NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2022
(UNAUDITED)
1.
Business
We
(or the “Company”) provide cryptocurrency and other check-out and payment systems that securely automate and simplify the
way online payment and shipping information is received by merchants from their customers. Our “one click” checkout solution
is modeled on the “buy now” button on leading eCommerce sites. Our check-out systems are designed to enhance customers’
data protection, enabling consumers to pay for goods and services using cryptocurrencies or by direct transfers from their bank accounts
without exposing spending credentials such as credit card data. At the same time, our check-out systems are designed to increase the
speed, security and ease of use for both customers and merchants and include a merchant portal that provides detailed transactions and
metrics about payments received by the merchant. Our system also includes a customer portal where shoppers are able to track their payments,
configure payment defaults and connect with various cryptocurrency exchanges and banks to facilitate payment to merchants. Merchants
are able to integrate a unique pop-up user interface that allows customers to pay directly from their eCommerce checkout page with no
need to redirect to another website or web page.
Our
corporate headquarters are located in San Francisco, California.
On
May 12, 2022, the Company incorporated a wholly owned subsidiary, RocketFuel (BVI) Ltd., in the British Virgin Islands. The
subsidiary is formed to be the issuer of digital tokens in connection with our planned loyalty program. As of March 30, 2023, no
tokens had been issued. On May 17, 2022, the Company incorporated another wholly owned subsidiary, RocketFuel A/S, in Denmark. This
subsidiary will engage in our B2B cross border settlement program. The subsidiary received a Virtual Asset Services Provider (VASP)
license in July 2022, allowing it to offer a variety of crypto-based services in the EU. Both subsidiaries have not commenced
commercial operations as of December 31, 2022.
2.
Summary of Significant Accounting Policies
Other
than as discussed herein, our significant accounting policies are described in Note 2 to the audited financial statements as of March
31, 2022 which are included in our Annual Report on Form 10-K as filed with the SEC on July 15, 2022.
Basis
of Presentation
The
accompanying unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S.
GAAP”) for interim financial information pursuant to Rule 8-03 of Regulation S-X. Accordingly, these unaudited financial statements
do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management,
the accompanying unaudited financial statements include all adjustments (consisting only of normal recurring adjustments), which we consider
necessary, for a fair presentation of those financial statements. The results of operations for the three and nine months ended December
31, 2022 and cash flows for the nine months ended December 31, 2022 may not necessarily be indicative of results that may be expected
for any succeeding quarter or for the entire fiscal year. The March 31, 2022 balance sheet included herein was derived from the audited
financial statements included in the Company’s Annual Report on Form 10-K as of that date. These unaudited financial statements
should be read in conjunction with our audited financial statements as of March 31, 2022 as filed with the Securities and Exchange Commission
(the “SEC”) on July 15, 2022.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries in accordance
with consolidation accounting guidance. The Company’s subsidiaries consist of RocketFuel Blockchain Company (RBC)
(incorporated in Nevada), RocketFuel A/S (incorporated in Denmark), and RocketFuel (BVI) (incorporated in the British Virgin
Islands), the latter two of which were incorporated during the quarter ended June 30, 2022. All intercompany balances and
transactions have been eliminated in consolidation.
Use
of Accounting Estimates
The
preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments,
which are evaluated on an ongoing basis, and that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during
the reporting periods. Management bases its estimates on historical experience and on various other assumptions that it believes are
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and
liabilities and the amounts of revenues and expenses that are not readily apparent from other sources. Actual results could differ from
those estimates and judgments.
ROCKETFUEL
BLOCKCHAIN, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2022
(UNAUDITED)
Reclassifications
Certain
prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on
the reported results of operations.
Cash
and Cash Equivalents
Cash
includes cash on hand. We consider all highly-liquid, temporary cash investments with a maturity date of three months or less to be cash
equivalents.
