NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED MAY 31, 2019 AND 2018
NOTE
1 – ABOUT THE COMPANY
Organization
and Capitalization of the Company
The
Company was organized August 26, 2010 (Date of Inception) under the laws of the State of Nevada, as JA Energy. The Company was
incorporated as a subsidiary of Reshoot Production Company, a Nevada corporation. Reshoot Production Company was incorporated
October 31, 2007. In November 2014, Reshoot dividended its shares of JA Energy to the then stockholders of Reshoot. On November
21, 2016, the Company reincorporated in Delaware under the name UBI Blockchain Internet Ltd.
On
September 15, 2016, the Company, with the approval of the Board of Directors agreed to issue 30,000,000 shares of unregistered
restricted Class A Common Stock, 6,000,000 shares of unregistered restricted Class B Voting Common Stock, which carries a voting
weight equal to ten (10) Common Shares, and 40,000,000 shares of unregistered restricted Class C Common Stock to UBI Blockchain
Internet, LTD (“UBI Hong Kong”), a Hong Kong company, or assigns in exchange for $200,000. On September 26, 2016,
pursuant to NRS 78.1955, the Board of Directors approved the filing of a Certificate of Designation with the Nevada Secretary
of State to designate Class A, B and C common shares, par value $0.001. Concurrently with the filing of this Certificate of Designation,
all Common Stock issued and outstanding became Class A Common Stock. Class B Common Stock carries a voting weight equal to ten
(10) Common Shares. The Class B shares can be converted into fully paid and non-assessable Common Shares, on a one-to-one basis,
at the option of the holder at any time upon written notice to the Company and its authorized transfer agent. Class C Common Stock
has no voting or conversion rights.
On
October 7, 2016, the 30,000,000 Class A shares and 6,000,000 Class B shares were issued.
On
November 21, 2016, the Company reincorporated in Delaware under the name UBI Blockchain Internet Ltd. and increased the number
of authorized shares from 75,000,000 to 200,000,000 shares consisting of 130,000,000 authorized shares of Class A Common Stock,
6,000,000 authorized shares of Class B Common Stock and 64,000,000 authorized shares of Class C Common Stock. On March 1, 2017,
the 40,000,000 shares of Class C common stock were issued. All of the preceding shares were issued in reliance on the exemption
under Section 4(2) of the Securities Act of 1933, as amended (the “Act”) and were issued under Regulation S to one
(1) foreign entity who attested it is an accredited investor who is not a citizen or a resident of the USA.
On
January 3, 2017, the Company appointed four new directors, accepted the resignations of its two former directors and appointed
Tony Liu (who controls UBI Hong Kong) as Chief Executive Officer of the Company.
Commencing
in the three months ended February 28, 2017, the Company started research activities in Hong Kong relating to “blockchain”
technology planned to be provided for future customers.
On
March 1, 2017, the Company issued 40,000,000 shares of Class C common stock to our chief executive officer Tony Liu pursuant to
the September 15, 2016 agreement (see above).
On
April 3, 2017, the Company issued a total of 8.400,000 shares of Class C common stock to a total of 45 contractor employees and
nonemployees (see Note 7).
On
May 1, 2017, the Company issued 500,000 restricted shares of Class A common stock to an independent consultant for consulting
services to be performed for the Company (see Note 7).
On
May 24, 2017, the Company increased the number of authorized common shares from 200,000,000 shares to 2,000,000,000 shares (1,000,000,000
shares of Class A common stock, 500,000,000 shares of Class B common stock, and 500,000,000 shares of Class C common stock).
On
August 29, 2017, upon the approval of the acquisition by the related PRC authorities, the Company issued a total of 25,000,000
shares of Class C common stock to shareholders of Shenzhen Nova E-commerce, Ltd. (“Nova”) in exchange for control
of the business of Nova (see Notes 4 and 7). On April 7, 2018, Nova changed its name to UBI Shenzhen Cross Border E- Commerce
Co., Ltd. (“UBI Shenzhen”).
Current
Company Operations
UBI
Blockchain Internet Ltd. (“UBI Delaware”) was reincorporated in Delaware on November 21, 2016 for the purpose of entering
into the blockchain technology business. UBI Blockchain Internet, Ltd (“UBI Hong Kong”) was organized in the Hong
Kong Special Administrative Region (the “HKSAR”) in September 2016 to facilitate local financing participations. UBI
Delaware opened a bank account at Abacus Federal Savings Bank in New York City. This bank account is funded by Tony Liu and is
used to pay Company invoices from the U.S. UBI Hong Kong has a bank account at China Citic Bank International in Hong Kong, which
is also funded by Tony Liu; this account makes disbursements relating to UBI Delaware operations in Hong Kong (such as payroll,
rent, and other office expenses). UBI Hong Kong is owned and controlled by Tony Liu, CEO of UBI Delaware. UBI Hong Kong owns 30,000,000
(97%) of the 30,799,046 issued and outstanding shares of UBI Delaware Class A common stock at May 31, 2019. UBI Hong Kong has
no other assets and no business operations of its own.
In
December 2016, UBI Delaware engaged the services of 8 full time employees to principally work in its blockchain technology business.
In January 2018, UBI Hong Kong executed an agreement with the HKSAR and The Hong Kong Polytechnic University to complete a project
related to blockchain technology (see Note 11).
