as we intend.
Securities
Exchange Act of 1934
We
do not currently contemplate investing in any cryptocurrencies that constitute securities under the U.S. securities laws.
In
the event we do invest in assets that are deemed securities, however, we may be required to make certain filings with the SEC in connection
with any acquisition or beneficial ownership of more than 5% of any class of the equity securities of a company registered under the
Exchange Act. Generally, these filings require disclosure of the identity and background of the purchaser, the source and amount of funds
used to acquire the securities, the purpose of the transaction, the purchaser’s interest in the securities, and any contracts,
arrangements or undertakings regarding the securities. Also, if we become the beneficial owner of more than 10% of any class of the equity
securities of a company registered under the Exchange Act, we may be subject to certain additional reporting requirements and to liability
for short-swing profits under Section 16 of the Exchange Act.
Investment
Company Act of 1940
The
Investment Company Act regulates certain companies that invest in, hold or trade securities. In general, a company with more than 40%
of the value of its non-cash assets held in investment securities is an “investment company.” We believe that our Company
will not be subject to the provisions of the Investment Company Act since we do not intend to invest in assets that constitute securities
under the U.S. securities laws. Accordingly, stockholders are not afforded the protections of the Investment Company Act.
In
the event that we do invest in assets that are deemed securities, however, we may be subject to additional regulatory requirements, including
under the Investment Company Act. For example, we may be required to register as an investment company. Registered investment companies
are subject to extensive, restrictive and potentially adverse regulations relating to, among other things, operating methods, leverage,
management, capital structure, dividends and transactions with affiliates. Registered investment companies may not be permitted to operate
their business in the manner in which we operate our businesses, nor are registered investment companies permitted to have many of the
relationships that we have with our affiliated companies.
Investment
Advisers Act of 1940
The
Investment Advisers Act of 1940, as amended (the “Advisers Act”) regulates persons who for compensation are engaged in the
business of providing advice, making recommendations, issuing reports, or furnishing analyses on securities, either directly or through
publications, to others. We believe that, because the assets of the Company are not expected to constitute securities under the U.S.
securities laws, we will not be subject to investment adviser regulation under the Advisers Act.
In
the event we do invest in assets that are deemed securities, however, we may be subject to additional regulatory requirements, including
under the Advisers Act. For example, we may be required to register as an investment adviser. Registered investment advisers are subject
to extensive, restrictive and potentially adverse regulations relating to, among other things, operating methods, disclosure, advertising,
and fees. Registered investment advisers may not be permitted to operate their business in the manner in which we intend to operate our
business. its businesses.
Commodity
Exchange Act
We
will not hold or trade in commodity futures contracts or other derivative contracts regulated by the CEA, as administered by the CFTC.
We do not believe we are a commodity pool for purposes of the CEA.
Foreign
Considerations
Our
primary place of business and market of operation is the United States. We may, however, also be subject to a variety of foreign laws
and regulations that involve matters central to our business. These could include, for example, regulations related to privacy, blockchain
technology, data protection, and intellectual property, among others. In certain cases, foreign laws may be more restrictive than those
in the United States. Although we believe we are operating in compliance with the laws of jurisdictions in which we operate, foreign
laws and regulations are constantly evolving and can be subject to significant change. In addition, the application and interpretation
of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate. As a result,
cryptocurrency networks, blockchain technologies, and coin and token offerings such as those we intend to be involved in face an uncertain
regulatory landscape in many foreign jurisdictions, including but not limited to the European Union, China and Russia. Other foreign
jurisdictions may also, in the near future, adopt laws, regulations or directives that affect digital assets that we may invest in.
Government
Regulation—OpenLocker
We
are subject to an extensive and highly-evolving regulatory landscape, and any adverse changes to, or our failure to comply with, any
laws and regulations could adversely affect our brand, reputation, business, operating results, and financial condition. We are also
subject to governmental regulations routinely imposed on corporate and/or publicly traded businesses.
Blockchain
and digital assets are increasingly becoming subject to governmental regulation, both in the U.S. and internationally. The technology
underlying blockchain technology is affected by a number of industry-wide challenges and risks relating to consumer acceptance of blockchain
technology, including but not limited to government and quasi-government regulation of NFTs and their use, or restrictions on or regulation
of access to and operation of blockchain networks or similar systems, the maintenance and development of the open-source software protocol
of blockchain networks, changes in consumer demographics and public tastes and preferences, the extent to which current interest in NFTs
represents a speculative “bubble”.
Digital
assets have grown in both popularity and market size, the U.S. Congress and a number of U.S. federal and state agencies (including FinCEN,
SEC, CFTC, FINRA, the Consumer Financial Protection Bureau, the Department of Justice, the Department of Homeland Security, the Federal
Bureau of Investigation, the IRS and state financial institution regulators have each been examining the operations of digital asset
networks, digital asset users and the digital asset exchange markets. Particular focus has been given on the extent to which digital
assets can be used to launder the proceeds of illegal activities or fund criminal or terrorist enterprises, as well as the safety and
soundness of exchanges or other service providers that hold digital assets for users.
Many
federal and state agencies have issued advisories and general public inquiries regarding the risks posed by digital assets, crypto currencies
and solutions. In addition, federal and state agencies, and other countries have issued rules or guidance about the treatment of digital
asset transactions or requirements for businesses engaged in digital asset activity, both at a “Know Your Customer” and at
“Know Your Transaction” levels.
As
discussed above, the SEC, U.S. state securities regulators and several foreign governments have issued warnings that digital assets sold
in ICOs may be classified as securities and that both those digital assets and ICOs may be subject to securities regulations. Our anticipated
business activities, however, do not involve any ICOs nor any fractionalized NFT offerings.
On
March 9, 2022, President Biden signed an executive order on cryptocurrencies entitled “Ensuring Responsible Development of Digital
Assets” and issued with an accompanying fact sheet, regarding the U.S. government’s strategy for digital assets, defined
to include cryptocurrencies and other forms of exchange that are recorded on the blockchain. Citing the need for the federal government
to address the role of digital assets in the financial system, the executive order represents the first whole-of-government approach
to the benefits and risks of digital assets. It is a general policy statement that reflects the views of the administration, as opposed
to a specific proposal for regulation. While the executive order did not mandate any specific regulations, it instructs various federal
agencies to consider potential regulatory measures, including the evaluation of the creation of a U.S. Central Bank digital currency.
Accordingly, depending on the rules, regulations and laws stemming from this executive order, it may have a substantive effect on our
current and planned operations. Digital assets currently face an uncertain regulatory landscape in not only the United States, but also
abroad.
Ongoing
and future regulatory actions may alter, perhaps to a materially adverse extent, the nature of the services provided by OpenLocker or
the ability of OpenLocker to continue to operate. Additionally, U.S. state and federal, and foreign regulators and legislatures have
taken action against virtual currency businesses or enacted restrictive regimes in response to adverse publicity arising from hacks,
consumer harm, or criminal activity stemming from virtual currency activity.
The
U.S. Financial Crimes Enforcement Network is planning to release new requirements relating to digital asset activities in the first half
of 2022. Various foreign jurisdictions have, and may continue to in the near future, adopt laws, regulations or directives that affect
the digital asset markets and their users, particularly digital assets and their service providers that fall within such jurisdictions’
regulatory scope. They will further require crypto asset service providers to register and comply with its anti-money-laundering (AML)
and counter-terrorism financing framework. These measures also provide the government with the authority to close digital asset platforms
and service providers that do not comply with specified processes. Such laws, regulations or directives may conflict with those of the
United States and may negatively impact the acceptance of digital assets by users, merchants and service providers outside the United
States and may therefore impede the growth or sustainability of the digital asset economy in the European Union, China, Japan, Russia,
the United States and elsewhere. Otherwise, they may also negatively affect the value of digital assets.
Federal
Regulatory Authorities
The
regulatory schemes – both foreign and domestic – possibly affecting DApp technology (“DAPP”), a decentralized
application that runs on blockchain network, and other Digital Asset networks may not be fully developed as of the present time. It is
possible that any jurisdiction may, in the near or distant future, adopt laws, regulations, policies or rules directly or indirectly
affecting the Digital Assets, generally, or restricting the right to acquire, own, hold, sell, convert, trade, lend or use Digital Assets,
or to exchange Digital Assets for either fiat currency or other virtual currency, or to operate or participate or transact with a DAPP.
It is also possible that government authorities may claim ownership over or ban certain types of Digital Assets or DAPPs or law enforcement
agencies (of any or all jurisdictions, foreign or domestic) may take direct or indirect investigative or prosecutorial action related
to, among other things, the use, ownership or transfer of Digital Assets, or the operation, participation or transacting with DAPPs,
resulting in a change to the value of a Digital Asset or to the development such asset (e.g., the closure and seizure of Silk
Road and the closure and seizure of www.libertyreserve.com—the domain name for Liberty Reserve, an online, virtual currency
payment processor and money transfer system that the U.S. government alleges acted as a financial hub of the cybercrime world) or DAPP.
CFTC
The
Commodity Futures Trading Commission (“CFTC”) has asserted its regulatory authority over Digital Assets, stating that both
Bitcoin and Ether are Digital Asset commodities. See IN CASE YOU MISSED IT: Chairman Tarbert Comments on Cryptocurrency Regulation at
Yahoo! Finance All Markets Summit, Release Number 8051-19 (Oct. 10, 2019). In addition, the CFTC has brought close to 50 enforcement
actions involving the Digital Asset space. See Testimony of Chairman Rostin Behnam Regarding “Examining Digital Assets: Risks,
Regulation, and Innovation” (Feb. 09, 2022). For example, the CFTC fined the stablecoin issuer Tether for making misleading statements
regarding USDT in October 2021. See CFTC Orders Tether and Bitfinex to Pay Fines Totaling $42.5 Million, Release Number 8450-21 (Oct.
15, 2021). As the primary regulator of derivatives (i.e., futures, options and swaps), the CFTC also has jurisdiction over all such digital
currency-linked derivatives, including the platforms that list them and the clearing houses that clear them.