Restricted
Cash
In
relation to the Company’s incorporation of a subsidiary in Denmark, a cash deposit of $55,956 was made into an escrow account controlled
by a legal firm. This cash is not available to fund immediate or general business use until it is released from escrow into an operating
cash account of the Denmark subsidiary. Until this release occurs, the cash is restricted in nature and is separately disclosed on the
Company’s consolidated balance sheet and consolidated statement of cash flows.
Software
Development Costs
The
Company accounts for software development costs in accordance with Accounting Standards Codification (“ASC”) 350-40. Research and development costs are expensed as incurred,
except for certain costs which are capitalized in connection with the development of its internal-use software and website. These capitalized
costs are primarily related to the application software that is hosted by the Company and accessed by its customers through the Company’s
website. In addition, the Company capitalizes certain general and administrative costs related to the customization and development of
our internal business systems. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application
has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially
complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing performed to ensure the product
is ready for its intended use. The Company also capitalizes costs related to specific upgrades and enhancements of internal-use software
when it is probable that the expenditures will result in additional functionality. Maintenance and training costs are expensed as incurred.
Capitalized internal use software costs are recorded as part of property and equipment and are amortized on a straight-line basis over
an estimated useful life of two years.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated
useful lives of the assets, which is three years for the Company. Maintenance and repairs are charged to operations as incurred. Significant
improvements are capitalized and depreciated over the useful life of the assets. Gains or losses on disposition or retirement of property
and equipment are recognized in operating expenses.
The
Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying
value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition.
In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an
amount by which the carrying value exceeds the fair value of the related assets. The factors considered by management in performing this
assessment include current operating results, trends and prospects, the manner in which the property is used, the effects of obsolescence,
demand, competition, and other economic factors.
Revenue
Recognition
During
March 2021 we commenced commercial operations. Our revenues are generated from (i) fees charged under software development contracts;
(ii) fees charged in connection with conversion of crypto currencies to and from fiat currencies; (iii) fees charged in connection with
the implementation of our ecommerce checkout solutions; and (iv) ongoing daily transactional fees derived as a negotiated percentage
of the transactional revenues earned by our merchant customers. In June 2022, we conducted tests of our cross-border B2B solution, which
we expect to place in commercial operations by mid-2023.
Our
revenue recognition policy follows the guidance from ASC 606, “Revenue Recognition,”
and Accounting Standards Update No. 2014-09 Revenue from Contracts with Customers (Topic 606) which provides guidance on the recognition,
presentation, and disclosure of revenue in consolidated financial statements. We determine revenue recognition through the following
steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract;
(iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract
and (v) recognition of revenue when a performance obligation is satisfied. Collectability is assessed based on a number of factors, including
the creditworthiness of a client, the size and nature of a client’s website and transaction history. Amounts billed or collected
in excess of revenue recognized are included as deferred revenue. An example of this deferred revenue would be arrangements where clients
request or are required by us to pay in advance of delivery.
ROCKETFUEL
BLOCKCHAIN, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2022
(UNAUDITED)
Earnings
(Loss) Per Share
Earnings
(loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting
period. Diluted earnings per share is computed similar to basic earnings per share, except the weighted average number of common shares
outstanding are increased to include additional shares from the assumed exercise of share options, if dilutive. The dilutive effect,
if any, of convertible instruments or warrants is calculated using the treasury stock method. There are no outstanding dilutive instruments
as the outstanding convertible instruments, stock options and warrants would be anti-dilutive if converted or exercised for the three
and nine months ended December 31, 2022 and 2021.
Stock-based
Compensation
The
Company applies the provisions of ASC 718, Compensation - Stock Compensation, (“ASC 718”) which requires the measurement
and recognition of compensation expense for all stock-based awards made to employees, including employee stock options, in the statements
of operations.
For
stock options issued to employees and members of the Board of Directors (the “Board) for their services, the Company estimates
the grant date fair value of each option using the Black-Scholes option pricing model. The use of the Black-Scholes option pricing model
requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock
consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the common stock. For awards
subject to service-based vesting conditions, including those with a graded vesting schedule, the Company recognizes stock-based compensation
expense equal to the grant date fair value of stock options on a straight-line basis over the requisite service period, which is generally
the vesting term. Forfeitures are recorded as they are incurred as opposed to being estimated at the time of grant and revised.