NOTE
2 - GOING CONCERN
The accompanying unaudited condensed financial
statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern which
contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. At
May 31, 2019, the Company had cash of $60,328 and current liabilities of $3,623,003. For the nine months ended May 31, 2019, the
Company incurred a net loss of $2,043,557. According to US GAAP, these conditions raise substantial doubt about the Company’s
ability to continue as a going concern. However, our major shareholder, who has been funding our operations in the past, has agreed
to continue doing so when the Company does not generate sufficient revenue to cover its costs of operations. The Company does
not have any debt other than good faith loans from the major shareholder.
The
Company’s ability to continue as a going concern is contingent upon the successful completion of additional financing arrangements
and its ability to achieve and maintain profitable operations. Management plans to raise equity capital to finance the operating
and capital requirements of the Company.
The
accompanying condensed unaudited financial statements do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or amounts and classification of liabilities that might result from the outcome of this uncertainty.
NOTE
3 - SIGNIFICANT ACCOUNTING POLICIES
Interim
Financial Statements
The
consolidated balance sheet of the Company at the end of the preceding fiscal year has been derived from the audited balance sheet
and notes thereto contained in the Company’s annual report on Form 10-K for the fiscal year ended August 31, 2018 and is
presented herein for comparative purposes. All other financial statements are unaudited. In the opinion of management, all adjustments,
which include only normal recurring adjustments necessary to present fairly the financial position, results of operations and
cash flows for all period presented, have been made. The results of operations for the interim periods presented are not necessarily
indicative of the operating results for the respective full years.
Certain
footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally
accepted in the United States (“US GAAP”) have been omitted in accordance with the published rules and regulations
of the Securities and Exchange Commission (“SEC”). These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended August
31, 2018 filed with the SEC on December 7, 2018.
Basis
of Accounting
The
accompanying condensed unaudited consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the
U.S. Securities and Exchange Commission (“SEC”).
Principles
of Consolidation
The
accompanying unaudited condensed consolidated financial statements include the accounts of UBI Blockchain Internet Ltd. and its
wholly owned subsidiary UBI Shenzhen Cross Border E-Commerce Co., Ltd, (“UBI Shenzhen”), formerly Shenzhen Nova E-commerce,
Ltd. (“Nova”) from the date of acquisition of Nova on August 29, 2017 (see Note 4). All intercompany balances and
transactions have been eliminated in consolidation.
Earnings
per Share
The
basic earnings (loss) per share of Class A, Class B and Class C common stock is calculated by dividing the Company’s net
income (loss) available to Class A, Class B and Class C common shareholders by the weighted average number of Class A, Class B
and Class C common shares issued and outstanding during the period. The diluted earnings (loss) per share of Class A, Class B
and Class C common stock is calculated by dividing the Company’s net income (loss) available to Class A, Class B and Class
C common shareholders by the diluted weighted average number of Class A, Class B and Class C shares outstanding during the period.
The diluted weighted average number of Class A, Class B and Class C shares outstanding is the basic weighted average number of
Class A, Class B, and Class C shares adjusted as of the first day of the period for any potentially dilutive debt or equity (none
for the periods presented).
Cash
and Cash Equivalents
The
Company considers all short-term investments with a maturity of three months or less at the date of purchase to be cash and cash
equivalents.
Of
the $60,328 cash at May 31, 2019, $45,388 was held in foreign bank accounts not insured by FDIC.
Use
of Estimates
In
preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from
those estimates.
Inventory
Inventory,
consisting of finished goods purchased from third parties, are stated at the lower of cost (first-in, first-out method) or market.
Property
and Equipment
Property
and equipment is stated at cost less accumulated depreciation. Depreciation is calculated on the straight-line basis over the
estimated useful lives of the respective assets. Expenditures for repairs and maintenance are expensed as incurred.
Intangible
Assets
Intangible
assets, including website development costs, software acquired to be marketed, and office software, are carried at cost less accumulated
amortization. Intangible assets are amortized using the straight-line method over the estimated economic lives of the respective
assets (5 years for website development costs and 5 years for the software acquired to be marketed and 2 years for the office
software).
Software
development costs include payments made to independent software developers under development agreements, as well as direct costs
incurred for internally developed products. Software development costs are capitalized once technological feasibility of a product
is established and such costs are determined to be recoverable. Technological feasibility of a product requires both technical
design documentation and game design documentation, or the completed and tested product design and a working model. Significant
management judgments and estimates are utilized in the assessment of when technological feasibility is established and the evaluation
is performed on a product-by-product basis. For products where proven technology exists, this may occur early in the development
cycle. Software development costs related to hosted service revenue arrangements are capitalized after the preliminary project
phase is complete and it is probable that the project will be completed and the software will be used to perform the function
intended. Prior to a product’s release, if and when we believe capitalized costs are not recoverable, we expense the amounts.
Capitalized costs for products that are canceled or are expected to be abandoned are expensed in the period of cancellation. Amounts
related to software development which are not capitalized are charged immediately to “Research and development”.
Foreign
Currency Translation
The
reporting currency and functional currency of the Company is the United States Dollar.
The
functional currency of UBI Shenzhen is the Chinese Renminbi (“RMB”). Assets and liabilities of UBI Shenzhen are translated
into United States dollars at period-end exchange rates ($1.00 = 6.9092 RMB at May 31, 2019 and $1.00 = 6.8375 RMB at August 31,
2018). UBI Shenzhen revenues and expenses are translated into United States dollars at weighted average exchange rates ($1.00
= 6.8264 RMB for the nine months ended May 31, 2019 and $1.00 = 6.5282 RMB for the nine months ended May 31, 2018). Resulting
translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’
equity.