SEC
Although
the SEC has not formally asserted regulatory authority over any certain Digital Asset, on April 3, 2019, the SEC published a framework
aimed at assisting in determining whether a cryptocurrency is a security (the “Framework”). Alongside the Framework, the
SEC also published a no-action letter for TurnKey Jet, Inc. (the “TurnKey Letter”), which marks the first ever no-action
letter regarding cryptocurrencies. Per the Framework and the TurnKey Letter, cryptocurrencies cannot be used to raise capital without
implicating U.S. securities laws.
Prior
to the Framework, the SEC had addressed the regulatory status of cryptocurrency in various contexts. For example, on November 16, 2018,
the SEC settled charges against CarrierEQ Inc. (“Airfox”) and Paragon Coin Inc. (“Paragon”), two companies that
sold digital tokens in ICOs in 2017. The SEC determined that both AirTokens and PRG tokens were “securities” and that, in
turn, Airfox and Paragon violated Sections 5(a) and 5(c) of the Securities Act of 1933, as amended (together with the rules and regulations
thereunder, the “Securities Act”) by offering and selling those securities without having a registration statement filed
or in effect with the SEC or qualifying for exemption from registration with the SEC. The orders imposed $250,000 penalties against each
company and both companies agreed to return funds to harmed investors, register the tokens as securities, file periodic reports with
the SEC, and pay penalties. Airfox and Paragon consented to the orders without admitting or denying the findings.
The
SEC has also engaged in an enforcement action involving decentralized finance, charging two individuals, along with their Cayman Islands
company, for (1) the unregistered sale of more than $30 million of securities via smart contracts and DApp technology, and (2) for misleading
investors regarding the operations and profitability of their business, DeFi Money Market. See SEC Charges Decentralized Finance Lender
and Top Executives for Raising $30 Million Through Fraudulent Offerings, SEC Press Release No. 2021-145 (Aug. 06, 2021).
In
the event that the DAPPs were deemed to be “issuers” within the meaning of the Securities Exchange Act of 1934, as amended
(together with the rules and regulations thereunder, the “Exchange Act”) with respect to the Native Tokens, such Native Tokens
could be considered unregistered securities. Such a determination could adversely affect OpenLocker’s liquidity and negatively
affect the valuations of the OpenLocker’s Digital Assets.
FinCEN
To
the extent that OpenLocker and/or the DAPP engages in money services business activity, including money transmission, as defined by FinCEN,
OpenLocker and/or the DAPP may be deemed to fall within the Bank Secrecy Act’s definition of a financial institution, and subject
to the Bank Secrecy Act, 31 U.S.C. §§ 5311-5314; 5316-5330, and its implementing regulations, and as such required to register
as a money services business with FinCEN. OpenLocker and/or the DAPP would also be required to develop an AML program and adhere to U.S.
federal reporting and record keeping requirements. Owners, operators, participants and others who assist in the operation of an unregistered
money services business may be subject to civil money penalties under 31 U.S.C. § 5321, and/or criminal liability under 31 U.S.C.
§ 5322 and 18 U.S.C. § 1960. Such additional legal and regulatory obligations may cause OpenLocker to incur extraordinary expenses
and ongoing expenses, possibly affecting an investment in OpenLocker in a material and adverse manner. To the extent OpenLocker limits
or reduces the scope of certain activities, investors’ rights or investment initiatives, in order to ensure compliance with laws,
or to limit the applicability of government regulation and supervision, investments in OpenLocker may be adversely affected.
State
Regulatory Authorities
To
the extent that the activities of OpenLocker cause it to be deemed a “money transmitter” (and/or other type of regulated
financial services provider, for example, a “virtual currency business” in New York) under state statutes or regulations,
it may incur significant fees in becoming licensed in each state in which it does business and may also be required to adhere to state
statutes or regulations. To the extent that a state requires an additional license or registration for the DAPP’s activities involving
Digital Assets that require the DAPP to obtain a license or register with the state for its activities involving Digital Assets, the
DAPP may cease or limit its operations or activities, which may have an adverse effect on OpenLocker. In either case, states may impose
fines or penalties with respect to any unlicensed activity. Owners, operators, participants and others who assist in the operation of
an unlicensed money transmission or virtual currency business may also be subject to fines or penalties and/or criminal liability under
state laws or 18 U.S.C. § 1960, if applicable.
In
the event that OpenLocker is required to adhere to state statutes and regulations applicable to money transmitters or virtual currency
businesses, such additional legal and regulatory obligations may cause OpenLocker to incur extraordinary expenses and ongoing expenses,
possibly affecting an investment in OpenLocker in a material and adverse manner. To the extent that OpenLocker limits or reduces the
scope of certain OpenLocker activities, investors’ rights or investment initiatives, in order to limit the applicability of government
regulation and supervision over OpenLocker, investment in OpenLocker may be adversely affected.
The
effect of any future regulatory change on OpenLocker is impossible to predict, but such change could be substantial and be materially
adverse to OpenLocker’s business and results of operations. This risk and others are described below under the heading “Risk
Factors”.
Intellectual
Property
Trademarks
We
own a registered trademark for the character mark “OpenLocker”, which was filed on September 1, 2021 in the category of online
advertising and marketing services in the field of sports and NFTs, as well as promoting the sale of goods and services of others by
means of contests and incentive award programs; as well as promoting the sale of goods and services of others by OpenLocker.
Patents
While
OpenLocker has developed proprietary technology, as defined under Proprietary Marketplace & Platform, OpenLocker has not registered
any patents with the United States Patent & Trademark Office.
Employees
As
of October 31, 2022, we have no full-time employees. Mr. Gostfrand serves as our Chief Executive Officer and principal financial officer,
and Ms. Anthony serves as our President. OpenLocker uses contractors on an as-needed basis to fulfill its staffing needs. Mr. Klatsky
serves as President of OpenLocker, Ms. Klatsky serves as Chief Operating Officer of OpenLocker, Mr. Washington serves as Chief Creative
Officer of OpenLocker, and Mr. Goldman serves as Head of Business Development and Community Strategy of OpenLocker.
Organizational
History
Descrypto
was originally incorporated in Delaware in 1986. Descrypto changed domicile to Massachusetts in 1987. Until July 7, 1992, Descrypto was
engaged in the sale of an automated luminometer and an accompanying reagent system that measures raw material for microbiological contamination.
Descrypto discontinued operations and liquidated the remaining inventory of reagents on April 16, 1993. Descrypto changed its state of
domicile again in Delaware in May 1996 and concurrently changed its name to IMSCO Technologies, Inc. At the time, Descrypto switched
its focus to developing technology that achieves molecular separation with innovative applications of electrostatics. Descrypto ultimately
abandoned these endeavors and continued to go through shifts in its business operations. In 2001, Descrypto changed its name to Global
Sports and Entertainment, Inc. In 2002, Descrypto changed its name to GWIN, Inc. Descrypto changed its name to Winning Edge International,
Inc. in 2006 and in 2007, to W Technologies, Inc.
In
June 2021, the Company closed upon a share exchange agreement with Krypto Ventures pivoting the Company into the blockchain technology
and digital asset business. While remaining focused on blockchain technology and digital assets, in November 2021, the Company redeemed
a large portion of the common stock issued in the Krypto Ventures transaction and current management took over the Company operations.
Effective
December 31, 2021, the Company changed its name to “Descrypto Holdings, Inc.”, and on April 12, 2022, the Company began trading
under its current symbol - “DSRO”.
Descrypto
is now a holding company focused on blockchain technology and digital assets, including the burgeoning world of non-fungible tokens (NFTs)
and the metaverse. Descrypto is currently focused on the sports and entertainment aspects of NFTs including building out a creative studio
and NFT platform for the development of crypto art, NFT development and digital entertainment. Descrypto also intends to provide consulting
and support services related to the development of decentralized autonomous organizations.
Through
the acquisition of OpenLocker, Descrypto is connecting fans and athletes with innovative digital collectibles and through OpenStable,
which is part of the OpenLocker ecosystem, Descrypto is providing the first thoroughbred racing digital collectibles to a growing next
generation of fans.
Series
A Preferred Stock
On
January 10, 2022, the Company filed a Certificate of Designations of Preferences and Rights of Series A Preferred Stock with the Delaware
Secretary of State, authorizing 200,000 shares of Series A preferred stock (the “Series A Preferred”). Each share of Series
A Preferred is convertible into 1,000 shares of common stock, at the election of the holder, at any time. On any matter submitted to
the holders of common stock for a vote or on which the holders of common stock have a right to vote, each share of Series A Preferred
will have a number of votes equal to the number of shares of common stock into which the Series A Preferred is convertible. The Series
A Preferred will vote together with the common stock as one class. The Series A Preferred will participate in any dividends, distributions
or payments to the holders of the common stock on an as-converted basis. Series A Preferred is not entitled to receive any distribution
of the Company’s assets or surplus funds upon a liquidation, merger or similar event.
On
January 13, 2022, the Company entered into and closed upon a Share Exchange Agreement (the “ACV Agreement”) by and between
the Company and ACV. Pursuant to the terms of the ACV Agreement, the Company acquired 88,800,191 shares of common stock from ACV in exchange
for the issuance of 88,800 shares of Series A Preferred stock.
Also
on January 13, 2022, the Company entered into and closed upon a Share Exchange Agreement (the “Leone Agreement”) by and between
the Company and Leone. Pursuant to the terms of the Leone Agreement, the Company acquired 88,800,191 shares of common stock from Leone
in exchange for the issuance of 88,800 shares of Series A Preferred.
Series
A Preferred Redemptions
On
February 18, 2022, the Company entered into and closed certain Redemption Agreements (each, a “Series A Redemption Agreement”),
by and between the Company and ACV and Leone (together, the “Redeeming Series A Stockholders”). Pursuant to the terms of
the Series A Redemption Agreements, each of the Redeeming Series A Stockholders sold, and the Company purchased, 80% of the Redeeming
Series A Stockholders’ holdings of Series A Preferred, for an aggregate purchase price of $2.00.