Pursuant
to Accounting Standards Update (“ASU”) 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to
Non-employee Share-Based Payment Accounting, the Company accounts for stock options issued to non-employees for their services
in accordance with ASC 718. The Company uses valuation methods and assumptions to value the stock options that are in line with the process
for valuing employee stock options noted above.
ROCKETFUEL
BLOCKCHAIN, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2022
(UNAUDITED)
Income
Taxes
We
are required to file federal and state income tax returns in the United States. The preparation of these tax returns requires us to interpret
the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by us. In consultation
with our tax advisors, we base our tax returns on interpretations that are believed to be reasonable under the circumstances. The tax
returns, however, are subject to routine reviews by the various federal and state taxing authorities in the jurisdictions in which we
file tax returns. As part of these reviews, a taxing authority may disagree with respect to the income tax positions taken by us (“uncertain
tax positions”) and, therefore, may require us to pay additional taxes. As required under applicable accounting rules, we accrue
an amount for our estimate of additional income tax liability, including interest and penalties, which we could incur as a result of
the ultimate or effective resolution of the uncertain tax positions. We account for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributed to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary
to reduce deferred tax assets to amounts expected to be realized.
In
assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of
the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
Impact
of COVID-19 on Our Business
The
COVID-19 pandemic has resulted, and may continue to result, in significant economic disruption despite progress made in the development
and distribution of vaccines. It disrupted global travel, supply chains and the labor market and adversely impacted global commercial
activity. While the pandemic has largely subsided, considerable uncertainty still surrounds COVID-19, the evolution of its variants,
its potential long-term economic effects, as well as the effectiveness of any responses taken by government authorities and businesses
and of various efforts to inoculate the global population.
Significant
uncertainty continues to exist concerning the impact of the COVID-19 pandemic on our customers’ and prospects’ business and
operations in future periods. Although our total revenues for the three and nine months ended December 31, 2022 were not materially impacted
by COVID-19, we believe our revenues may be negatively impacted in future periods until the effects of the pandemic have fully subsided
and the current macroeconomic environment has substantially recovered. Effects of the COVID-19 pandemic that may negatively impact our
business in future periods include, but are not limited to: limitations on the ability of our customers to conduct their business, purchase
our products and services, and make timely payments; curtailed consumer spending; deferred purchasing decisions; delayed
consulting services implementations; labor shortages and decreases in product licenses revenues driven by channel partners. We will
continue to actively monitor the nature and extent of the impact to our business, operating results, and financial condition.
Recent
Accounting Pronouncements
From
time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that
may have an impact on our accounting and reporting. We believe that such recently issued accounting pronouncements and other authoritative
guidance for which the effective date is in the future either will not have an impact on our accounting or reporting or that such impact
will not be material to our financial position, results of operations and cash flows when implemented.
ROCKETFUEL
BLOCKCHAIN, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2022
(UNAUDITED)
3.
Going Concern
Our
consolidated financial statements have been presented on the basis that we are a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. We incorporated our business on January 12, 2018, the
date of our inception, and commenced commercial operations in March 2021. During the three and nine months ended December 31, 2022,
we reported a net loss of $1,335,971 and $3,527,170, respectively, which included as a component of general and administrative
expenses in the statements of operations a non-cash stock-based compensation charge of $697,608 and $1,287,048, respectively, and cash
flows used in operating activities during the nine months ended December 31, 2022 of $(483,865). These factors, among others, raise
substantial doubt about the ability of the Company to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
We
will require additional financing to continue to develop our product and execute on our business plan. However, there can be no assurances
that we will be successful in raising the additional capital necessary to continue operations and execute on our business plan. During
the nine months ended December 31, 2022, we raised $700,000 in proceeds, net of the issuance costs, through a private placement of common
stock, warrants and tokens (see Note 7). We have used and plan to continue using the net proceeds of the private placement and warrant
exercise to recruit key management and operational personnel, to retain software and blockchain developers and to develop our blockchain
based check-out solution. Management believes the funding from the private placement, the exercise of the common stock purchase warrant,
and the growth strategy actions executed and planned for execution could contribute to our ability to mitigate any substantial doubt
as to our ability to continue as a going concern.