The
functional currency of UBI HK is the Hong Kong Dollar (“HK$”). Assets and liabilities of UBI HK are translated into
United States dollars at period-end exchange rates ($1.00 = 7.8430 HK$ at May 31, 2019 and $1.00 = 7.8494 HK$ at August 31, 2018).
UBI HK revenues and expenses are translated into United States dollars at weighted average exchange rates ($1.00 = 7.8399 HK$
for the nine months ended May 31, 2019 and $1.00 = 7.8130 HK$ for the nine months ended May 31, 2018). Resulting translation adjustments
are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity.
Transactions
denominated in currencies other than the functional currency are translated at the exchange rates prevailing at the dates of the
transactions. Exchange gains and losses, which were not significant for the three and nine months ended May 31, 2019 and 2018,
were reflected in income.
Income
Taxes
The
provision for income taxes is the total of the current taxes payable and the net of the change in the deferred income taxes. Provision
is made for the deferred income taxes where differences exist between the period in which transactions affect current taxable
income and the period in which they enter into the determination of net income in the financial statements.
Revenue
recognition
The
Company recognizes revenue from services and product sales once all the following criteria for revenue recognition have been met:
pervasive evidence that an agreement exists; the services or products have been delivered; the fee is fixed and determinable and
not subject to refund or adjustment; and collection of the amount due is reasonably assured.
Stock-Based
Compensation
The
Company accounts for employee stock-based compensation in accordance with the guidance of FASB ASC Topic 718, “Compensation
- Stock Compensation,” which requires all share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values. The Company does not have an employee stock option plan.
The
Company follows ASC Topic 505-50, formerly EITF 96-18, “
Accounting for Equity Instruments that are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling Goods and Services
,” for stock issued to consultants and other
non-employees. In accordance with ASC Topic 505-50, the stock issued as compensation for services provided to the Company are
accounted for based upon the fair value of the services provided or the estimated fair market value of the stock, whichever can
be more clearly determined. The fair value of the equity instrument is charged directly to expense over the period during which
services are rendered.
Year
end
The
Company’s fiscal year-end is August 31.
Related
Parties
Related
parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries,
control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the
Company, its management, members of the immediate families of principal owners of the Company and its management and other parties
with which the Company may deal with if one party controls or can significantly influence the management or operating policies
of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
The Company discloses all related party transactions.
Recent
Accounting Pronouncements
Certain
accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective and
therefore have not yet been adopted by the Company. The impact on the Company’s financial position and results of operations
from adoption of these standards is not expected to be material.
NOTE
4 – ACQUISITION OF UBI SHENZHEN CROSS BORDER E-COMMERCE CO., LTD (FORMERLY NOVA E-COMMERCE, LTD.)
On
August 29, 2017, pursuant to an Acquisition Agreement dated May 16, 2017, the Company acquired 100% ownership of UBI Shenzhen
Cross Border E-Commerce Co., Ltd. (“UBI Shenzhen”), formerly Shenzhen Nova E-commerce, Ltd. (“Nova”),
in exchange for 25,000,000 shares of Company Class C common stock. UBI Shenzhen is a Shenzhen Chinese corporation which was incorporated
on May 26, 2016. UBI Shenzhen plans on operating an online store in China selling a wide range of products.
The
acquisition has been accounted for as a recapitalization transaction in the accompanying condensed unaudited consolidated financial
statements. Accordingly, the financial position and results of operations of UBI Shenzhen prior to the August 29, 2017 date of
acquisition have been excluded from the accompanying condensed unaudited consolidated financial statements.
The
carrying values of the assets and liabilities of UBI Shenzhen at the August 29, 2017 date of acquisition consisted of:
Cash
|
|
$
|
-
|
|
Office equipment, net
|
|
|
13,628
|
|
Website development costs
|
|
|
92,035
|
|
Total assets
|
|
|
105,663
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
24,651
|
|
Due to related party
|
|
|
135,865
|
|
Total liabilities
|
|
|
160,516
|
|
|
|
|
|
|
Excess of liabilities over assets
|
|
$
|
54,853
|
|
NOTE
5 – PREPAID STOCK BASED SALARIES AND CONSULTING FEES
Prepaid
stock-based salaries and consulting fees at May 31, 2019 and August 31, 2018 consist of:
|
|
Fair value of stock issuance (Note 6)
|
|
|
Prepaid balance at May 31, 2019
|
|
|
Prepaid balance at August 31, 2018
|
|
1,450,000 shares of Class C common stock issued to 7 employees on April 3, 2017 pursuant to service agreements between UBI Delaware and the respective employees with a service term of one year expiring December 31, 2017
|
|
$
|
290,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
6,950,000 shares of Class C common stock issued to 38 consultants on April 3, 2017 pursuant to service agreements between UBI Delaware and the respective consultants with a service term of one year expiring December 31, 2017
|
|
|
1,390,000
|
|
|
|
-
|
|
|
|
-
|
|
500,000 shares of Class A common stock issued to a consultant on May 1, 2017 pursuant to Consulting Agreement dated April 28, 2017 between UBI Delaware and the respective consultant with a service term of two years expiring April 30, 2019
|
|
|
1,480,000
|
|
|
|
-
|
|
|
|
493,333
|
|
Total
|
|
$
|
3,160,000
|
|
|
|
-
|
|
|
|
493,333
|
|
Current portion