On
February 18, 2022, pursuant to the terms of the Series A Redemption Agreements, the Company paid an aggregate of $2.00 to the Redeeming
Series A Stockholders in exchange for the transfer of a total of 142,080 shares of Series A Preferred (the “Redeemed Series A Shares”)
to the Company. As a result of the Series A Redemption, the Redeemed Series A Shares were returned to the status of authorized and unissued
shares of Series A Preferred Stock.
Following
the Series A Redemption, ownership of the Series A Preferred was as follows:
Name of Stockholder | |
No. of Shares of Series A Preferred Stock Owned Following Redemption | | |
Percentage of Outstanding Series A Preferred Stock Held Following Redemption | |
ACV | |
| 17,760 | | |
| 50.00 | % |
Leone | |
| 17,760 | | |
| 50.00 | % |
The
Series A Redemption Agreements will be null and void and the Redeemed Series A Shares will be reissued to the respective Redeeming Series
A Stockholders if the Company does not raise at least $1.5 million in financing and enter into a definitive agreement for the acquisition
of a blockchain based company within 12 months of February 18, 2022. As of October 26, 2022, the Company has satisfied the condition
to enter into an agreement for the acquisition and has raised $860,000 in financing through the sale of 2,150,000 shares of Company’s
common stock, at $0.40 per share.
2022
Common Stock Redemption Agreements
On
February 18, 2022, the Company entered into certain Redemption Agreements (each, a “2022 Redemption Agreement” and collectively,
the “2022 Redemption Agreements”), by and among the Company and each of the following holders of the Company’s common
stock: Balance Labs, Aleksandr Rubin, Ronald Cons, Avon Road, 2018 Investor Trust, Congregation Boro Minyan, Rachel Jacobs, Jessica Beren,
Aros, LLC, Lyons Capital, MACA, and J and K Ventures, LLC (collectively, the “2022 Redeeming Stockholders”). Pursuant to
the terms of the 2022 Redemption Agreements, each of the 2022 Redeeming Stockholders agreed to sell, and the Company agreed to purchase,
80% of such 2022 Redeeming Stockholders’ common stock holdings at a purchase price of $0.00001 per share.
On
February 18, 2022, pursuant to the terms of the 2022 Redemption Agreements, the Company paid an aggregate of $773.82 to the 2022 Redeeming
Stockholders in exchange for the transfer of a total of 77,382,494 shares of common stock (the “2022 Redeemed Shares”), representing
80% of the shares of common stock held by the 2022 Redeeming Stockholders. As a result of the redemption, the 2022 Redeemed Shares were
returned to the status of authorized and unissued shares of common stock.
The
2022 Redemption Agreements will be null and void and the 2022 Redeemed Shares will be reissued to the respective 2022 Redeeming Stockholders
if the Company does not raise at least $1.5 million in financing and enter into a definitive agreement for the acquisition of a blockchain
based company within 12 months of February 18, 2022. As of October 28, 2022, the Company has satisfied the condition to enter into an
agreement for the acquisition and has raised $860,000 in financing through the sale of 2,150,000 shares of Company’s common stock,
at $0.40 per share.
Organizational
History of OpenLocker
OpenLocker
was incorporated under the laws of the State of Delaware on August 25, 2021. As discussed above, on May 31, 2022, pursuant to the closing
of the transactions pursuant to the Share Exchange Agreement, Descrypto acquired OpenLocker.
RISK
FACTORS
An
investment in our securities carries a significant degree of risk. You should carefully consider the following risks, as well as the
other information contained in this Annual Report on Form 10-K, including our historical financial statements and related notes included
elsewhere herein, before you decide to purchase our securities. Any one of these risks and uncertainties has the potential to cause material
adverse effects on our business, prospects, financial condition and operating results which could cause actual results to differ materially
from any forward-looking statements expressed by us and a significant decrease in the value of our common shares and warrants. Refer
to “Cautionary Statement Regarding Forward-Looking Statements”.
We
may not be successful in preventing the material adverse effects that any of the following risks and uncertainties may cause. These potential
risks and uncertainties may not be a complete list of the risks and uncertainties facing us. There may be additional risks and uncertainties
that we are presently unaware of, or presently consider immaterial, that may become material in the future and have a material adverse
effect on us. You could lose all or a significant portion of your investment due to any of these risks and uncertainties.
Below
is a summary of material risks, uncertainties and other factors that could have a material effect on the Company and its operations:
Risks
Related to Our Business and Industry
| ● | We
are an early-stage company with a limited operating history. Such limited operating history
may not provide an adequate basis to judge our future prospects and results of operations. |
| ● | Our
auditors have indicated that there is substantial doubt about our ability to continue as
a going concern. |
| ● | We
may suffer from lack of availability of additional funds. |
| ● | We
may be unable to scale our operations successfully. |
| ● | The
requirements of remaining a public company may strain our resources and distract management,
which could make it difficult to manage our business. |
| ● | Descrypto
may acquire other assets or businesses, or form collaborations or make investments in other
companies or technologies that could harm its operating results, dilute its stockholders’
ownership, increase its debt or cause it to incur significant expense. |
| ● | Our
financial results fluctuate and may be difficult to forecast, and this may cause a decline
in the trading price of Descrypto’s stock. |
| ● | Our
plans for expansion cannot be implemented if we lose our key personnel or cannot recruit
additional personnel. |
| ● | If
we do not respond to rapid technological changes, our services could become obsolete and
we could lose customers. |
Risks
Related to Cryptocurrency and Digital Assets
| ● | The
trading prices of many digital assets have experienced extreme volatility in recent periods
and may continue to do so. Extreme volatility in the future, including further declines in
the trading prices of cryptocurrencies in general, could have a material adverse effect on
the value of Descrypto. |
| ● | Our
risk management efforts may not be effective to prevent fraudulent activities by third-party
providers or other parties, which could expose us to material financial losses and liability
and otherwise harm our business. |
| ● | Digital
assets were only introduced within the past decade, and the success of OpenLocker will be
impacted by number of factors relating to the capabilities and development of blockchain
technologies and to the fundamental investment characteristics of digital assets. |
| ● | Digital
assets represent a new and rapidly evolving industry, and the value of OpenLocker depends
significantly on the acceptance of digital assets as payment, such as cryptocurrencies. |
| ● | A
determination that any of the digital assets we invest in is a “security” may
adversely affect the value of the digital assets we invest in and the value of OpenLocker,
and result in potentially extraordinary, nonrecurring expenses to, or termination of, OpenLocker. |
| ● | Changes
in the governance of a digital asset network may not receive sufficient support from users
and miners, which may negatively affect that digital asset network’s ability to grow
and respond to challenges. |
| ● | Certain
cryptocurrencies may rely on a public or third-party blockchain and the success of such blockchain
may have a direct impact on the success and value of cryptocurrencies held by OpenLocker. |
Risks
Relating to NFTs
| ● | The
market for NFTs is relatively new and subject to significant volatility. |
| ● | NFT
collectibles may be a relatively illiquid asset. |
| ● | There
may be virtual currency tax implications. |
Risks
Related to Our Common Stock
| ● | Descrypto’s
common stock is subject to risks arising from restrictions on reliance on Rule 144 by shell
companies or former shell companies. |
| ● | Descrypto’s
common stock constitutes restricted securities and is subject to limited transferability. |
| ● | Descrypto’s
common stock price may decrease due to factors beyond our control. |
| ● | Descrypto’s
common stock is subject to the application of the “penny stock” rules which could
adversely affect the market price of Descrypto’s common stock and increase transaction
costs to sell those shares. |
| ● | The
market price for Descrypto’s common stock is particularly volatile which could lead
to wide fluctuations in our share price. You may be unable to sell your common stock shares
at or above your purchase price, or at all, which may result in substantial losses to you. |
| ● | Descrypto
does not intend to pay dividends for the foreseeable future. |
Risks
Related to Our Business and Industry
Our
OpenLocker subsidiary is an early-stage company with a limited operating history. Such limited operating history may not provide an adequate
basis to judge our future prospects and results of operations.
OpenLocker
was incorporated in Delaware on August 25, 2021. We have limited experience and a limited operating history in which to assess our future
prospects as a company. In addition, the market for our products and services is highly competitive. If we fail to successfully develop
and offer our products and services in an increasingly competitive market, we may not be able to capture the growth opportunities associated
with them or recover our development and marketing costs, and our future results of operations and growth strategies could be adversely
affected. Our limited history may not provide a meaningful basis for investors to evaluate our business, financial performance, and prospects.
Our
current business model, including operating the OpenLocker subsidiary has a limited operating history. Such limited operating history
may not provide an adequate basis to judge our future prospects and results of operations.
We
pivoted into the blockchain based business in July 2021. We have limited experience in this business sector and a limited operating history
in which to assess our future prospects as a company. In addition, the market for our products and services and Web3 in general is highly
competitive. If we fail to successfully develop and offer our products and services in an increasingly competitive market, we may not
be able to capture the growth opportunities associated with them or recover our development and marketing costs, and our future results
of operations and growth strategies could be adversely affected. Our limited history may not provide a meaningful basis for investors
to evaluate our business, financial performance, and prospects.
We
may fail to successfully execute our business plan.
Our
stockholders may lose their entire investment if we fail to execute our business plan. Our prospects must be considered in light of the
following risks and uncertainties, including but not limited to, competition, the erosion of ongoing revenue streams, the ability to
retain experienced personnel and general economic conditions. We cannot guarantee that we will be successful in executing our business
plan. If we fail to successfully execute our business plan, we may be forced to cease operations, in which case our stockholders may
lose their entire investment.
Since
inception, we have experienced losses, and may have to further reduce our costs by curtailing future operations to continue as a business.