4.
Property, Plant & Equipment
The
Company’s property, plant and equipment assets are comprised of the following:
Schedule
of Property Plant And Equipment
| | |
Useful Life | |
December 31, 2022 | | |
March 31, 2022 | |
| Capitalized software development costs | |
2 years | |
$ | 1,221,905 | | |
$ | 586,700 | |
| Computer equipment | |
3 years | |
| 40,022 | | |
| 23,395 | |
| Less: Accumulated depreciation and amortization | |
| |
| (493,660 | ) | |
| (149,919 | ) |
| Property and equipment, net | |
| |
$ | 768,267 | | |
$ | 460,176 | |
ROCKETFUEL
BLOCKCHAIN, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2022
(UNAUDITED)
Capitalized
software development costs represent the costs incurred during the development stage, when direct and incremental internal and external
costs, are capitalized until the software is substantially complete and ready for its intended use. The Company also capitalizes costs
related to specific upgrades and enhancements of internal-use software when it is probable that the expenditures will result in additional
functionality.
Depreciation
and amortization expenses amount to $256,659 and $493,660 for the three and nine months ended December 31, 2022. No depreciation
and amortization expenses were recorded for the three and nine months ended December 31, 2021.
5.
Related Party Transactions
During
the three and nine months ended December 31, 2022 and 2021, our chief financial officer was affiliated with legal counsel who provided
us with general legal services (the “Affiliate”). We recorded legal fees paid to the Affiliate of $34,569 and $82,248
for the three and nine months ended December 31, 2022, respectively. We recorded legal fees paid to the Affiliate of $11,277 and $36,680
for the three and nine months ended December 31, 2021, respectively. As of December 31, 2022 and March 31, 2022, we had $24,396 and
$35,475, respectively, payable to the Affiliate.
On
January 18, 2023, we borrowed $200,000 from Peter M. Jensen, our CEO, pursuant to a convertible promissory note. The proceeds were to
be used to support a transaction that ultimately was not consummated. On February 15, 2023, we repaid the loan in full together with
$1,535 representing accrued interest at a rate of 10% per annum.
6.
Deferred Revenue
We
enter into certain contracts typically having initial one-year terms which define the scope of services to be provided. These contracts
can include agreed-upon setup fees during the initial one-year term, which setup fees are recorded as deferred revenue and amortized
ratably over the initial one-year term. Deferred revenue was $3,504 and $15,073 as of December 31, 2022 and March 31, 2022, respectively.
7.
Stockholders’ Equity
Private
placement:
On
September 19, 2022, the Company completed a private placement (the “Offering”) of 3,389,831 shares of its common stock, par
value $0.001 per share (the “Common Stock”) and warrants to purchase 1,694,915 shares of Common Stock (the “Warrants”).
In addition, in connection with the Offering, RocketFuel (BVI) Ltd., a wholly owned subsidiary of the Company, also entered into pre-launch
token sale agreements with four investors for the issuance of 3,389,831 cryptographic tokens (the “Tokens”) when such Tokens
are created. The Company plans to issue the Tokens in connection with a loyalty program it is developing, and these Tokens have not been
issued as of December 31, 2022. The combined purchase price for one share of Common Stock, an accompanying Warrant and a Token was $0.2065.
The Warrants are immediately exercisable at an exercise price equal to $0.2065 per share of Common Stock, subject to adjustments as provided
under the terms of the Warrants. The Warrants are exercisable for five years from the initial exercise date.