|
|
|
|
|
|
|
-
|
|
|
|
(493,333
|
)
|
Non-current portion
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE
6 – INTANGIBLE ASSETS
Intangible
assets at May 31, 2019 and August 31, 2018 consist of:
|
|
May 31, 2019
|
|
|
August 31, 2018
|
|
Website development costs
|
|
$
|
92,977
|
|
|
$
|
93,952
|
|
Accumulated amortization
|
|
|
(25,041
|
)
|
|
|
(11,278
|
)
|
Website development costs, net
|
|
|
67,936
|
|
|
|
82,674
|
|
|
|
|
|
|
|
|
|
|
Software acquired to be marketed
|
|
|
36,907
|
|
|
|
37,294
|
|
Accumulated amortization
|
|
|
(5,603
|
)
|
|
|
-
|
|
Software acquired to be marketed, net
|
|
|
31,304
|
|
|
|
37,294
|
|
|
|
|
|
|
|
|
|
|
Office software
|
|
|
8,395
|
|
|
|
8,483
|
|
Accumulated amortization
|
|
|
(4,547
|
)
|
|
|
(1,414
|
)
|
Office software, net
|
|
|
3,848
|
|
|
|
7,069
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets - net
|
|
$
|
103,088
|
|
|
$
|
127,037
|
|
At
May 31, 2019, the expected future amortization expense of the intangible assets was:
Years ending
|
|
Amount
|
|
May 31, 2020
|
|
$
|
29,824
|
|
May 31, 2021
|
|
|
25,976
|
|
May 31, 2022
|
|
|
24,043
|
|
May 31, 2023
|
|
|
18,595
|
|
May 31, 2024
|
|
|
4,650
|
|
Total
|
|
$
|
103,088
|
|
Website
Development Costs
In
January 2018, UBI Shenzhen changed the domain name for its website from www.oyamall.com to www.hihealth8.com. The change was made
to, among other things, correct certain technical problems which we experienced in testing potential transactions involving Chinese
currency. UBI Shenzhen’s website became operational on March 12, 2018.
UBI
Shenzhen has yet to generate any revenues from its website. In order for UBI Shenzhen to begin its business operations, UBI Shenzhen
will be selling third party products. In the future, management plans to develop its own products for sale. It was a management
decision to acquire UBI Shenzhen for primarily two business reasons: 1) as a separate subsidiary, once UBI Shenzhen is fully operational,
management anticipates it should generate revenues and profit for the Company; and 2) this acquisition provides a test model to
utilize the blockchain technology the Company is developing to track drug products sold by UBI Shenzhen. As a test model, this
will allow the Company to see if the products sold through its website are substituted with counterfeit products before they reach
the final consumer. In other words, products sold through a third-party consumer will be tracked using the Company’s blockchain
technology to see if there is a break in the supply chain. This will take place once the Company develops its blockchain digital
tracking system. The Company will be able to monitor UBI Shenzhen shipments to the final consumer to determine if there has been
any tampering with shipments in the supply chain.
UBI
Shenzhen employs two people principally involved in website related creation/maintenance activities. UBI Shenzhen’s expenses
are being funded by loans from Tony Liu.
Software
Acquired to be Marketed
On
November 24, 2017, January 17, 2018 and March 15, 2018, UBI Shenzhen executed agreements with a third-party vendor to produce
customized game software called Farmer Game for a total of RMB 285,000 ($41,682 using the August 31, 2018 exchange rate). UBI
Shenzhen expects to use the Farmer Game to attract more visitors to its website and to potentially earn revenues from users’
use of game points to purchase products sold on the website. Farmer Game is expected to be introduced to website visitors in the
near future.
In
the year ended August 31, 2018, UBI Shenzhen paid the Farmer Game vendor a total of RMB 285,000 ($41,682), of which RMB 30,000
($4,388) was expensed and RMB 255,000 ($37,294) was capitalized.
NOTE
7 - STOCKHOLDERS’ EQUITY
Pursuant
to the September 15, 2016 change in control agreement (see Note 1), a representative of UBI paid into an attorney trust account
$150,000 on September 14, 2016 and $67,500 on October 11, 2016, for a total of $217,500. The $217,500 consisted of $200,000 for
the newly issued shares of Class A, Class B Voting, and Class C Common Stock and $17,500 for the payment of specific expenses.
Starting
in December 2016, the Company engaged the services of a total of 45 employees and non-employees to perform certain marketing,
research and development and investor relations services. The related agreements, which were executed in March 2017, provided
for the contractors to work for the Company for terms ranging from September 2016 to January 1, 2017 to December 31, 2017 for
compensation including the issuance of a total of 8,400,000 shares of Class C common stock (which occurred April 3, 2017). Of
the 8,400,000 shares, 5,000,000 shares were issued to Star Bright International Investment Enterprise Limited, 100,000 shares
were issued to the Company’s chief financial officer and 500,000 shares were issued to an independent Director of the Company.
The
$1,680,000 estimated fair value of the 8,400,000 shares of Class C common stock (using a price of $0.20 per share) was recorded
as prepaid expenses and was expensed evenly over the year ended December 31, 2017 (see Note 5). For the nine months ended May
31, 2019 and 2018, we recognized stock-based employee compensation of $0 and $96,668, respectively and recognized stock-based
consulting fees expense of $0 and $463,333, respectively, from these agreements.
On
May 1, 2017, the Company issued 500,000 restricted shares of Class A common stock to a consultant pursuant to a Consulting Agreement
dated April 28, 2017 with a service term of two years expiring April 30, 2019. The $1,480,000 estimated fair value of the 500,000
shares of Class A common stock (using a price of $2.96 per share based on a $3.95 closing trading price on April 28, 2017 less
a 25% restricted stock discount) was recorded as a prepaid expense and was expensed evenly over the 2-year service period expiring
April 30, 2019. For the year ended August 31, 2018, we recognized stock-based consulting fees expense of $740,000 from this agreement.