Since
the original incorporation of OpenLocker on August 25, 2021, it has experienced operating losses. We have also experienced operating
losses and in the last several years, prior to the acquisition of OpenLocker, have had no revenues. Our cash flow may be inadequate to
support our ongoing operations. Our ability to fund our capital requirements out of our available cash and cash generated from our operations
depends on a number of factors, including our ability to gain interest in our products and services and continue growing our existing
operations and our ability to raise funds as needed. If we cannot generate positive cash flow from operations, we will have to reduce
our costs and try to raise working capital from other sources. These measures could materially and adversely affect our ability to execute
our operations and expand our business.
Our
auditors have indicated that there is substantial doubt about our ability to continue as a going concern.
Our
auditors have indicated that there is a substantial doubt about our ability to continue as a going concern. We had a loss from
operations of $2,494,217 for the year ended July 31, 2022. The Company’s ability to continue as a going concern ultimately is
dependent on the management’s ability to obtain equity or debt financing, attain further operating efficiencies, and achieve
profitable operations. Management intends to raise additional funds by way of a public or private offering. Management believes that
the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for our
Company to continue as a going concern. While we believe in the viability of its strategy to generate revenues and in its ability to
raise additional funds, there can be no assurances to that effect or the timeframe in which it may occur. Our ability to continue as
a going concern is dependent upon our ability to further implement our business plan and generate revenues. For further discussion
about our ability to continue as a going concern and our plan for future liquidity, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
We
may suffer from lack of availability of additional funds.
We
expect to have ongoing needs for working capital in order to fund operations and to continue to expand our operations. To that end, we
will be required to raise additional funds through equity or debt financing. However, there can be no assurance that we will be successful
in securing additional capital on favorable terms, if at all. If we are successful, whether the terms are favorable or unfavorable, there
is a potential that we will fail to comply with the terms of such financing, which could result in severe liability for us. If we are
unsuccessful, we may need to (a) initiate cost reductions; (b) forego business development opportunities; (c) seek extensions of time
to fund liabilities, or (d) seek protection from creditors. In addition, any future sale of our equity securities would dilute the ownership
and control of your shares and could be at prices substantially below prices at which our shares currently trade. Our inability to raise
capital could require us to significantly curtail or terminate our operations altogether. We may seek to increase our cash reserves through
the sale of additional equity or debt securities. The sale of convertible debt securities or additional equity securities could result
in additional and potentially substantial dilution to our shareholders. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants that would restrict our operations and liquidity. In addition,
our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties.
In
addition, if we are unable to generate adequate cash from operations, and if we are unable to find sources of funding, it may be necessary
for us to sell all or a portion of our assets, enter into a business combination, or reduce or eliminate operations. These possibilities,
to the extent available, may be on terms that result in significant dilution to our shareholders or that result in our shareholders losing
all of their investment in our Company.
Our
management team’s attention may be diverted by acquisitions and searches for new acquisition targets, and our business
and operations may suffer adverse consequences as a result.
Mergers
and acquisitions are time intensive, requiring significant commitment of our management team’s focus and resources. If our management
team spends too much time focused on acquisitions or on potential acquisition targets, the management team may not have sufficient time
to focus on its existing business and operations. This diversion of attention could have material and adverse consequences on our operations
and its ability to be profitable.
We
may be unable to scale our operations successfully.
Our
growth strategy will place significant demands on our management and financial, administrative and other resources. Operating results
will depend substantially on the ability of our officers and key employees to manage changing business conditions and to implement and
improve our financial, administrative and other resources. If OpenLocker is unable to respond to and manage changing business conditions,
or the scale of its operations, then the quality of its services, its ability to retain key personnel, and its business could be harmed.
The
current outbreak of the coronavirus may have a negative effect on our ability to conduct our business and operations and may also cause
an overall decline in the economy as a whole and could materially harm us.
If
the current outbreak of the coronavirus continues, the effects of such a widespread infectious disease and epidemic may inhibit our ability
to conduct our business and operations and could materially harm our operations, including any in person fan events or experiences. The
coronavirus may cause us to have to reduce operations as a result of various lock-down procedures enacted by the local, state or federal
government. The continued coronavirus outbreak may also restrict our ability to raise funding when needed and may also cause an overall
decline in the economy as a whole. The specific and actual effects of the spread of coronavirus are difficult to assess at this time
as the actual effects will depend on many factors beyond our control and knowledge. However, the spread of the coronavirus, if it continues,
may cause an overall decline in the economy as a whole and also may materially harm our business.
Economic
conditions or changing consumer preferences could adversely impact our business.
A
downturn in economic conditions in one or more of our markets could have a material adverse effect on our results of operations, financial
condition, business and prospects. Any sustained failure to identify and respond to trends could have a material adverse effect on our
results of operations, financial condition, business and prospects.
The
requirements of remaining a public company may strain our resources and distract management, which could make it difficult to manage
our business.
We
are required to comply with various regulatory and reporting requirements, including those required by the SEC. Complying with these
reporting and other regulatory requirements are time-consuming and expensive and could have a negative effect on our business, results
of operations and financial condition. We are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of
2002, as amended (the “Sarbanes-Oxley Act”) including maintaining internal controls over financial reporting, and if we fail
to continue to comply, our business could be harmed, and the price of our securities could decline.
Currently,
our President’s law firm is providing legal services necessary to maintain our reporting obligations under the Exchange Act without
charge. If our President were to leave or otherwise cease providing these services without charge, we could incur significant additional
expenses which could harm our business.
We
rely on technology, such as our information systems, to conduct our business. Failure to protect our technology against breakdowns and
security breaches could adversely affect our business.
We
rely on technology, such as our own information systems, vendors’ information systems and third-party application programming interfaces
(APIs), to conduct our business. This technology is vulnerable to service interruptions and security breaches from inadvertent or intentional
actions by our employees, partners and vendors, or from attacks by malicious third parties. Such attacks are of ever-increasing levels
of sophistication and are made by groups and individuals with a wide range of motives and expertise, including organized criminal groups,
“hacktivists,” identity thieves, nation states and others. The techniques used to breach security safeguards evolve rapidly,
and they may be difficult to detect for an extended period of time, and the measures we take to safeguard our technology may not adequately
prevent such incidents.
While
we have taken steps to protect our confidential and personal information and invested in information technology, there can be no assurance
that our efforts will prevent service interruptions or security breaches in our systems or the unauthorized or inadvertent wrongful use
or disclosure of confidential information. Such incidents could adversely affect our business operations, reputation, and client relationships.
Any such breach would require us to expend significant resources to mitigate the breach of security and to address matters related to
any such breach, including the payment of fines. Although we maintain an insurance policy that covers data security, privacy liability
and cyber-attacks, our insurance may not be adequate to cover losses arising from breaches or attacks on our systems. Insurance coverage
may not be available in the future or may not be available at affordable prices. We also may be required to notify regulators about any
actual or perceived personal data breach as well as the individuals who are affected by the incident within strict time periods.
Any
actual or perceived failure of our platform to block malware or prevent failures or security breaches or incidents could harm our reputation,
cause the platform to be perceived as insecure, underperforming, or unreliable, impede our efforts to attract and retain customers, and
otherwise negatively impact our business, results of operations and financial condition.
We
face security threats from malicious third parties that could obtain unauthorized access to our internal systems, networks and data.
Computer malware, viruses and computer hacking, fraudulent use, social engineering (including spear phishing attacks) and general hacking
have become more prevalent, and such incidents or incident attempts have been initiated against our customers in the past and may occur
against our customers in the future. This risk is accentuated
because hackers may be more inclined to hack us in anticipation of stealing our cryptocurrency. We
may become the target of cyber-attacks by third parties seeking unauthorized access to our customers’ confidential data, which
could disrupt our ability to provide some or all of the services on the platform or lead to exposure of customer information. Additionally,
we use certain third-party service providers to store and process data on our behalf, and they face a variety of security risks. We have
taken steps to protect customer information that might pass through our platform. However, our security measures or those of our third-party
service providers could be breached or we could suffer data loss or unauthorized access to, or use of, our platform or the systems or
networks used in our business.
It
is virtually impossible for us to entirely mitigate the risk of these security threats, and the security, performance, and reliability
of our platform may be disrupted by third parties, including competitors, hackers, disgruntled employees, former employees, or contractors.
Certain kinds of viruses or malware can corrupt basic functionalities of device operating systems to allow hackers to access or misdirect
our customers’ digital assets.
We
also process, store and transmit our own data as part of our business and operations. This data may include personally identifiable,
confidential or proprietary information, and we use third-party service providers to store and process certain data for us. There can
be no assurance that any security measures that we or our third-party service providers have implemented will be effective against current
or future security threats. While we take steps in an effort to protect the security of our platform and the availability, integrity,
confidentiality and security of our data, our security measures or those of our third-party providers could fail and result in unauthorized
access to or use of our platform or unauthorized, accidental or unlawful access to, or disclosure, modification, misuse, loss or destruction
of, our or our customers’ data.
Whether
or not accurate, a market perception that our platform is insecure, underperforming or unreliable could result in:
| ● | A
loss of existing or potential customers or third-party relationships; |
| ● | Harm
to our financial condition and results of operations; |
| ● | Delay
or inability to attain market acceptance of our platform; |
| ● | Expenditure
of significant financial resources in efforts to analyze, correct, eliminate, remediate,
or work around errors or defects, to address and eliminate vulnerabilities, and to address
any applicable legal or contractual obligations relating to any actual or perceived security
breach or incident; |
| ● | Negative
publicity and damage to our reputation and brand; and |
| ● | Legal
claims and demands (including for stolen assets or information, repair of system damages,
and compensation to customers), litigation, regulatory audits, proceedings or investigations,
and other liabilities. |
Any
actual or perceived security breach or other incident may also lead to the expenditure of significant financial and other resources in
efforts to investigate or correct a breach, address and eliminate vulnerabilities and prevent future security breaches or incidents,
as well as the incurring of significant expenses for remediation that may include liability for stolen assets or information, repair
of system damage that may have been caused, and other liabilities. We have incurred and expect to incur significant expenses in an effort
to prevent security breaches and other incidents, including deploying additional personnel and protection technologies, training personnel
and engaging third-party experts and consultants.