On
September 19, 2022, in connection with the Offering, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”)
with four investors. The Purchase Agreement sets forth the economic terms set forth above and contains customary representations and
warranties of the Company, as well as certain indemnification obligations of the Company and ongoing covenants for the Company. The Company
also entered into a registration rights agreement with the investors requiring the Company to file within 90 days of closing a registration
statement under the Securities Act of 1933 covering the Common Stock sold in the private placement and the shares issuable upon exercise
of the Warrants.
The
net proceeds to the Company from the Offering, excluding the proceeds, if any, from the exercise of the Warrants, are $700,000. In connection
with the Offering, the Company issued 338,983 shares of its common stock to one of the investors for a commission.
ROCKETFUEL
BLOCKCHAIN, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2022
(UNAUDITED)
Issuance
of common stock:
The
Company entered the marketing service agreement in July 2022 with a firm. In connection with this service agreement, the Company issued
333,943 restricted shares and recognized $17,491 of stock compensation expense for the three and nine months ended December 31, 2022.
Total unrecognized stock compensation expense as of December 31, 2022 was 27,591
Cancellations
of Stock:
On
October 6, 2021, we entered into a contract with one customer having a one-year term from the date of execution that provided for (1)
the payment of $10,000 in connection with the implementation of our blockchain technology and (2) the issuance of 10,000 shares of our
common stock valued at $1.00 per share in consideration of being an early adopter of our blockchain technology. In March 2022, in settlement
of a customer dispute, we repurchased the 10,000 shares of stock issued in October 2021 for $3,000. During the three months ended June
30, 2022, the 10,000 shares were cancelled.
On
June 7, 2022, we entered into a settlement agreement in the legal proceedings with Joseph Page, our former director and chief technology
officer, as defendant, whereunder Page surrendered 3,600,394 shares of the Company’s common stock. In connection with this settlement,
we recognized a gain of $540,059, calculated based on the Company’s share price of $0.15 per share on the date of settlement of
the legal proceedings. This gain was recorded in other income for the nine months ended December 31, 2022 in the accompanying consolidated
statements of operations (see Note 9). Immediately after these shares were transferred to the Company, the 3,600,394 shares were cancelled
and we recorded cancellation of these treasury shares during the three months ended June 30, 2022.
As
of December 31, 2022, and March 31, 2022, we had 36,297,840 and 31,965,083 shares of our common stock outstanding,
respectively.
Warrants:
As
of December 31, 2022 and March 31, 2022, the total outstanding warrants to purchase of the Company’s common stock were 12,360,897
and 10,665,982 with a weighted average exercise price of $0.71 and $0.84, respectively. There were 1,694,915 new warrants issued
with an average exercise price of $0.21 during the three and nine months ended December 31, 2022. There were no warrants exercised, cancelled
or expired during the three and nine months ended December 31, 2022. As of December 31, 2022 and March 31, 2022, the weighted average
remaining contractual terms were 4.33 and 4.11 years, respectively.
8.
Stock-Based Compensation
Stock
Option Plan:
On
August 8, 2018, the Board and stockholders holding a majority of our voting power approved the RocketFuel Blockchain, Inc., 2018 Plan,
which plan enables us to make awards that qualify as performance-based compensation. Under the terms of the 2018 Plan, the options will
(i) be incentive stock options, (ii) have an exercise price equal to the fair market value per share of our common stock on the date
of grant as determined by an independent valuation by a qualified appraiser, (iii) have a term of 10 years, (iv) vest and become exercisable
pursuant to the terms set forth in the grantees stock option agreement, (v) be subject to the exercise, forfeiture and termination provisions
set forth in the 2018 Plan and (vi) otherwise be evidenced by and subject to the terms of our standard form of stock option agreement.
We initially reserved 2,000,000 shares of our common stock for issuance in connection with awards under the plan. On September 15, 2020
and March 18, 2021, our board of directors unanimously resolved to amend the 2018 Plan to increase the number of shares of our common
stock available for grant to 4,000,000 shares and 6,000,000 shares, respectively. On May 10, 2022, the Board has approved a plan to increase
the number of shares to 8,000,000 for 2018 plan. As of December 31, 2022 and March 31, 2022, there were 918,987 and 393,987 shares,
respectively, of our common stock available for grant pursuant to the 2018 Plan.