For the nine months ended May 31, 2019 and 2018, we recognized stock-based consulting fees expense of $493,333 and $555,000, respectively,
from this agreement.
On
August 29, 2017, upon the regulatory approval of the transfer of Nova’s Hong Kong business license to the Company, the Company
acquired 100% ownership of Nova in exchange for the Company’s issuance of a total of 25,000,000 shares of Class C common
stock to the 130 owners of Nova.
On
October 2, 2017, the Company issued a total of 82,000 restricted shares of Class A common stock to 4 individuals associated with
the Company’s law firm for legal services rendered. The $335,872 estimated fair value of the 82,000 shares of Class A common
stock (using a price of $4.10 per share based on a $5.12 closing trading price on October 2, 2017 less a 20% restricted stock
discount) was expensed in the three months ended November 30, 2017.
On
December 26, 2017, the Company’s Board of Directors approved a 3 for 1 common stock dividend of the Company’s issued
and outstanding Class A and Class B common stock. On January 2, 2018, the Company was advised by FINRA to resubmit its request
as a forward stock split instead of a stock dividend.
On
January 4, 2018, the Company’s Board of Directors approved a 4 for 1 forward stock split for holders of record on January
10, 2018 of the Company’s issued and outstanding shares of Class A and Class B common stock. For each share of Class A common
stock held, stockholders were to receive an additional 3 shares of Class A common stock, For each share of Class B common stock
held, stockholders were to receive an additional 3 shares of Class B common stock. On January 18, 2018, the Company’s Board
of Directors decided to cancel the proposed 4-for-1 forward stock split.
On
January 5, 2018, the Securities and Exchange Commission announced the temporary suspension of trading in the Company’s securities
from January 8, 2018 to January 22, 2018 because of (i) questions regarding the accuracy of assertions, since at least September
2017, by the Company in filings with the Commission regarding the Company’s business operations; and (ii) concerns about
recent, unusual and unexplained market activity in the Company’s Class A common stock since at least November 2017.
On
March 31, 2018, the Company’s Board of Directors approved issuing 150,000 Class C common unregistered restricted shares
to Global Alliance Securities for consulting services. 150,000 Class C common shares were issued on August 30, 2018. The $30,000
estimated fair value of the 150,000 shares of Class C common stock (using a price of $0.20 per share) was expensed in the three
months ended August 31, 2018.
NOTE
8 - RELATED PARTY TRANSACTIONS
Commencing
March 2017, the Company has been using office space provided by an affiliate of UBI Blockchain Internet, LTD. (Hong Kong) (“UBI
Hong Kong”) at a monthly rent of 22,100 Hong Kong Dollars (approximately $2,818 at the May 31, 2019 exchange rate) per month.
For expediency reasons, the Company also uses bank accounts in the name of UBI Hong Kong to collect cash receipts and expend cash
disbursements relating to Company operations. UBI Hong Kong owns 30,000,000 shares of the Company’s Class A common stock.
During
the three and nine months ended May 31, 2019, Tony Liu, chief executive officer of the Company, advanced or paid a total of $557,703
and $1,361,014, respectively, of expenditures on behalf of the Company. As of May 31, 2019, the total principal amount due to
Tony Liu was $3,181,634. The amount due to Tony Liu for these expenditures is interest bearing at a rate of 7% per annum. $51,173
and $24,024 interest expense was accrued for the three months ended May 31, 2019 and 2018, respectively. $128,122 and $52,869
interest expense was accrued for the nine months ended May 31, 2019 and 2018, respectively. As of May 31, 2019, accrued interest
amounted to $219,091. The advances and related accrued interest are due on demand.
Included
in accounts payable and accrued liabilities at May 31, 2019 and August 31, 2018 is accrued salary due to Tony Liu, chief executive
officer, $51,000 and $62,744, respectively.
NOTE
9 - PROVISION FOR INCOME TAXES
The
Company accounts for income taxes under FASB Accounting Standard Codification ASC 740 “Income Taxes”. ASC 740 requires
use of the liability method. ASC 740 provides that deferred tax assets and liabilities are recorded based on the differences between
the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary
differences. Deferred tax assets and liabilities at the end of each period are determined using the currently enacted tax rates
applied to taxable income in the periods in which the deferred tax assets and liabilities are expected to be settled or realized.
As
of May 31, 2019 and August 31, 2018, the Company had net operating loss carry forwards of approximately $4,433,000 and $2,883,000,
respectively, as follows:
Tax Jurisdiction
|
|
May 31, 2019
|
|
|
August 31, 2018
|
|
United States
|
|
$
|
1,543,000
|
|
|
$
|
1,296,000
|
|
Hong Kong
|
|
|
1,631,000
|
|
|
|
855,000
|
|
China (UBI Shenzhen)
|
|
|
1,259,000
|
|
|
|
732,000
|
|
Total
|
|
$
|
4,433,000
|
|
|
$
|
2,883,000
|
|
United
States net operating losses prior to 2018 may be carried forward to reduce future years taxable income for 20 years; United States
net operating losses after 2017 may be carried forward indefinitely. Hong Kong net operating losses may be carried forward indefinitely.
China net operating losses may be carried forward for 5 years. Future tax benefits which may arise as a result of these losses
have not been recognized in these financial statements as their realization has not been determined likely to occur. Also, United
States tax laws limit the amount at loss available to be offset against future taxable income when a substantial change in ownership
occurs.