Furthermore,
because data security is a competitive factor in our industry, we make statements publicly, including in our privacy policies and terms
of service, providing assurances about the security of our platform, including descriptions of our security measures. Should any of these
statements be untrue or become untrue, even though circumstances beyond our reasonable control, we may face claims, investigations or
other proceedings by U.S. federal and state regulators, as well as foreign regulators and private parties.
If
we fail to integrate our platform with a variety of software applications, operating systems, and platforms that are developed by others,
our platform may become less marketable, less competitive or obsolete, and our business, operating results, and financial condition would
be adversely impacted.
Our
customers and prospective customers expect our platform to integrate with a variety of software systems, and we need to continuously
modify and enhance our platform to adapt to changes in software, browser, and database technologies. In general, we rely heavily on the
fact that the providers of such software systems continue to allow us access to their APIs to enable these customer integrations. In
the future we expect to integrate our platform with additional third-party APIs and we anticipate that we will be unable to rely on long-term
written contracts to govern our relationships with these providers and instead will be subject to the standard terms and conditions for
application developers of such providers, which govern the distribution, operation, and fees of such software systems, and which are
subject to change by such providers from time to time. As such, our business, operating results, and financial condition could be adversely
impacted.
We
may acquire other assets or businesses, or form collaborations or make investments in other companies or technologies that could harm
our operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.
As
part of our business strategy, we may pursue acquisitions of businesses and assets or enter into strategic alliances and collaborations,
to initiate and then expand our operations. We may not identify or complete these transactions in a timely manner, on a cost-effective
basis, or at all, and we may not realize the anticipated benefits of any such transaction, any of which could have a detrimental effect
on our financial condition, results of operations and cash flows. We have limited experience with acquiring other companies and assets
and limited experience with forming strategic alliances and collaborations. We may not be able to find suitable acquisition candidates,
and if we make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing business and we may
incur additional debt or assume unknown or contingent liabilities in connection therewith. Integration of an acquired company or assets
may also disrupt ongoing operations, require the hiring of additional personnel and the implementation of additional internal systems
and infrastructure, especially the acquisition of commercial assets, and require management resources that would otherwise focus on developing
our existing business. We may not be able to find suitable strategic alliances or collaboration partners or identify other investment
opportunities, and we may experience losses related to any such investments.
To
finance any acquisitions or collaborations, we may choose to issue debt or equity securities as consideration. Any such issuance of securities
would dilute the ownership of our stockholders. If the price of our common stock is low or volatile, we may not be able to acquire other
assets or companies or fund a transaction using our stock as consideration. Alternatively, it may be necessary for us to raise additional
funds for acquisitions through public or private financings. Additional funds may not be available on terms that are favorable to us,
or at all.
Because
we do not have an audit or compensation committee, shareholders will have to rely on our entire Board of Directors to perform these functions.
We
do not have an audit or compensation committee. These functions are performed by our Board of Directors of as a whole. Thus, there is
a potential conflict in that board members who are also part of management will participate in discussions concerning management compensation
and audit issues that may affect management decisions.
We
expect to face intense competition, often from companies with greater resources and experience than we have.
To
acquire qualified companies, we are likely to face competition from companies that have substantially greater financial, technological,
managerial and research and development resources and experience than we have. In addition, if we are successful in closing an acquisition
of one or more target companies, these acquired companies are likely to face competition for their service and product offerings from
large and well-established companies that have greater marketing and sales experience and capabilities than we have. If we are unable
to compete successfully, we may be unable to grow, sustain our revenue or be successful in achieving our business plan.
Current
global financial conditions have been characterized by increased volatility which could negatively impact our business, prospects, liquidity
and financial condition.
Current
global financial conditions and recent market events have been characterized by increased volatility and the resulting tightening of
the credit and capital markets has reduced the amount of available liquidity and overall economic activity. We cannot guaranty that debt
or equity financing, the ability to borrow funds or cash generated by operations will be available or sufficient to meet or satisfy our
initiatives, objectives or requirements. Our inability to access sufficient amounts of capital on terms acceptable to it for its operations
will negatively impact its business, prospects, liquidity and financial condition.
We
are growing the size of our organization, and we may experience difficulties in managing any growth we may achieve.
As
our growth plans proceed and development and commercialization plans and strategies develop, we expect to need additional development,
managerial, operational, sales, marketing, financial, accounting, legal, and other resources. Future growth would impose significant
added responsibilities on members of management. Our management may not be able to accommodate those added responsibilities, and our
failure to do so could prevent us from effectively managing future growth, if any, and successfully growing our Company.
Our
potential for rapid growth and our entry into new markets make it difficult for us to evaluate our current and future business prospects,
and we may be unable to effectively manage any growth associated with these new markets, which may increase the risk of your investment
and could harm our business, financial condition, results of operations and cash flow.
Our
entry into new markets as we seek to expand our business and seek to acquire complementary businesses may place a significant strain
on our resources and increase demands on our executive management, personnel and systems, and our operational, administrative and financial
resources may be inadequate. We may also not be able to effectively manage any expanded operations or achieve planned growth on a timely
or profitable basis, particularly if the number of customers using our technology significantly increases or their demands and needs
change as our business expands. If we are unable to manage expanded operations effectively, we may experience operating inefficiencies,
the quality of our products and services could deteriorate, and our business and results of operations could be materially adversely
affected.
If
we are unable to develop and maintain our brand and reputation for our service and product offerings, our business and prospects could
be materially harmed.
Our
business and prospects depend, in part, on developing and then maintaining and strengthening our brand and reputation in the markets
we will serve and for the companies we acquire. If problems arise with our future products or services, our brand and reputation could
be diminished. If we fail to develop, promote and maintain our brand and reputation successfully, our business and prospects could be
materially harmed.
Any
failure to protect our future intellectual property rights could impair our ability to protect our technology and our brand.
Our
success depends in part on our ability to enforce our intellectual property and other proprietary rights of the companies we expect to
acquire. We expect to rely upon a combination of trademark and trade secret laws, as well as license and other contractual provisions,
to protect our intellectual property and other proprietary rights. These laws, procedures and restrictions provide only limited protection
and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. To the extent
that our intellectual property and other proprietary rights are not adequately protected, third parties may gain access to our proprietary
information, develop and market products similar to ours or use trademarks similar to ours, each of which could materially harm our business.
The failure to adequately protect our intellectual property and other proprietary rights could have a material adverse effect on our
business, financial condition and results of operations.
Our
expansion into new products, services, technologies, and geographic regions subjects us to additional risks.
We
may have limited or no experience in our newer markets, and our customers may not adopt our product or service offerings. These offerings,
which can present new and difficult technology challenges, may subject us to claims if customers of these offerings experience service
disruptions or failures or other quality issues. For example, the NFTs on which we have recently focused may prove to be speculative
and not sustain the value they currently have to our clients. In addition, profitability, if any, in our newer activities may not meet
our expectations, and we may not be successful enough in these newer activities to recoup our investments in them. Failure to realize
the benefits of amounts we invest in new technologies, products, or services could result in the value of those investments being written
down or written off.
The
impact of epidemics or pandemics may limit our future business both from the demand and supply sides. Our sale people may not be able
to effectively engage with customers due to restrictions on travel, conferences and in-person meetings. Our supply chain may be impacted
by production and distribution delays. Due to these factors, we may limit future operations to reduce expenses until events support and
allow normal business procedures.
Our
current business and future acquired businesses and/or operations both domestic and abroad, and the businesses of our potential customers
could be materially and adversely affected by the risks, or the public perception of the risks, related to a pandemic or other health
crisis, such as the outbreak of the novel coronavirus (COVID-19) as well as the variants.
The
growth of the businesses we acquire may, in part, be reliant on the willingness of customers to invest in their products and solutions.
The risk, or public perception of the risk, of a pandemic or media coverage of infectious diseases could cause customers to avoid purchases
which would delay sales of those products and solutions.
Our
financial results fluctuate and may be difficult to forecast, and this may cause a decline in the trading price of our stock.
Our
revenues, expenses and operating results are difficult to predict given our limited history of current operations. We expect that our
operating results will continue to fluctuate in the future due to a number of factors, some of which are beyond our control. These factors
include, but are not limited to:
| ● | Our
ability to increase our brand awareness; |
| ● | Our
ability to attract new customers; |
| ● | Our
ability to increase our customer base; |
| ● | The
amount and timing of costs relating to the expansion of our operations, including sales and
marketing expenditures; |
| ● | Our
ability to introduce new mobile payment offerings or customer services in a competitive environment; |
| ● | Technical
difficulties consumers might encounter in using our NFTs; and |
| ● | Our
ability to manage third-party outsourced operations; |
Due
to all of these factors, our operating results may fall below the expectations of investors, which could cause a decline in the trading
price of our common stock.
We
intend to make acquisitions that could disrupt our operations and adversely impact our business and operating results.
We
intend to attempt to acquire complementary Web3 businesses and to support the transition and integration of acquired operations with
our ongoing business as a part of our growth strategy. Other than as disclosed herein, we currently have no binding commitments or agreements
with respect to any such acquisitions and there can be no assurance that we will eventually consummate any acquisitions. The process
of integrating acquired assets into our operations may result in unforeseen operating difficulties and expenditures and may absorb significant
management attention that would otherwise be available for the ongoing development of our business. In addition, we have limited experience
in performing acquisitions and managing growth. There can be no assurance that the anticipated benefits of any acquisition will be realized.
In addition, future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other intangible assets, any of which could materially and adversely affect
our operating results and financial position. In addition, acquisitions also involve other risks, including risks inherent in entering
markets in which we have no or limited prior experience and the potential loss of key employees.
Our
plans for expansion cannot be implemented if we lose our key personnel or cannot recruit additional personnel.
We
depend substantially on the continued services, specialized knowledge and performance of our senior management, particularly but not
limited to Howard Gostfrand, Laura Anthony, Brian Klatsky, Lauren Klatsky, Kemah E. P. Washington, and Rafi Goldman . We do not
have employment agreements with these individuals, and they could terminate their employment with us at any time. As a result, these
officers may elect to pursue other opportunities at any time. If one or more of these individuals choose to leave our Company, we may
lose a significant number of relationships and operating expertise which they have developed over many years and which would be difficult
to replace. The loss of the services of any executive officer or other key employee could hurt our business.
In
addition, as our business expands, we will need to add new information technology and engineering personnel to maintain and expand our
systems and customer support personnel to serve our growing customer base. If we are unable to hire and successfully train employees
or contractors in these areas, users of our platform may have negative experiences and we may lose customers, which would diminish the
value of our brand and harm our business. The market for recruiting qualified information technology and other personnel is extremely
competitive, and we may experience difficulties in attracting and retaining employees. Should we fail to retain or attract qualified
personnel, we may not be able to compete successfully or implement our plans for expansion.
We
have an evolving business model with still untested growth initiatives.
We
have an evolving business model and intend to implement new strategies to grow our business in the future. Among other strategies for
organic growth, we intend to recruit partners to sell our NFT products and other digital assets. There can be no assurance that we will
be successful in developing new product categories or in entering new specialty markets or in implementing any other growth strategies.
Similarly, there can be no assurance that we already have or will be able to obtain or retain any employees, consultants or other resources
with any specialized skills or relationships to successfully implement our strategies in the future.
We
rely on third-party systems to conduct our business and relationships with payment processors, advertisers, third party sellers of our
NFTs, and our revenues and market share may decrease if these third-party relationship and systems are unavailable in the future or if
they no longer offer quality performance.
We
rely on third-party computer systems and third-party service providers, including payment services such as Stripe, and Wyre for credit
card verifications and confirmations, to host our website and to advertise and deliver the products sold on our website to customers.
We also rely on third-party licenses for components of the software underlying our technology platform. Any interruption in our ability
to obtain the products or services of these or other third parties or deterioration in their performance could impair the timing and
quality of our own service. If our service providers fail to deliver high-quality services in a timely manner to our customers, our services
will not meet the expectations of our customers and our reputation and brand will be damaged. Furthermore, if our arrangements with any
of these third parties are terminated, we may not find an alternate source of systems support on a timely basis or on terms as advantageous
to us. In addition, our contracts or arrangements with suppliers do not provide for the continuation of particular pricing practices,
for the availability of any specific services and generally may be terminated by either party. If we are unable to develop and maintain
relationships with these third-party suppliers that will allow us to obtain sufficient levels of service on acceptable commercial terms,
such inability could harm our business, prospects, financial condition and results of operations.
We
are subject to cyber security risks and risks of data loss or other security breaches.
Our
business involves the storage and transmission of users’ proprietary information, and security breaches could expose us to a risk
of loss or misuse of this information, and to resulting claims, fines, and litigation. We have been subjected to a variety of cyber-attacks,
which have increased in number and variety over time. We believe our systems are probed by potential hackers virtually 24/7, and we expect
the problem will continue to grow worse over time. Cyber-attacks may target us, our customers, our suppliers, banks, credit card processors,
delivery services, e-commerce in general or the communication infrastructure on which we depend. 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, any of which could have a material adverse effect on our financial results and business.
Moreover, any insurance coverage we may carry may be inadequate to cover the expenses and other potential financial exposure we could
face as a result of a cyber-attack or data breach.
We
may not be able to compete successfully against existing or future competitors including larger, well-established and well-financed NFT
companies.
Many
of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do. In addition, some of our competitors may be able to devote greater resources
to marketing and promotional campaigns, adopt more aggressive pricing and devote substantially more resources to systems development
than we do. Increased competition may result in reduced operating margins, loss of market share and a diminished brand franchise. We
cannot provide assurance that we will be able to compete successfully against existing or future competitors.
Our
business depends on effective marketing, including marketing via email and social networking messaging, and we intend to increase our
spending on marketing and branding, which may adversely affect our financial results.
We
depend on effective marketing to attract customers and merchants. We depend on email and social networking messaging to promote our site
and offerings and to generate a substantial portion of our revenues. If we are unable to develop, implement and maintain effective and
efficient cost-effective advertising and marketing programs, it would have a material adverse effect on our financial results and business.
Further, as part of our growth strategies, we intend to increase our spending on marketing and branding initiatives significantly, which
may adversely affect our financial results. There is no assurance that any increase in our marketing or branding expenditures will result
in increased market shares or will ultimately have a positive effect on our financial results.
If
we do not respond to rapid technological changes, our services could become obsolete and we could lose customers.
To
remain competitive, we must continue to enhance and improve the functionality and features of our NFT platform and design studio businesses.
We may face material delays in introducing new services, products and enhancements. If this happens, our customers may forego the use
of our platform and use those of our competitors. If competitors introduce new products and services using new technologies or if new
industry standards and practices emerge, our existing technology and systems may become obsolete. Our failure to respond to technological
change or to adequately maintain, upgrade and develop our computer network and the systems used to process customers’ orders and
payments could harm our business, prospects, financial condition and results of operations.
Use
of social media may adversely impact our reputation.
There
has been a marked increase in the use of social media platforms and similar devices, including blogs, social media websites and other
forms of internet-based communications that allow individuals access to a broad audience of consumers and other interested persons. Consumers
value readily available information concerning retailers, manufacturers, and their goods and services and often act on such information
without further investigation, authentication and without regard to its accuracy. The availability of information on social media platforms
and devices is virtually immediate as is its impact. Social media platforms and devices immediately publish the content their subscribers
and participants post, often without filters or checks on accuracy of the content posted. The opportunity for dissemination of information,
including inaccurate information, is seemingly limitless and readily available. Information concerning our company may be posted on such
platforms and devices at any time. Information posted may be adverse to our interests, may be inaccurate, and may harm our performance,
prospects or business. The harm may be immediate without affording us an opportunity for redress or correction. Such platforms also could
be used for the dissemination of trade secret information or otherwise compromise valuable company assets, all of which could harm our
business, prospects, financial condition and results of operations.
Risks
Related to Digital Assets
Whether
a particular non-fungible token (NFT) or other crypto assets is a “security” in any relevant jurisdiction is subject to a
high degree of uncertainty, and if we are unable to properly characterize an NFT or other crypto asset, we may be subject to regulatory
scrutiny, inquiries, investigations, fines, and other penalties, which may adversely affect our business, operating results, and financial
condition.
The
SEC and its staff have taken the position that certain crypto assets (which includes NFTs) fall within the definition of a “security”
under the U.S. federal securities laws. The legal test for determining whether any given crypto asset is a security is a highly complex,
fact-driven analysis that evolves over time, and the outcome is difficult to predict. The SEC generally does not provide advance guidance
or confirmation on the status of any particular crypto asset as a security. Furthermore, the SEC’s views in this area have evolved
over time and it is difficult to predict the direction or timing of any continuing evolution. It is also possible that a change in the
governing administration or the appointment of new SEC commissioners could substantially impact the views of the SEC and its staff. For
example, Chair Gary Gensler has repeatedly remarked on the need for further regulatory oversight on crypto assets, crypto trading, and
lending platforms by the SEC. Public statements by senior officials at the SEC indicate that the SEC does not intend to take the position
that Bitcoin or Ethereum are securities (in their current form). Bitcoin and Ethereum are the only crypto assets as to which senior officials
at the SEC have publicly expressed such a view. Moreover, such statements are not official policy statements by the SEC and reflect only
the speakers’ views, which are not binding on the SEC or any other agency or court and cannot be generalized to any other crypto
asset. With respect to all other crypto assets, there is currently no certainty under the applicable legal test that such assets are
not securities, notwithstanding the conclusions we may draw based on our risk-based assessment regarding the likelihood that a particular
crypto asset could be deemed a “security” under applicable laws. Similarly, though the SEC’s Strategic Hub for Innovation
and Financial Technology published a framework for analyzing whether any given crypto asset is a security in April 2019, this framework
is also not a rule, regulation or statement of the SEC and is not binding on the SEC.
Several
foreign jurisdictions have taken a broad-based approach to classifying crypto assets as “securities,” while other foreign
jurisdictions, such as Switzerland, Malta, and Singapore, have adopted a narrower approach. As a result, certain crypto assets may be
deemed to be a “security” under the laws of some jurisdictions but not others. Various foreign jurisdictions may, in the
future, adopt additional laws, regulations, or directives that affect the characterization of crypto assets as “securities.”
The
classification of a crypto asset as a security under applicable law has wide-ranging implications for the regulatory obligations that
flow from the offer and sale of such assets. For example, a crypto asset that is a security in the United States may generally only be
offered or sold in the United States pursuant to a registration statement filed with the SEC or in an offering that qualifies for an
exemption from registration. Persons that effect transactions in crypto assets that are securities in the United States may be subject
to registration with the SEC as a “broker” or “dealer.” Platforms that bring together purchasers and sellers
to trade crypto assets that are securities in the United States are generally subject to registration as national securities exchanges,
or must qualify for an exemption, such as by being operated by a registered broker-dealer as an ATS in compliance with rules for ATSs.
Persons facilitating clearing and settlement of securities may be subject to registration with the SEC as a clearing agency. Foreign
jurisdictions may have similar licensing, registration, and qualification requirements.
We
have policies and procedures to analyze whether each NFT that we seek to facilitate listing and sale on our platform could be deemed
to be a “security” under applicable laws. Our policies and procedures do not constitute a legal standard but rather represent
our company-developed model, which permits us to make a risk-based assessment regarding the likelihood that a particular NFT could be
deemed a “security” under applicable laws. Regardless of our conclusions, we could be subject to legal or regulatory action
in the event the SEC, a state or foreign regulatory authority, or a court were to determine that an NFT listed and sold on our platform
is a “security” under applicable laws. Because our platform is not registered or licensed with the SEC or foreign authorities
as a broker-dealer, national securities exchange, or ATS (or foreign equivalents), and we do not seek to register or rely on an exemption
from such registration or license to facilitate the offer and sale of NFTs on our platform, we only permit listing on our platform of
those NFTs for which we determine there are reasonably strong arguments to conclude that the NFT is not a security. We believe that our
process reflects a comprehensive and thoughtful analysis and is reasonably designed to facilitate consistent application of available
legal guidance to crypto assets to facilitate informed risk-based business judgment. However, we recognize that the application of securities
laws to the specific facts and circumstances of crypto assets may be complex and subject to change, and that a listing determination
does not guarantee any conclusion under the U.S. federal securities laws. We expect our risk assessment policies and procedures to continuously
evolve to take into account case law, facts, and developments in technology.
There
can be no assurances that we will properly characterize any given NFT as a security or non-security for purposes of determining whether
our platform will allow the listing of such NFT, or that the SEC, foreign regulatory authority, or a court, if the question was presented
to it, would agree with our assessment. If the SEC, state or foreign regulatory authority, or a court were to determine that NFTs offered
or sold on our platform are securities, we would not be able to offer such NFTs until we are able to do so in a compliant manner. A determination
by the SEC, a state or foreign regulatory authority, or a court that an NFT listed and sold on our platform was a security may also result
in us determining that it is advisable to remove NFTs from our platform that have similar characteristics to the NFT that was determined
to be a security. In addition, we could be subject to judicial or administrative sanctions for failing to offer or sell the NFT in compliance
with the registration requirements, or for acting as a broker, dealer, or national securities exchange without appropriate registration.
Such an action could result in injunctions, cease and desist orders, as well as civil monetary penalties, fines, and disgorgement, criminal
liability, and reputational harm. Customers that purchased such NFTs on our platform and suffered losses could also seek to rescind a
transaction that we facilitated as the basis that it was conducted in violation of applicable law, which could subject us to significant
liability. We may also be required to cease facilitating transactions in other similar NFTs, which could negatively impact our business,
operating results, and financial condition.
We
rely on third party platforms to operate our NFT Marketplace.
We
rely on third-party platforms and software providers such as MetaMask and OpenSea to operate our NFT marketplace and perform auctions
of NFTs. If we are unable to maintain a good relationship with such platform providers; if the terms and conditions or pricing of such
platform providers change; if we violate or cannot comply with the terms and conditions of such platforms; or if any such platform loses
market share or falls out of favor or is unavailable for a prolonged period of time, access to and use of our NFT marketplace will suffer.
There
are risks associated with operating a marketplace for NFTs.
The
regulatory regime governing blockchain technologies, cryptocurrencies, and tokens is uncertain, and new regulations or policies may materially
affect our NFT marketplace and our business generally. There are risks associated with marketplaces for NFTs that sell user generated
content, including but not limited to, counterfeit assets, intellectual property violations, unregistered sales of securities, assets
on smart contracts with bugs, and assets that may become untransferable. These risks could create liability and have an adverse effect
on the Company.
Our
risk management efforts may not be effective to prevent fraudulent activities by third-party providers or other parties, which could
expose us to material financial losses and liability and otherwise harm our business.
We
contract with third-party providers for applications available through our platform, as well as some services required to maintain the
platform. We may be targeted by parties, including customers, hackers, or third-party providers, who seek to commit acts of financial
fraud using techniques such as stolen identities and bank accounts, compromised email accounts, employee or insider fraud, account takeover,
or other types of fraud. We may suffer losses from acts of financial fraud committed by our employees or third parties.
The
techniques used to perpetrate fraud on our platform and the applications accessed through our platform are continually evolving, and
we expend considerable resources to monitor and combat them, and to inform customers of the limits to the control we have over third-party
provider activities. Additionally, when we introduce new products and applications, or expand existing products, we may not be able to
identify all risks created by the new products or applications. Our risk management policies and procedures may not be sufficient to
identify all of the risks to which we or our customers are exposed, to enable us to prevent or mitigate the risks we have identified,
or to identify additional risks to which we or our customers may become subject in the future. Furthermore, our risk management policies
and procedures may contain errors, or our employees or agents may commit mistakes or errors in judgment as a result of which we may suffer
large financial losses.
The
growth of our business will continue to place significant demands on our risk management efforts, and we will need to continue developing
and improving our existing risk management policies and procedures. As techniques used to perpetrate fraud on our platform evolve, we
may need to modify our platform, services or agreements with third parties to mitigate fraud risks. Further, these types of fraudulent
activities on our platform can also expose us to civil and criminal liability, governmental and regulatory sanctions as well as potentially
cause us to be in breach of our contractual obligations to our third-party providers.
Digital
assets were only introduced within the past decade, and our success will be impacted by number of factors relating to the capabilities
and development of blockchain technologies and to the fundamental investment characteristics of digital assets.
Digital
assets (such as cryptocurrencies) were only introduced within the past decade, and the medium-to-long term value of such assets is subject
to a number of factors relating to the capabilities and development of blockchain technologies, such as the nascency of their development,
their dependence on the internet and other technologies, their dependence on the role played by users, developers and miners and the
potential for malicious activity. As our primary business plan involves dealing directly with digital assets, the realization of one
or more of the following risks could materially adversely affect our business:
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Digital
asset networks and the software used to operate digital assets are in the early stages of development. Given the nascency of the
development of digital asset networks, digital assets may not function as intended and parties may be unwilling to use digital assets,
which would dampen the growth, if any, of digital asset networks. |
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● |
The
loss or destruction of a private key required to access a digital asset may be irreversible. If a private key is lost, destroyed,
or otherwise compromised and no backup of the private key is accessible, the owner would be unable to access the digital asset corresponding
to that private key and the private key will not be capable of being restored by the digital asset network. |
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● |
Digital
asset networks are dependent upon the internet. A disruption of the internet or a digital asset network would affect the ability
to transfer digital assets, and, consequently, their value. |
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The
acceptance of software patches or upgrades by a significant, but not overwhelming, percentage of the users and miners in a digital
asset network, could result in a “fork” in such network’s blockchain, resulting in the operation of multiple separate
networks. |
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● |
Over
the past several years, digital asset mining operations have evolved from individual users mining with computer processors, graphics
processing units and first-generation application specific integrated circuit machines to “professionalized” mining operations
using proprietary hardware or sophisticated machines. If the profit margins of digital asset mining operations are not sufficiently
high, digital asset miners are more likely to immediately sell tokens earned by mining, resulting in an increase in liquid supply
of that digital asset, which would generally tend to reduce that digital asset’s market price. |
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● |
In
the past, flaws in the source code for digital assets have been exposed and exploited, including flaws that disabled some functionality
for users, exposed users’ personal information and/or resulted in the theft of users’ digital assets. Such occurrences
can reduce confidence in digital assets as a whole. Any reduction in confidence in the source code or cryptography underlying digital
assets generally could negatively affect the demand for digital assets and therefore adversely affect the value of OpenLocker. |
Moreover,
because digital assets, have been in existence for a short period of time and are continuing to develop, there may be additional risks
in the future that are impossible to predict at this time.
Digital
assets represent a new and rapidly evolving industry, and the value of OpenLocker depends significantly on the acceptance of digital
assets as payment, such as cryptocurrencies.
Cryptographic
and algorithmic protocols governing the issuance of digital assets represent a new and rapidly evolving industry that is subject to a
variety of factors that are difficult to evaluate. For example, the realization of one or more of the following risks could materially
adversely affect our value:
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Digital
assets – for example, Bitcoin – have only recently become selectively accepted as a means of payment by retail and commercial
outlets, and use of such digital by consumers to pay such retail and commercial outlets remains limited. Banks and other established
financial institutions may refuse to process funds for cryptocurrency transactions; process wire transfers to or from digital asset
exchanges, digital asset-related companies, or service providers; or maintain accounts for persons or entities transacting in digital
assets. |
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● |
Banks
may not provide banking services, or may cut off banking services, to businesses that provide digital asset-related services or that
accept digital assets as payment, which could dampen liquidity in the market and damage the public perception of digital assets generally
or any one digital asset in particular and their or its utility as a payment system, which could decrease the price of digital assets
generally or individually. |
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Certain
privacy-preserving features have been or are expected to be introduced to digital asset networks, and exchanges or businesses that
facilitate transactions in Bitcoin, for example, may be at an increased risk of having banking services cut off if there is a concern
that these features interfere with the performance of anti-money laundering duties and economic sanctions checks. |
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Users,
developers and miners may otherwise switch to or adopt certain digital assets at the expense of their engagement with other digital
asset networks, which may negatively impact those networks. |
Changes
in the governance of a digital asset network may not receive sufficient support from users and miners, which may negatively affect that
digital asset network’s ability to grow and respond to challenges.
The
governance of decentralized networks, such as the Bitcoin and Ethereum networks, is by voluntary consensus and open competition. As a
result, there may be a lack of consensus or clarity on the governance of any particular decentralized digital asset network, which may
stymie such network’s utility and ability to grow and face challenges. The foregoing notwithstanding, the protocols for some decentralized
networks are informally managed by a group of core developers that propose amendments to the relevant network’s source code. Core
developers’ roles evolve over time, largely based on self-determined participation. If a significant majority of users and miners
adopt amendments to a decentralized network based on the proposals of such core developers, such network will be subject to new protocols
that may adversely affect the value of the relevant digital asset.
As
a result of the foregoing, it may be difficult to find solutions or marshal sufficient effort to overcome any future problems, especially
long-term problems, on digital asset networks.
Digital
assets may have concentrated ownership and large sales or distributions by holders of such digital assets could have an adverse effect
on the market price of such digital asset.
As
of December 31, 2021, the largest 100 Bitcoin wallets held approximately 15% of the digital assets in circulation. Moreover, it is possible
that other persons or entities control multiple wallets that collectively hold a significant number of digital assets, even if they individually
only hold a small amount, and it is possible that some of these wallets are controlled by the same person or entity. As a result of this
concentration of ownership, large sales or distributions by such holders could have an adverse effect on the market price of digital
assets, increasing risk for investment in our Company.
Certain
cryptocurrencies may rely on a public or third-party blockchain and the success of such blockchain may have a direct impact on the success
and value of cryptocurrencies held by us.
Some
cryptocurrencies are built on existing third-party blockchains and are partly dependent on the effectiveness and success of such blockchains,
as well as the success of other blockchain and decentralized data storage systems that are being used by the issuer of the cryptocurrencies.
There is no guarantee that any of these systems or will continue to exist or be successful. This could lead to disruptions of our operations
and could negatively affect us.
Digital
assets held by us may be negatively affected by technological advances that undermine the cryptographic consensus mechanism underpinning
blockchain and distributed ledger protocols.
Advances
in cryptography or technical advances such as the development of quantum computing could present risks to the viability of digital asset
by undermining or vitiating the cryptographic consensus mechanism that underpins blockchain and distributed ledger protocols. Similarly,
legislatures and regulatory agencies could prohibit the use of current and/or future cryptographic protocols which could limit the use
of cryptocurrencies, resulting in a significant loss of value for our shareholders.
Risks
Relating to NFTs
The
market for NFTs is relatively new and subject to significant volatility.
The
valuation of NFTs depends considerably on scarcity and the perception of potential and existing owners and buyers of an NFT’s worth
and each other, along with other cultural factors and the exclusivity and availability of distribution channels. It is extremely difficult
to anticipate the market for an NFT, however the value of NFTs, like many other digital assets, may change substantially and in a rapid
and unpredictable manner. NFTs are a hard-to-value asset and valuation methodology is still developing. As such, the valuations of the
NFTs held and sold by us may change significantly over time. Additionally, a decline in the market for collectible NFTs generally or
specific types of NFT collectibles, or adverse market conditions generally (due to general economic conditions, market preferences or
cultural factors) would result in either the failure of our NFT collectibles to maintain or increase in value or alternatively a decrease
in value of our NFT collectibles compared to the acquisition price. There is a limited basis for us to evaluate the possible merits or
risks of offering any particular NFT product or service. For these and additional reasons, offering NFT products and services, are speculative
and involve a high degree of risk.
NFT
collectibles may be a relatively illiquid asset.
While
many digital assets can be bought and sold easily, in the case of NFT collectibles, we will need to identify buyers who are willing to
pay a certain price for a particular, one-of-a-kind item. If we elect to dispose of an NFT collectible through an auction house, commissions
will be to the auction house that will reduce our returns. In addition, following a sale at auction, a successful bidder may fail to
pay in accordance with the timescales laid down by the relevant auction house resulting in either (i) delayed payment by said bidder;
or (ii) the need for us to sell the work either privately, via a gallery or at a subsequent auction, in either case resulting in losses
for us.
There
may be virtual currency tax implications.
On
March 25, 2014, the Internal Revenue Service (the “Service”) issued a notice regarding certain U.S. federal tax implications
of transactions in, or transactions that use, “virtual currency” (the “Notice”). According to the Notice, virtual
currency is treated as property, not currency, for U.S. federal tax purposes, and “general tax principles applicable to property
transactions apply to transactions using virtual currency”. In part, the Notice provides that the character of gain or loss from
the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer. Accordingly,
in the United States, certain transactions in virtual currency are taxable events and subject to information reporting to the Service
to the same extent as any other payment made in property.
Additionally,
the Service recently issued a revenue ruling regarding certain tax consequences of “hard forks” and “airdrops”
of a virtual currency (the “Revenue Ruling”). The Revenue Ruling provides that a taxpayer does not have gross income as a
result of a hard fork of a virtual currency the taxpayer owns if the taxpayer does not receive units of a new virtual currency. However,
an airdrop of a new virtual currency following a hard fork generally results in ordinary income to the taxpayer if the taxpayer receives
units of new cryptocurrency.
Although
the Service has issued the Notice and the Revenue Ruling, the U.S. Department of Treasury and the Service may publish future guidance
that provides for adverse tax consequences to our Company. Those tax laws and regulations change on an ongoing basis and that they may
be changed with retroactive effect. Moreover, the interpretation and application of tax laws and regulations by certain tax authorities
may not be clear, consistent or transparent. As a result, the U.S. federal tax consequences impacting us are uncertain, and our net asset
value at the time any subscriptions, withdrawal or exchanges of Interests occur may not accurately reflect our direct or indirect tax
liabilities, including on any historical realized or unrealized gains (including those tax liabilities that are imposed with retroactive
effect). In addition, our net asset value at the time any subscriptions, withdrawals or exchanges of Interests occur may reflect a direct
or indirect accrual for tax liabilities, including estimates of such tax liabilities, that may not ultimately be paid. Accounting standards
may also change, creating an obligation for our Company to accrue for a tax liability that was not previously required to be accrued
for or in situations in which it is not expected that we will directly or indirectly be ultimately subject to such tax liability.
Risks
Related to Our Common Stock
Our
common stock is subject to risks arising from restrictions on reliance on Rule 144 by shell companies or former shell companies.
Under
a regulation of the SEC known as “Rule 144,” a person who beneficially owns restricted securities of an issuer and who is
not an affiliate of that issuer may sell them without registration under the Securities Act provided that certain conditions have been
met. One of these conditions is that such person has held the restricted securities for a prescribed period, which will be six months
for the common stock. However, Rule 144 is unavailable for the resale of securities issued by an issuer that is a shell company (other
than a business combination related shell company) or, unless certain conditions are met, that has been at any time previously a shell
company.
The
SEC defines a shell company as a company that has (a) no or nominal operations and (b) either (i) no or nominal assets, (ii) assets consisting
solely of cash and cash equivalents; or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets.
As
a result of a transaction reported on Form 8-K on August 4, 2021, we ceased being a shell company as such term is defined in Rule 12b-2
under the Exchange Act. While we believe that we ceased to be a shell company, the SEC and others whose approval is required in order
for shares to be sold under Rule 144 might take a different view.
Rule
144 is available for the resale of securities of former shell companies if and for as long as the following conditions are met:
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(i) |
the
issuer of the securities that was formerly a shell company has ceased to be a shell company; |
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(ii) |
the
issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act; |
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(iii) |
the
issuer of the securities has filed all Exchange Act reports and material required to be filed, as applicable, during the preceding
12 months (or such shorter period that the issuer was required to file such reports and materials), other than Current Reports on
Form 8-K; and |
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(iv) |
at
least one year has elapsed from the time that the issuer filed current comprehensive disclosure with the SEC reflecting its status
as an entity that is not a shell company known as “Form 10 Information.” |
Our
common stock price may decrease due to factors beyond our control.
The
stock market from time to time has experienced extreme price and volume fluctuations, which have particularly affected the market prices
for early-stage companies and which often have been unrelated to the operating performance of the companies. These broad market fluctuations
may adversely affect the market price of our stock. If Descrypto’s stockholders sell substantial amounts of their stock in the
public market, the price of our stock could fall. These sales also might make it more difficult for us to sell equity, or equity-related
securities, in the future at a price we deem appropriate.
The
market price of our stock may also fluctuate significantly in response to the following factors, most of which are beyond our control:
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variations
in our quarterly operating results; |
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changes
in general economic conditions; |
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changes
in market valuations of similar companies; |
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announcements
by us or our competitors of significant acquisitions, strategic partnerships or joint ventures, or capital commitments; |
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poor
reviews; |
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loss
of a major customer, partner or joint venture participant; and |
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the
addition or loss of key managerial and collaborative personnel. |
Any
such fluctuations may adversely affect the market price or value of our common stock, regardless of our actual operating performance.
As a result, stockholders may be unable to sell their shares, or may be forced to sell them at a loss.
Our
common stock is subject to the application of the “penny stock” rules which could adversely affect the market price of our
common stock and increase transaction costs to sell those shares.
The
SEC has adopted rule 3a51-1 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject
to certain exceptions. For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires:
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that
a broker or dealer approve a person’s account for transactions in penny stocks, and |
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the
broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the
penny stock to be purchased. |
In
order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
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obtain
financial information and investment experience objectives of the person, and |
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make
a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. |
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to
the penny stock market, which, in highlight form:
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sets
forth the basis on which the broker or dealer made the suitability determination and |
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that
the broker or dealer received a signed, written agreement from the investor prior to the transaction. |
Generally,
brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more
difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
The
market price for our common stock is particularly volatile, which could lead to wide fluctuations in our share price. You may be unable
to sell your common stock shares at or above your purchase price, or at all, which may result in substantial losses to you.
The
market for our common stock is characterized by significant price volatility when compared to seasoned issuers, and we expect that our
share price will continue to be more volatile than a seasoned issuer for the indefinite future. As a consequence of this enhanced risk,
more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress,
be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a
seasoned issuer. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our
operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common stock shares
will be at any time, or if our common stock shares will ever be able to trade, or as to what effect the sale of shares or the availability
of common stock shares for sale at any time will have on the prevailing market price.
We
do not intend to pay dividends for the foreseeable future.
We
have never declared nor paid any cash dividends on our stock and do not intend to pay any cash dividends in the foreseeable future. We
anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes.
Any determination to pay dividends in the future will be at the discretion of our Board.
If
we are unable to comply with the financial reporting requirements mandated by the SEC’s regulations, investors may lose confidence
in our financial reporting and the price of our common stock could decline.
If
we fail to maintain effective internal controls over financial reporting, our ability to produce timely, accurate and reliable periodic
financial statements could be impaired. If we do not maintain adequate internal control over financial reporting, investors could lose
confidence in the accuracy of our periodic reports filed under the Exchange Act. Additionally, our ability to obtain additional financing
could be impaired or a lack of investor confidence in the reliability and accuracy of its public reporting could cause our stock price
to decline.