Service-Based
Stock Option Grants
In
determining the fair value of the service-based options during the nine months ended December 31, 2022, we utilized the Black-Scholes
pricing model utilizing the following assumptions:
Legal
Proceedings
Other
than as set forth below, we are not the subject of any pending legal proceedings; and to the knowledge of management, no proceedings
are presently contemplated against us by any federal, state or local governmental agency. Further, to the knowledge of management, no
director or executive officer is party to any action in which any has an interest adverse to us.
On
October 8, 2020, we filed a lawsuit in the U.S. District Court for the Central District of California against Joseph Page, our former
director and chief technology officer. On January 13, 2021, the case was transferred to the U.S. District Court for the District of Nevada,
Las Vegas Division. The causes of action include securities fraud under Federal and California law; fraud, breach of fiduciary duty,
negligent misrepresentation and unjust enrichment under California law; and violation of California Business and Professions Code §17200
et seq.
On
May 29, 2019, Mr. Page resigned from our board. After his resignation, we retained independent patent counsel to review our patent applications.
In connection with this review, we discovered certain deficiencies in some of the applications and in their assignments to us. We determined
that all of the applications had been abandoned. Based on this review, we decided to refile three of our applications with the U.S. Patent
and Trademark Office, which we did in May 2020. It is our belief that the three newly filed patent applications cover and/or disclose
the same subject matter as we disclosed in the five original patent applications. In this case, our rights may be subject to any intervening
patent applications made after the dates of the original applications. In the lawsuit, we were alleging that Mr. Page was aware of the
abandonments when he assigned the patents to RocketFuel Blockchain Company (“RBC”), a private corporation that he controlled,
and that he failed to disclose to us the abandonments when the Company acquired RBC in exchange for shares of the Company’s Common
Stock. Mr. Page filed an answer denying the Company’s claims and asserted cross- and counterclaims against the Company and several
of the Company’s shareholders alleging breach of contract and fraud. In September 2021, Mr. Page voluntarily dismissed all of the
counterclaims against the shareholders.
On
June 7, 2022, RBC entered into a settlement agreement in the legal proceedings between the Company as plaintiff, and Joseph Page as defendant,
whereunder Page surrendered 3,600,394 shares of the Company’s common stock, and kept 1,500,000 shares. Mr. Page represents and
warrants that he has not filed or assisted anyone else in filing any patent applications that would preempt or infringe upon the Company’s
patent applications. Plaintiff and defendant have each released their claims against each other and covenanted not to sue the other,
including related parties and stakeholders, with the exclusion of current or future claims against EGS. The parties agreed to a Stipulated
Dismissal of the Action with Prejudice filed with the court. In connection with this settlement, we recognized a gain of $540,059, calculated
based on the Company’s share price of $0.15 per share on the date of settlement of the legal proceedings. This gain was recorded
in other income for the nine months ended December 31, 2022 in the accompanying consolidated statements of operations (see Note 7).
On
March 2, 2021, we filed a lawsuit in the U.S. District Court for the Southern District of New York against Ellenoff Grossman & Schole
LLP (“EGS”) for negligence and legal malpractice, breach of contract and breach of fiduciary duty. EGS had represented RBC
prior to the Business Combination and represented us after the closing of the Business Combination through August 2019. In the litigation
against Mr. Page, he has alleged that he provided information to an EGS partner that the patent applications had been abandoned and that
EGS failed to inform RBC and us of the fact. We are seeking damages and the return of legal fees previously paid.
On
February 8, 2023 we entered into a settlement agreement with EGS, pursuant to which EGS agreed to pay us $750,000 in full settlement
of the lawsuit. After payment of our legal fees, the net payment to us, which was received on February 14, 2023, was $525,000. As part
of the settlement (i) we have agreed to dismiss the lawsuit with prejudice and (ii) each party has agreed to grant a mutual general release
to the other party and its affiliates, related parties and agents.