At
May 31, 2019 and August 31, 2018, deferred tax assets consisted of:
|
|
May 31, 2019
|
|
|
August 31, 2018
|
|
Net operating loss carry forwards
|
|
$
|
907,919
|
|
|
$
|
587,617
|
|
Valuation allowance
|
|
|
(907,919
|
)
|
|
|
(587,617
|
)
|
Deferred tax assets - net
|
|
$
|
-
|
|
|
$
|
-
|
|
As
a result of the Tax Cuts and Jobs Act enacted on December 22, 2017, the United States corporate income tax rate was reduced from
35% to 21% effective January 1, 2018. Accordingly, we reduced our deferred income tax asset relating to our United States net
operating loss carryforward (and the valuation allowance thereon) by approximately $166,000 on December 31, 2017.
All
tax years remain subject to examination by the respective tax authorities.
NOTE
10 - DEVELOPMENT AGREEMENTS
The
Brewing Company Agreement
In
August 2018, the Company entered into a development agreement, by and among the Company, Heilongjiang Province TongFangZhuoXin
Brewing Co., Ltd. (the “Brewing Company”) and Global Blockchain Cooperation Alliance, dated August 26, 2018 (the “Brewing
Company Agreement”). Pursuant to the terms of the Brewing Company Agreement, the Company agreed to provide to the Brewing
Company blockchain based technology and software for the management of the Brewing Company’s manufacturing process. In exchange
for the services and technology provided by the Company, the Brewing Company agreed to pay to the Company a total of RMB 7,000,000
(approximately $1,007,808), which is payable over the term of the Brewing Company Agreement in a series of milestone payments.
The Company received the initial payment of RMB 400,000 (RMB 388,350 net of tax or approximately $56,223) on September 30, 2018.
The balance is payable in a series of 8 payments ranging from RMB 300,000 (approximately $43,192) to RMB 1,500,000 (approximately
$215,959) from time to time as each milestone is completed over a period of 27 months, with the final payment being due on or
before December 31, 2020. Any disputes between the parties are to be submitted to the Beijing International Arbitration Center.
The Brewing Company Agreement provides for a breach penalty in an amount equal to 5% of the contract amount in the event that
either party defaults in its obligations pursuant to the Brewing Company Agreement.
The
Company recognizes revenue under this agreement as its performance obligations under each milestone of the agreement are completed.
At November 30, 2018, the Company’s performance obligations of the Phase 1 Period 1 milestone (relating to the RMB 400,000
initial payment) had been completed. At May 31, 2019, the Company has no contract assets or contract liabilities relating to this
agreement.
The
Hotel Group Agreement
In
August 2018, the Company entered into a development agreement, by and between the Company and Harbin Madieer Hotel Group Co.,
Ltd. (the “Hotel Group”), dated August 26, 2018 (the “Hotel Group Agreement”). Pursuant to the terms of
the Hotel Group Agreement, the Company agreed to provide to the Hotel Group a blockchain based system for hotel management. In
exchange for the services and technology provided by the Company, the Hotel Group agreed to pay to the Company a total of RMB
1,000,000 (approximately $143,973) which is payable over the term of the Hotel Group Agreement in a series of milestone payments.
The initial payment of RMB 400,000 (RMB $388,350 net of tax or approximately $56,222) was received on November 12, 2018. The balance
is payable in a series of 2 payments of RMB 300,000 (approximately $43,192) from time to time as each milestone is completed,
over a period of 11 months, with the final payment being due on or before July 31, 2019. Any disputes between the parties are
to be submitted to the Beijing International Arbitration Agency or a People’s Court of the Hotel Group’s location.
The Hotel Group Agreement provides for a breach penalty in an amount equal to 5% of the contract amount in the event that either
party defaults in its obligations pursuant to the Hotel Group Agreement.
The
Company recognizes revenue under this agreement as its performance obligations under each milestone of the agreement are completed.
At November 30, 2018, the Company’s performance obligations of the Phase 1 Period 1 milestone (relating to the RMB 400,000
initial payment) had been completed. At May 31, 2019, the Company has no contract assets or contract liabilities relating to this
agreement.
NOTE
11 – COMMITMENTS AND CONTINGENCIES
The
Hong Kong Polytechnic University Project
On
January 10, 2018, the Company announced that the Hong Kong Special Administrative Region (“HKSAR”) approved in principle
a grant of up to HK$3,018,750 (approximately $386,000) to assist in financing a project entitled “Blockchain-Based Food
and Drug Counterfeit Detection and Regulatory System” (“the HKPU Project”) to be jointly developed by UBI Hong
Kong and The Hong Kong Polytechnic University (“HKPU”). The related agreement also provides for UBI Hong Kong to contribute
up to HK $3,018,750 (approximately $386,000) to the project cost in installments with the first installment of HK$561,198 (approximately
$72,000) due upon HKSAR’s signing of the agreement (which occurred on January 5, 2018). UBI Hong Kong, owned and controlled
by Tony Liu, is the largest Class A Common Stock shareholder of UBI Blockchain Internet, Ltd., (Delaware). Although the Company
does not own or control UBI Hong Kong, UBI Hong Kong entered into an Assignment Agreement with UBI Delaware on May 1, 2018, whereby
UBI Hong Kong assigned all of its rights, plans, ideas, tangible assets, intangible assets and intellectual property under the
HKPU Project agreement to UBI Delaware, in order for UBI Delaware to commercialize the technology being developed. The project
is expected to be completed by November 14, 2019. In a series of two payments made by UBI Hong Kong on January 12, 2018 and January
16, 2018, UBI Hong Kong paid its first installment of a total of HK$561,198 (approximately $72,000) to HKPU. On February 1, 2018,
HKSAR paid its first installment of HK $561,198 (approximately $72,000) to HKPU. At this point, the project is progressing on
track, and the parties believe the established budget will be sufficient to complete the project.
The
agreement also provides for UBI Hong Kong to pay the remaining HK $2,457,552 (approximately $314,000) of its installments as follows:
HK $687,934 (approximately $88,000) by April 1, 2018; HK$687,934 (approximately $88,000) by October 1, 2018; HK $687,934 (approximately
$88,000) by April 1, 2019 and HK$393,750 (approximately $50,000) within three months of the completion of the HKPU Project. On
May 11, 2018, UBI Hong Kong paid HKPU a second installment of HK $643,647 (approximately $82,000). On May 24, 2018, HKSAR also
paid HKPU a second installment of HK $643,647 (approximately $82,000). On December 10, 2018, UBI Hong Kong paid HKPU a third installment
of HK$ 653,647 (approximately $83,000). On May 10, 2019, UBI Hong Kong paid HKPU a fourth installment of HK$ 766,507 (approximately
$98,000), While UBI Hong Kong does not have the financial wherewithal to pay current installments under the agreement as due,
Tony Liu has personally agreed and been able to provide funding as necessary for both operations of the Company and obligations
due under the agreement.
The
agreement also provides for the HKSAR to pay the remaining HK $2,457,522 (approximately $314,000) of its installments periodically
within 30 days after the acceptance by the Commissioner of Innovation and Technology (“CIT”), an agency of the HKSAR,
of certain Progress Reports to be submitted periodically by HKPU. The agreement provides that HKPU should provide CIT the first
written Progress Report in a format acceptable to CIT covering from the Commencement Date to August 31, 2018 to be submitted on
or before September 30, 2018. The first written progress report was timely submitted by UBI Hong Kong and HKPU to CIT. The agreement
imposes no penalties on UBI Hong Kong should it fail to make any of its installment contributions except that HKSAR principally
has the right to cease their installment contributions if UBI Hong Kong fails to make its installment contributions. HKSAR may
terminate the agreement if UBI Hong Kong fails to make any of its installment contributions. Further, if any of the parties are
in breach of the terms of the agreement or fail in a material way to progress in accordance with the Project Proposal, HKPU shall
on demand by the government pay to the Government an amount equivalent to the funds or portion thereof released for the Project.
Installment
payments to HKPU are charged to research and development expense.
Project
Summary
The
goal of this project is to provide a comprehensive solution to the worldwide problem of counterfeit medicines. Leveraging latest
techniques the team wants to develop a low-cost, scalable, secure system for: (1) Manufacturers to record necessary data of the
drugs during their production and transportation; (2) Distributors to trace the drugs; (3) Auditors to inspect all data; and finally
(4) Consumers to verify the authenticity of the purchased product. This platform will provide suppliers of food and drug products
a safety control system to determine if there was a break in the supply chain. It will identify if a product was substituted with
a counterfeit or inferior product. It will help suppliers of perishable food products, reduce spoilage by tracking food shipments
in the supply chain to the final consumer.
In
February 2018, UBI Hong Kong performed a test at the offices of Guangxi Houde Mega Health Enterprise (“Guangxi”),
a medical products company, of the e-commerce “alpha” platform (using simulated test data provided by Guangxi). Guangxi
is owned 70% by Star Bright International Investment Enterprise Limited, owner of 5,000,000 shares of Company Class C Common Stock
(see Note 7). The test identified some technical issues that needed to be addressed. A second round of tests was performed in
July 2018 at Guangxi’s offices and at the offices of three other pharmaceutical companies. In December 2018, the company’s
research team made another visit to Guangxi’s offices to prepare for a third round of testing of the company’s latest
version of its blockchain tracking platform. The e-commerce platform will provide a digital shared accounting ledger that would
make it possible to trace back a product to the very origin of the raw material used.
Once
a working model of a platform is successfully operational, the Company plans to license the technology to larger food and drug
third party customers, in which case the licensee can use it in accordance with the license agreement; and the Company also intends
to provide the technology, when commercial ready, to third party suppliers as a paid service.
The
agreement provides that the equipment acquired from the HKPU Project will belong to HKPU, who is also identified as the Beneficiary
of the grant for the project and is required to provide CIT with interim and a final accounting for the proceeds of the grant
as well as monies advanced by UBI Hong Kong whether the project is successful or not. While HKPU, as the Beneficiary, is provided
discretion on how income arising from the intellectual property rights from the Project Materials (including among other things
computer software/programs, technical materials, models, documents and materials compiled developed, produced or created by or
on behalf of the Beneficiary - the “platform”) and Project Result is to be allocated, UBI Hong Kong is the sole and
absolute beneficial owner (has title to) of all of the intellectual property rights which would include the platform if successfully
completed under the project.
While
HKPU receives full legal and equitable title and interest in any and all of the equipment procured by the Beneficiary, the agreement
does not discuss whether HKPU can discontinue its own performance in the event that either HKSAR or UBI Hong Kong fail to make
the required payments. However, without funding no one would expect that HKPU would be obligated to continue its performance.
The
agreement also has a provision whereby the HKSAR can terminate the grant under certain conditions. These conditions include, among
other things, ethical misuse of funds received under the grant or violations of other requirements under the grant. This would
include UBI Hong Kong’s failure to meet its general financial obligations as due or go into liquidation. In the event of
termination, the HKSAR has the right to suspend payment under the grant or require that amounts previously paid by it be refundable
under the grant.
The
Company expects to use the technology learned from the HKPU Project to help it develop and market a platform system for application
to control and manage the safety of food and drugs. Pursuant to an understanding with UBI Hong Kong, the Company is responsible
for the installments due and other costs relating to the HKPU Project paid by UBI Hong Kong. These costs are expected to be paid
by UBI Hong Kong from loans received from the Company’s CEO Tony Liu. The Company records these costs as research and development
expenses and increases in amounts due to Tony Liu until such time as a “technologically feasible” working model of
the platform has been successfully produced.
The
Company plans to commercialize our blockchain technology, by selling suppliers of food and drug products a blockchain technology
platform to track the shipping of their products from its source to the final consumer with tamper-resistant digital records that
replaces the current related shipping paperwork. There are two ways we plan to commercialize the technology: 1) to license the
technology to third parties, in which case the licensee can use it in accordance with the license agreement; and 2) UBI to provide
the technology to third party suppliers (the supplier will pay for each use). The goal is to license our blockchain technology
to streamline record-keeping for the food and drug supply chain. We also plan to provide blockchain technology, when commercial
ready, to suppliers as a paid service. Our goal is to design a blockchain tracking system that eliminates counterfeit drug products
being substituted in the supply chain. And, with regards to food products where lost or delayed shipments causes perishable goods
lying in wait to spoil, our blockchain tracking is being designed to help expedite and monitor physical transportation. It is
management’s goal to have this technology ready for commercialization soon after the fiscal year ending August 31, 2019.
Management
believes that blockchain technology along with the capabilities of tamper resistance products can help bring about new safety
standards for the health industry. This makes blockchain technology worthy of our research and investment. It is for this reason
management made the decision to establish a company to research and develop blockchain technology. In order to achieve its goals,
management is working to design a product tracking system, where every step a product takes in its supply chain is recorded, time-stamped
and monitored to protect the integrity of the product(s) being shipped from its source to the final consumer. This is accomplished
by tracing the movement of the product from its origin to its final consumer. Utilizing blockchain technology, every time the
product moves, its location is recorded and time-stamped, and a shared accounting ledger can be reviewed to determine if there
was a break in the supply chain, to see if the product was substituted with a counterfeit or inferior product.
UBI’s
business strategy is to incorporate the research and application of blockchain technology, Internet of Things (“IoT”),
pharmaceutical and food products, which together, we refer to as IBSH platform. We have hired professional and technical personnel
to develop a working platform. With the development and research on the platform, we plan to build a blockchain based safety control
system, tentatively named “UBI Security Shield”, with its first application to be used for food and drug safety.
Agreement
with Jinzhuan Think Tank (Beijing) International Information Consulting Co., Ltd
On
March 15, 2019, the Company executed an agreement with Jinzhuan Think Tank (Beijing) International Information Consulting Co.,
Ltd. (“Jinzhuan”). The agreement provides for Jinzhuan to arrange for the Company’s sponsorship and participation
in a “Belt and Road” Think Tank Cooperation Forum where company representatives are to deliver speeches and for Jinzhuan
to introduce the Company to participating government agencies, higher educational institutions, and financial institutions and
to provide consulting and referral services to the Company. The agreement also provides for the Company’s payment of a RMB
611,700 (approximately $91,500) fee to Jinzhuan for such services. This fee was paid on March 15, 2019 and charged to other operating
expenses.
Lease
Commitments
In
September 2017, UBI Shenzhen entered into two lease agreements for office space in Shenzhen China. The first lease provides for
monthly rent of RMB 12,353, or approximately $1,788 per month, and expires September 2020. The second lease provides for monthly
rent of RMB 8,964, or approximately $1,297 per month, and expires September 2019.
As
of May 31, 2019, the future minimum lease payments under non-cancelable operating leases were:
Year ending May 31, 2020
|
|
$
|
26,644
|
|
Year ending May 31, 2021
|
|
|
5,188
|
|
Total
|
|
$
|
31,832
|
|
For
the three and nine months ended May 31, 2019, total rent expense was $29,752 and $96,825, respectively.
For
the three and nine months ended May 31, 2018, total rent expense was $25,359 and $65,049, respectively.
Right
of Rescission Contingency
The
offer and sale of the 25,000,000 Class C Common Shares for the acquisition of UBI Shenzhen may have been in violation of the rules
and regulations under the Securities Act and the interpretations of the SEC. The possible violation involves whether the Company
conducted a public offering without providing the former UBI Shenzhen shareholders with a registration statement declared effective
by the SEC. If a violation of the Section 5 of the Securities Act did in fact occur, anyone who acquired Class C Common Shares
at a price based on an evaluation of $0.20 per share would have a right to rescind the purchase. The Securities Act generally
requires that any claim brought for a violation of Section 5 of the Securities Act be brought within one year of the violation.
If all the shareholders who acquired Class C Common Shares for their exchange in the ownership of UBI Shenzhen demanded rescission
within that one-year period and prevailed in their claims, we would have potentially been obligated to repay approximately $5,000,000.
In
the opinion of management and company counsel, the likelihood of any of the former UBI Shenzhen shareholders making a claim for
a violation of Section 5 of the Securities Act is remote because the effected shareholders are all Chinese citizens who have a
close knit relationship with each other and who all voted in favor of the Company’s acquisition of UBI Shenzhen. None of
these effected shareholders have made any claim to date and the one-year period that they had to bring a claim expired August
29, 2018.