ROCKETFUEL
BLOCKCHAIN, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2022
(UNAUDITED)
In
January 2022, the Company terminated its agreement with Scarola Schaffzib Zubatov PLLC (“SSZ”), which the Company had retained
to represent it in the litigation against EGS. The reason for the termination was that the Company believed that SSZ had overcharged
for legal services provided. Subsequent to the termination, SSZ sent the Company additional invoices, to which the Company also objected.
In August 2022 SZZ filed a lawsuit in the Supreme Court of the State of New York, County of New York, claiming it is owed approximately
$120,000 in legal fees. The Company disputes that this amount is owed and contends that a portion of the legal fees previously paid
should be refunded. Discovery has commenced; a trial date has not been set. The Company has accrued approximately $120,000 in
accounts payable.
10.
Subsequent Events
On
January 13, 2023, we completed a private placement (the “Offering”) of $150,000 principal amount of its secured convertible
promissory notes (the “Notes”). The purchase price was $150,000. There were three purchasers, including Gert Funk, the Company’s
Chairman, and Peter M. Jensen, the Company’s Chief Executive Officer and a member of its Board of Directors. The third purchaser
was a private investor. Each investor purchased a Note for $50,000.
The
Notes bear interest at 10% per annum and mature on July 13, 2023 (the “Maturity Date”). The Notes may be prepaid by the Company
at any time. If the Company shall prepay the entire outstanding principal amount of a Note on or before April 13, 2023, then there is
no prepayment premium. If the Company shall prepay the entire outstanding principal amount of a Note between April 14, 2023 and the Maturity
Date, then it shall also pay accrued interest on such principal amount in an amount equal to 50% of such principal amount. If the Company
shall repay the outstanding principal amount of a Note on or after the Maturity Date, then it shall also pay accrued interest on such
principal amount in an amount equal to 100% of such principal amount.
The
Notes are convertible into shares of the Company’s Series A Preferred Stock (“Series A Preferred”) at a conversion
price equal to (a) the outstanding principal amount of, plus all accrued interest on, the Note divided by (b) $0.2065. The conversion
price is subject to adjustment for certain stock splits, recapitalizations and other similar events. The Notes are secured by a security
interest in all of the Company’s assets.
Up
to 1,000,000 shares of Series A Preferred were approved by the Board. The Series A Preferred has a 200% liquidation preference over the
common stock and any other future series of preferred stock, payable in the event of a liquidation or merger of the Company. In such
event, the holders of the Series A Preferred will be entitled to a priority distribution equal to 200% of the deemed issue price of $0.2065
per share, (i.e., $0.4130 per share). The Series A Preferred is convertible at the option of the stockholder into shares of common
stock at a conversion price of $0.2065 per share, subject to adjustment for certain stock splits, recapitalizations and other similar
events.
On
January 13, 2023, in connection with the Offering, the Company entered into a Convertible Notes Subscription Agreement (the “Subscription
Agreement”) with three investors. The Subscription Agreement sets forth the economic terms set forth above.
The
Company intends to use the $150,000 net proceeds of the Offering for general corporate purposes and to fund ongoing operations and expansion
of its business.
On
February 8, 2023 we entered into a settlement agreement with EGS, pursuant to which EGS agreed to pay us $750,000 in full settlement
of the lawsuit. After payment of our legal fees, the net payment to us, which was received on February 14, 2023, was $525,000. As part
of the settlement (i) we have agreed to dismiss the lawsuit with prejudice and (ii) each party has agreed to grant a mutual general release
to the other party and its affiliates, related parties and agents.
On
January 18, 2023, we borrowed $200,000 from Peter M. Jensen, our CEO, pursuant to a convertible promissory note. The proceeds were to
be used to support a transaction that ultimately was not consummated. On February 15, 2023, we repaid the loan in full together with
$1,535 representing accrued interest at a rate of 10% per annum.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations