Carrier EQ, LLC - FORM 10-Q - February 16, 2021

Attached files

file	filename
EX-31.1 - CERTIFICATION - Carrier EQ, LLC	airfox_ex31z1.htm
EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER - Carrier EQ, LLC	airfox_ex32z2.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Carrier EQ, LLC	airfox_ex32z1.htm
EX-31.2 - CERTIFICATION - Carrier EQ, LLC	airfox_ex31z2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————————

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2020

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _____________ to ____________

Commission File Number: 000-56037

Carrier EQ, LLC

(Exact name of registrant as specified in its charter)


Delaware		37-1981503
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

186 Lincoln Street, Third Floor, Boston, MA		02111
(Address of principal executive offices)		(Zip Code)

(617) 841-7207

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None


Title of each class	Trading Symbol(s)	Name of each exchange on which registered

Securities registered pursuant to section 12(g) of the Act:

AirTokens

(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer þ		Smaller reporting company þ
		Emerging growth company þ

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

CARRIER EQ, LLC. d/b/a AIRFOX AND SUBSIDIARIES



PART I — FINANCIAL INFORMATION
Item 1	Financial Statements	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Comprehensive Loss	2
	Condensed Consolidated Statements of Changes in Member’s Deficit and Stockholders’ Deficit	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4	Controls and Procedures	29

PART II — OTHER INFORMATION
Item 1	Legal Proceedings	30
Item 1A	Risk Factors	30
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3	Defaults upon Senior Securities	30
Item 4	Mine Safety Disclosures	30
Item 5	Other Information	30
Item 6	Exhibits	31

Signatures		32

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARRIER EQ, LLC. d/b/a AIRFOX AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	December 31, 2020 (unaudited)		September 30, 2020 (audited)
ASSETS
Current assets:
Cash and cash equivalents	$	4,703,419	$	3,272,664
Accounts receivable, net of allowance for doubtful accounts of $73,629 and $0 at December 31, 2020 and September 30, 2020, respectively	754,872		857,901
Prepaid expenses and other current assets	1,058,687		1,399,878
Total current assets	6,516,978		5,530,443

Non-current assets:
Intangibles, net	4,588,760		4,325,105
Property and equipment, net	3,551		3,790
Security deposits	328,940		338,386
Lease right of use assets	1,872,558		1,979,658
Due from related party	—		1,400,000
Other assets	—		130,664
Total non-current assets	6,793,809		8,177,603
Total assets	$	13,310,787	$	13,708,046

LIABILITIES AND MEMBER'S DEFICIT
Current liabilities:
Accounts payable	$	60,648	$	301,003
Accrued liabilities	7,505,959		4,261,009
Deferred revenue - AirToken Project, current portion	5,011,932		5,011,932
Other deferred revenue, current portion	63,322		58,283
AirToken refund liability	163,561		163,561
Deferred gain on issuance of AirTokens for Services, current portion	158,713		158,713
Lease liability, current portion	342,880		393,468
Due to related party	4,488,131		1,572,124
Total current liabilities	17,795,146		11,920,093

Long-term liabilities:
Deferred revenue - Mastercard Program Agreement	12,767,233		11,520,725
Deferred gain on issuance of AirTokens for Services, net of current portion	39,687		79,365
Lease liability, net of current portion	1,706,459		1,758,196
Deferred revenue - AirToken Project, net of current portion	1,252,983		2,505,966
Other deferred revenue, net of current portion	75,879		81,620
Total liabilities	33,637,387		27,865,965

Commitments and contingencies (Note 12)

Carrier EQ, LLC member's deficit:
Member's deficit; 1,277,635 limited liability company units outstanding as of December 31, 2020 and September 30, 2020	(21,335,992)		(15,729,266)
Accumulated other comprehensive income	1,010,870		1,572,382
Total member's deficit attributable to Carrier EQ, LLC members	(20,325,122)		(14,156,884)
Non-controlling interest in subsidiary	(1,478)		(1,035)
Total member's deficit	(20,326,600)		(14,157,919)
Total liabilities and member's deficit	$	13,310,787	$	13,708,046

The accompanying notes are an integral part of these condensed consolidated financial statements

CARRIER EQ, LLC. d/b/a AIRFOX AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)


	Three Months Ended December 31,
	2020		2019

Revenue	$	1,620,383	$	1,254,739

Operating expenses:
Selling, general and administrative	7,138,651		5,206,039
Total operating expenses	7,138,651		5,206,039

Loss from operations	(5,518,268)		(3,951,300)

Other (expense) income:
Realized loss on sale of digital assets	—		(1,392)
Foreign currency transaction loss	(388,383)		—
Gain on AirToken issuance for services	39,679		39,678
Interest income (expense), net	145,770		(32,900)
Other (expense) income, net	(202,934)		5,386

Loss before income taxes	(5,721,202)		(3,945,914)

Income tax benefit	114,033		46,631

Net loss	(5,607,169)		(3,899,283)
Net loss attributable to non-controlling interest	443		248
Net loss attributable to Carrier EQ, LLC and Carrier EQ, Inc.	(5,606,726)		(3,899,035)
Other comprehensive income
Foreign currency translation adjustment	(561,512)		(101,576)
Total comprehensive loss	$	(6,168,238)	$	(4,000,611)

The accompanying notes are an integral part of these condensed consolidated financial statements

CARRIER EQ, LLC. d/b/a AIRFOX AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF MEMBER’S DEFICIT AND STOCKHOLDERS’ DEFICIT


	CARRIER EQ LLC
	Accumulated Other Comprehensive Income		Membership Interests	Member's Deficit		Noncontrolling Interest		Total Deficit
Balance at September 30, 2020 (audited)	$	1,572,382	1,277,635	$	(15,729,266)	$	(1,035)	$	(14,157,919)
Noncontrolling interest	—		—	—		(443)		(443)
Net loss	—		—	(5,606,726)		—		(5,606,726)
Foreign currency translation	(561,512)		—	—		—		(561,512)
Balance at December 31, 2020 (unaudited)	$	1,010,870	1,277,635	$	(21,335,992)	$	(1,478)	$	(20,326,600)


	CARRIEREQ, INC.
	Preferred Stock (Series One)			Preferred Stock (Series One - A)			Common Stock			Treasury Stock			Additional Paid-In		Accumulated Other Comprehensive		Noncontrolling		Accumulated
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount		Capital		Income (Loss)		Interest		Deficit		Total Deficit
Balance at September 30, 2019 (audited)	2,652,072	$	27	1,046,147	$	11	6,813,928	$	78	914,893	$	(240,005)	$	2,014,658	$	110,363	(252)		$	(21,025,864)	$	(19,140,984)
Stock based compensation	—	—		—	—		—	—		—	—		42,588		—		—		—		42,588
Options exercised	—	—		—	—		122,510	1		—	—		33,922		—		—		—		33,923
Noncontrolling interest	—	—		—	—		—	—		—	—		—		—		(248)		—		(248)
Net loss	—	—		—	—		—	—		—	—		—		—		—		(3,899,035)		(3,899,035)
Foreign currency translation	—	—		—	—		—	—		—	—		—		(101,576)		—		—		(101,576)
Balance at December 31, 2019 (unaudited)	2,652,072	$	27	1,046,147	$	11	6,936,438	$	79	914,893	$	(240,005)	$	2,091,168	$	8,787	$	(500)	$	(24,924,899)	$	(23,065,332)

The accompanying notes are an integral part of these condensed consolidated financial statements

CARRIER EQ, LLC. d/b/a AIRFOX AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Three Months Ended December 31,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,607,169)	$	(3,899,283)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Amortization of intangible assets	472,939		36,757
Bad debt expense	73,629		—
Stock based compensation	5,348		42,588
Realized loss on sale of digital assets	—		1,392
Gain on issuance of AirToken for services	(39,678)		(39,678)
Changes in Assets and Liabilities:
Accounts receivable	29,400		13,956
Prepaid expenses and other current and long-term assets	481,301		(103,795)
Accounts payable	(240,355)		926,837
Accrued liabilities and other current liabilities	2,378,365		159,083
Operating lease right of use assets and liabilities	4,775		40,429
Deferred revenue - AirToken Project	(1,252,983)		(1,252,977)
Deferred revenue - Mastercard Program Agreement	1,246,508		16,092,700
Other deferred revenue	(702)		—
Due from related party	1,400,000		—
AirToken refund liability	—		(2,655,655)
Net cash (used in) provided by operating activities	(1,048,622)		9,362,354

CASH FLOWS FROM INVESTING ACTIVITIES:
Disposal of property and equipment	239		(3,632)
Acquisition of intangible assets	(736,594)		(1,336,984)
Net cash used in investing activities	(736,355)		(1,340,616)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party	2,916,007		—
Proceeds from exercise of options	—		33,923
Net cash provided by financing activities	2,916,007		33,923

Effect of exchange rate changes on cash and cash equivalents	299,725		70,770

Net increase in cash and cash equivalents	1,430,755		8,126,431

Cash and cash equivalents, beginning of period	3,272,664		5,451,348

Cash and cash equivalents, end of period	$	4,703,419	$	13,577,779

The accompanying notes are an integral part of these condensed consolidated financial statements

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Note 1 - Organization and Nature of Operations

Carrier EQ, LLC, doing business as Airfox (the “Company”), was incorporated in Delaware on May 21, 2020 with a principal place of business in Boston, Massachusetts. The Company was previously formed as a corporation, CarrierEQ, Inc. and was incorporated in Delaware on January 19, 2016.

On May 21, 2020, the Company filed a certificate of conversion (the “Certificate of Conversion”) to convert the Corporation to a Limited Liability Company and to change the Company’s name from “CarrierEQ, Inc.” to “Carrier EQ, LLC” The conversion and name change became effective on May 21, 2020. The Company filed a certificate of formation of Carrier EQ, LLC (the “Certificate of Formation”) on May 21, 2020.

On May 21, 2020, the Company was fully acquired by Via Varejo S.A, a corporation organized under the laws of the Federative Republic of Brazil (“Via Varejo”) through Lake Niassa Empreendimentos e Participações Ltda., a limited liability company duly organized under the laws of the Federative Republic of Brazil and wholly-owned by Via Varejo (the "Transaction").

The Company has a 99.99% ownership interest in banQi Instituição de Pagamento Ltda (formerly known as AirFox Servicos E Intermediacoes Ltda (“Airfox Brazil”), a limited liability company organized under the laws of the Federative Republic of Brazil and a 100% ownership interest in AirToken GmbH, a Swiss GmbH. Airfox USA, Airfox Brazil and Airtoken GmbH are collectively referred to herein, as the “Company.” On April 6, 2020, Airtoken GmbH was dissolved.

Beginning in February 2017, the Company began exploring consumer applications of its legacy prepaid mobile applications. The Company initiated a business plan to introduce a mobile application that would allow users to earn digital tokens, exchange them for free or discounted mobile data and, ultimately, other goods and services in South America as part of a new international business and ecosystem (the “AirToken Project”). The AirToken Project included the issuance of digital tokens (“AirToken(s)”). The AirToken is an ERC-20 token issued on the Ethereum blockchain.

The Company obtained Ether and Bitcoin (collectively referred therein as the “Digital Assets”), in August 2017 through early October 2017 from those interested in obtaining AirTokens. The Company raised approximately $15.4 million for the purpose of developing the AirToken Project.

The Company’s business is evolving to focus on providing unbanked and financially underserved individuals in emerging markets mobile access to financial services. The Company is developing a software technology platform initially consisting of two applications, a digital wallet application and an alternative credit scoring and lending application. The Company’s software technology platform is designed and built as a Software as Service (or SaaS) offering. The Company expects to generate revenue from these applications from fixed recurring fees, transaction fees, third party fees and interest income. The Company’s initial markets are the cash and unbanked markets in Brazil.

The Company’s digital wallet application, branded as banQi ("banQi"), is a digital banking application capable of leveraging machine learning capabilities to build alternative, smartphone-based credit risk models. This application, currently available on Android and iOS, aims to eliminate the need for traditional financial institutions allowing the underbanked without bank accounts or credit cards to more easily and quickly make many everyday transactions using a smartphone. It will also enable the Company to create an alternative credit scoring system for its users for use in connection with its alternative credit scoring and lending application.

The alternative credit scoring and lending application is a blockchain-based, peer-to-peer lending application that will enable anyone from around the world to provide capital for a microloan to a diversified cohort of borrowers. The technology is expected to harness the decentralized power of the Ethereum blockchain to create a digital ledger of the user’s behavioral and transactional data to fund a new financial asset class from a global pool of lenders seeking to make socially impactful microloans.

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Note 2 - Financial Condition and Management’s Plans

The Company has experienced recurring losses and negative cash flows from operations. At December 31, 2020, the Company had cash and cash equivalents of $4.7 million, a working capital deficit of $11.3 million, and total member's deficit of $20.3 million. The Company is obligated to refund the remaining amounts of claims related to the AirToken Project when valid claims are finalized. As of December 31, 2020, the amount that was not paid was approximately $0.2 million. Additionally, the Company may be subject to other legal liabilities (see Note 12).

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. The Company believes that its ability to continue operations depends on its ability to generate revenues and obtain funding that will be sufficient to sustain its operations until it rolls out its core product offerings and achieve profitability and positive cash flows from operating activities.

The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results. The condensed consolidated financial statements do not include any adjustments related to this uncertainty and as to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

The Company’s management has taken several actions in an effort to secure funding and generate revenue streams including:

After being acquired by Via Varejo, the sole shareholder of the Company, Via Varejo has been making recurring capital contributions to both Airfox and Airfox Brazil in order to decrease the Member’s deficit and guarantee its funding. For the three months ended December 31, 2020 and 2019, the Company received $1.4 million and $0, respectively.

Scale up the quantity of active users through marketing campaigns in social media, Via Varejo website, and at physical Casas Bahia stores (Via Varejo marketplaces). These campaigns incentivize the users to perform more transactions in the BanQi application, such as payments, online and prepaid card transactions, increasing the total payment volume.

Offering different products to the users in the banQi application, such as a new banking wire method ("PIX"), QR-Code payments, direct purchasing from partner’s marketplace, and personal loan credit.

Pursuing opportunities to enter into service agreements with insurance companies, travel companies, and other service companies, to use the Company platform as a source of distribution of their products.

In addition to the actions above, the Company is evaluating diversifying its revenue streams, raising additional capital, and considering other actions that may yield additional funding. Further, the Company’s management can implement expense reductions, as necessary. However, there is no assurance that the Company will be successful in obtaining funding or generating revenues sufficient to fund operations.

In the event the Company is unable to raise additional debt or equity financing, it may:

Have to cease operations, in which case the Company may file a petition for bankruptcy in U.S. Bankruptcy Court under Chapter 7, whereby a trustee will be appointed to sell off the Company’s assets, and the money will be used to pay off the Company’s debts in order of their priority. The priority of an AirToken holder seeking a refund claim should be equal to all of the Company’s other unsecured creditors; or

File a petition for bankruptcy in U.S. Bankruptcy Court under Chapter 11 to restructure the Company’s debt, including the Company’s debt to AirToken holders seeking refund claims. The priority of an AirToken holder seeking a refund claim, should be equal to all of the Company’s other unsecured creditors. The Chapter 11 reorganization plan will spell out rights of AirToken holders seeking refund claims and what such investors can expect to receive, if anything, from the Company.

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

COVID-19 Risks, Impacts and Uncertainties

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 Outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 Outbreak as a pandemic, based on the rapid increase in exposure globally. In Brazil, on March 20, 2020, the Governor of Sao Paulo declared a State of Public Calamity. On March 21, the Governor of Brazil’s financial hub also issued an order requiring that all no-essential business, including Via Varejo’s stores, close their physical workplaces and facilities to workers, customers and the public. On March 10, 2020 the Governor of Massachusetts declared a State of Emergency, and on March 23, 2020 the Governor issued an order requiring that all businesses and organizations that do not provide “COVID-19 Essential Services” close their physical workplaces and facilities to workers, customers and the public. The Governor’s order was extended to May 15, 2020. The Commonwealth’s “Reopening Massachusetts” process is underway, and as of July 6, 2020, the Commonwealth of Massachusetts entered into Phase III, Step 1 and the Company’s offices in Boston were opened on a limited basis subject to certain state mandated safety standards. While the Company expects the COVID-19 Outbreak to negatively impact its results of operations, cash flow and financial position, the related financial impact cannot be reasonably estimated at this time.

The Company is subject to the risks arising from the COVID-19 Outbreak’s social and economic impacts. The Company’s management believes that the social and economic impacts, which include but are not limited to the following, could have a significant impact on future financial condition, liquidity, and results of operations: (i) the duration and scope of the pandemic; (ii) governmental, business and individual actions that have been and continue to be taken in response to the pandemic, including travel restrictions, quarantines, social distancing, work-from-home and shelter-in-place orders and shut-downs; (iii) the impact on U.S. and global economies and the timing and rate of economic recovery; (iv) potential adverse effects on the financial markets and access to capital; (v) potential goodwill or other impairment charges; (vi) increased cybersecurity risks as a result of pervasive remote working conditions; and (vii) the Company’s ability to effectively carry out its operations due to any adverse impacts on the health and safety of the Company’s employees and their families.

In response to the COVID-19 Outbreak, the Company’s employees have been required to work from home. The significant increase in remote working, particularly for an extended period of time, could exacerbate certain risks to the Company’s business, including an increased risk of cybersecurity events and improper dissemination of personal or confidential information. The Company does not believe these circumstances have, or will, materially adversely impact the Company’s internal controls or financial reporting systems.

Note 3 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements (“interim statements”) of Airfox have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as determined by Financial Accounting Standards Board (the “FASB”) within its Accounting Standards Codification (“ASC”) and under the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim statements have been included. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year. These interim statements should be read in conjunction with the Company’s consolidated financial statements as of and for the year ended September 30, 2020.

The Company has elected not to apply pushdown accounting to the accompanying standalone condensed consolidated financial statements in accordance with ASC 805 Business Combinations ("ASC 805").

The Company is an emerging growth company as the term is used in The Jumpstart Our Business Startups Act, enacted on April 5, 2012 and has elected to comply with certain reduced public company reporting requirements, however, the Company may adopt accounting standards based on the effective dates for public entities.

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Principles of Consolidation

The accompanying condensed consolidated financial statements includes the accounts of the Company and its majority-owned subsidiaries. All intercompany transactions have been eliminated in consolidation. The Company is not involved with variable interest entities.

The Company has a 99.99% controlling interest in banQi Instituição de Pagamento Ltda (formerly known as Airfox Servicos E Intermediacoes LTDA) and a 100% interest in AirToken GmbH; accordingly, the Company consolidates these entities and records non-controlling interests to reflect the economic interest of the non-controlling equity holders. On April 6, 2020, Airtoked GmbH was dissolved.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates. The most significant accounting estimates inherent in the preparation of the Company's financial statements includes the fair values of AirTokens, issued for services and Digital Assets, estimated lives of intangible assets, intangible asset impairment, revenue recognition (including the estimated development period for completing the AirToken Project), stock-based compensation and deferred tax valuation allowance.

Foreign Currency

The Company has operations in Brazil where the local currency is used to prepare the financial statements which are translated into the Company’s reporting currency, U.S. dollars. The local currency is the functional currency for the operations outside the United States. Changes in the exchange rates between this currency and the Company’s reporting currency, are partially responsible for some of the periodic changes in the condensed consolidated financial statements. Assets and liabilities of the Company’s foreign operations are translated into U.S. dollars at the spot rate in effect at the applicable reporting date. Revenues and expenses of the Company’s foreign operations are translated at the average exchange rate during the applicable period. The resulting unrealized cumulative translation adjustment is recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized and unrealized transaction gains and losses generated by transactions denominated in a currency different from the functional currency of the applicable entity are recorded in other income (loss) in the period in which they occur.

Revenue Recognition

The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of this standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

ASC 606 prescribes a 5-step process to achieve its core principle:

Step 1: Identify the contract with the customer

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the performance obligations in the contract

Step 5: Recognize revenue when the Company satisfies a performance obligation

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

AirToken Project Development Services (Non ASC 606 Revenue)

The Company determined that its token issuances represent obligations to perform software development services and accounts for the proceeds received in the token issuances in accordance with ASC 730-20, Research and Development – Research and Development Arrangements (“ASC 730-20”). At the time of, and in conjunction with the token issuances, the Company’s obligation was to develop a live, operational, de-centralized network with token functionality including, at a minimum, features including a digital wallet, credit scoring and peer-to-peer networking (collectively, the “AirToken Project”). Due to the significant hurdles in developing the AirToken Project, technological feasibility had not been established at the time of the token issuances and, therefore, all of the Company’s development costs were expensed.

The Company, beginning in August 2017 through early October 2017, obtained Ether and Bitcoin totaling approximately $15.3 million (and cash of $0.1 million) towards the development of the AirToken Project. Pursuant to the terms of the AirTokens, there is no form of partnership, joint venture, agency or any similar relationship between a holder of an AirToken and the Company and/or other individuals or entities involved with the AirToken Project. AirTokens are non-refundable and do not pay interest and have no maturity date. AirTokens confer only the right to services in the AirToken Project and confer no other rights of any form with respect to the Company, including, but not limited to, any voting, distribution, redemption, liquidation, proprietary (including all forms of intellectual property), or other financial or legal rights. Subsequent to the distribution of AirTokens to those parties who contributed towards the funding of the AirToken Project, no AirTokens were sold by the Company.

Pursuant to the Settlement Agreement (as defined and described further in Note 12), the Company is obligated to refund amounts raised for the purpose of developing the AirToken Project if valid claims are submitted and may incur other fines and penalties.

On or before December 28, 2019, the Company paid all approved claims to approved claimants who returned their AirTokens to the Company (approximately 93.5% of the total dollar amount of all approved claim refunds). All amounts were refunded in cash and paid through the Company’s existing cash and cash equivalent reserves. The total claim amounts including interest, totaled $3.3 million on December 28, 2019. Certain approved claimants did not return their AirTokens to the Company. The Company did not pay approved claims to approved claimants who did not return their AirTokens to the Company. As of December 31, 2020, the amount that was not paid was approximately $0.2 million. All unpaid approved claims are expected to be paid during the 2021 fiscal year upon return to the Company of approved claimants’ AirTokens.

The Company will recognize the remaining proceeds of $12.5 million over the remaining estimated development period of the AirToken Project, on a straight-line basis, beginning on October 1, 2019 until the completion of the AirToken Project. The estimated development period to complete the AirToken Project is approximately 13 months and is expected to be completed in March 2022. Refer to Note 12 for further information on the rescission offer.

For the three months ended December 31, 2020 and December 31, 2019, the Company recognized $1.3 million and $1.3 million from the AirToken Project research and development arrangement as described above, and software development costs expensed, related to the AirToken Project was approximately $0.8 million and $1.1 million, respectively.

Mastercard Revenue and Sale Incentives (ASC 606 Revenue)

On December 16, 2019, Airfox Brazil, received R$65 million (approximately U.S. $16 million in December 2019) from Mastercard Brasil Soluções de Pagamento Digital Ltda. (“Mastercard Brasil) pursuant to a Strategic Alliance and Incentive Program Agreement (the “Program Agreement”) entered into between Airfox Brazil, Mastercard Brasil and Via Varejo S.A. (“Via Varejo”) on June 12, 2019 (See Note 4).

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

As a Mastercard prepaid card issuer, Airfox Brazil will be entitled to receive Sales Revenue Incentives pursuant to the Program Agreement. As a result, the Sales Revenue Incentives will be used to amortize the Sales Revenue Incentive Prepayment received on December 11, 2019. Upon complete amortization of Incentive Prepayment, Mastercard will make quarterly payments of the Sales Revenue Incentive, calculated according to the value of transactions completed with the prepaid cards issued by the Airfox Brazil. Airfox Brazil will have no minimum commitment of transaction volumes to be completed with the prepaid cards.

The Company will recognize the revenue as earned on a monthly basis, based on a fixed percentage of the total dollar value of card transactions completed during the month in accordance with the terms in the agreement. The Company has identified one performance obligation that meets the series provision and recognizes revenue over time. The Company Sales incentives totaling $3.4 thousand and $0, for the three months ended December 31, 2020 and 2019 respectively, and meets the guidance to be classified as a series.

In connection to the Program Agreement, the Company also entered into an agreement with Mastercard, an Interchange Manual (“Interchange Fee Agreement”) from Mastercard dated June 18, 2019, which details the fees paid by a merchant’s bank to Airfox Brazil to compensate for the value and benefits that merchant receives when it accepts electronic payments.

The fee is a specified percentage of the total dollar amount of a card transaction, and a fixed percentage based on the type of card transaction (i.e. merchant type, national vs. international, etc.), based on the schedule of fees outlined in the Interchange Fee Agreement (“Interchange Fee Revenue”).

On a monthly basis, the Company earns revenue from the Interchange Fee received. The Company has identified one performance obligation that meets the series provision and recognizes revenue over time. Interchange Fee Revenue totaling $30.2 thousand and $0 has been earned for the three months ended December 31, 2020 and 2019, respectively, and meets the guidance to be classified as a series.

Via Varejo Services Agreement Revenue (ASC 606 Revenue)

The Company entered into a Services Agreement (the “Services Agreement”) as of September 11, 2018 (“the Agreement Effective Date”) with Via Varejo (the “Client”).

The Company has been engaged to design and develop a mobile software module and application programming interface that will provide the Client’s customers with access to certain mobile payment functionality, and that integrates banQi (“VV Wallet Services”). The Company will provide certain services, including hosting, maintenance and operation of banQi. The VV Wallet Services are structured into four phases. The Phases are - Phase 1: Specifications and Customization; Phase 2: Features; Phase 3: License and Maintenance Services and Phase 4: Rollout.

The development of the VV Wallet Services is considered a bundled performance obligation that includes the development of the API and software as a service which is hosted on the Company’s servers. In addition to the software as a service performance obligation, the Company will provide support services for the software as a service. The Client is considered to simultaneously receive and consume the benefits provided by the Company’s performance as the Company performs the services. Accordingly, the revenue from Service Charges will be recognized over time based on the number of transactions made by Client customers with banQi. As of the date of the financial statements no revenue has been received or recognized. Revenue will not be recognized until banQi is utilized by the Client customers.

During Phase 1, there was a payment of $0.3 million (“Upfront Payment”) from the Client to be recognized as revenue commencing when the product was ready for its intended use and ratably over the remaining term of the Services Agreement through the duration of the Services Agreement. The total revenue recognized for the three months ended December 31, 2020 and 2019 totaled $12.6 thousand and $0, respectively.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks and money market instruments.

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness; and determines the allowance for doubtful accounts based on historical write-off experience, customer specific facts and economic conditions.

Concentrations of Credit Risk and Off-Balance Sheet Risk

The Company is subject to concentration of credit risk with respect to their cash and cash equivalents, which the Company attempts to minimize by maintaining cash and cash equivalents with institutions of sound financial quality. At times, cash balances may exceed limits federally insured by the Federal Deposit Insurance Corporation. At December 31, 2020, Airfox Brazil held cash, and cash equivalents totaling $3.8 million in Brazilian financial institutions. The Company had cash and cash equivalents, including amounts held in financial institutions in the USA and Brazil that totaled $4.7 million.

The Company believes it is not exposed to significant credit risk due to the financial strength of the depository institutions in which the funds are held. The Company has no financial instruments with off-balance sheet risk of loss.

Long-Lived Assets, Including Definite Intangible Assets

Long-lived assets and other indefinite-lived intangibles, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. The Company’s definite-lived intangible assets primarily consist of various domain names and websites. For long-lived assets used in operations, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. The Company measures the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value.

Security Deposits

As of December 31, 2020, security deposits primarily include monies being held subject to a security agreement (“Security Agreement”) with Mastercard, Inc. executed on June 7, 2019. The Security Agreement is related to the Services Agreement to ensure a minimum amount of users for the cards, as this is a major phase in the Company’s development process. On April 22, 2020 Mastercard returned $1.2 million plus interest in cash deposit to the Company. Upon Mastercard issuing the minimum number of cards to users, the $0.3 million will be paid back to the Company in full. The Company has classified this amount as non-current assets as these funds are not highly liquid and cannot be easily converted into cash.

Due to Related Party

Amounts due to Via Varejo as of December 31, 2020 are $4.5 million. Amounts are noninterest bearing and terms with Via Varejo are not finalized.

Software Development Costs

The Company capitalizes costs related to software developed or obtained for internal use in accordance with the ASC 350-40, Internal-Use Software (“ASC 350-40”). The following illustrates the various stages and related processes of computer software development in accordance with ASC 350-40:

Preliminary project stage: (a) conceptual formulation of alternatives; (b) evaluation of alternatives; (c) determination of existence of needed technology; and (d) final selection of alternatives. Internal and external costs incurred during the preliminary project stage are expensed as incurred.

Application development stage: (a) design of chosen path, including software configuration and software interfaces; (b) coding; (c) installation to hardware; and (d) testing, including parallel processing phase. Internal and external costs incurred to develop internal-use computer software during the application development stage are capitalized.

Post-implementation-operation stage: (a) training; and (b) application maintenance. Internal and external costs incurred during the post-implementation-operation stage are expensed as incurred.

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Certain costs incurred are considered enhancements, modifications to existing internal-use software that result in additional functionality. Enhancements normally require new software specifications and may also require a change to all or part of the existing software specifications. When this additional functionality is determinable, the related costs are capitalized. Otherwise, costs are expensed as incurred. Capitalization of internal-use software costs ceases when a computer software project is substantially complete and ready for its intended use. The Company begins amortization when the product is available for general release or use.

The Company has capitalized software costs relating to the Via Varejo Services Agreement and began amortization on January 1, 2020 as the product is now ready for its intended use and will be amortized through the contract term until September 2023. The amortization expense related to the Via Varejo Services Agreement capitalized software for the three months ended December 31, 2020 totaled $0.8 million.

The Company capitalizes costs related to the development and maintenance of its website in accordance with ASC 350-50, Website Development Costs. Accordingly, costs expensed as incurred include planning the website, developing the applications and infrastructure until technological feasibility is established, developing graphics such as borders, background and text colors, fonts, frames and buttons, and operating the site such as training administration and maintenance.

Capitalizing Software Costs in Connection with Hosting Arrangements and Software as a Service Arrangements

The Company develops certain software that are considered to be part of cloud computing arrangement (or hosting arrangement), whereby, a user or a customer of software does not take possession of the Company’s software; rather, the software is accessed on an as-needed basis over the Internet.

Therefore, when the software is used to produce a product or in a process to provide a service to a customer, and the customer is not given the right to obtain or use the software, the related costs are accounted for in accordance with ASC 350-40. When a hosting arrangement includes multiple modules or components, capitalized costs are amortized on a module-by-module basis. When a module or component is substantially ready for its intended use, amortization begins, regardless of whether the overall hosting arrangement is being placed in service in planned stages. If the module’s functionality is entirely dependent on the completion of one or more other modules, then amortization does not begin until that group of interdependent modules is substantially ready for use.

Impairment of Long-term Assets

The Company evaluates the recoverability of tangible and intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.

Leases

The Company categorizes leases at their inception as either operating or finance leases based on the criteria in ASC 842, Leases (“ASC 842”). The Company adopted ASC 842 on October 1, 2019, using the modified retrospective approach, and has established a Right-of-Use (“ROU”) Asset and a current and non-current Lease Liability for each lease arrangement identified. The lease liability is recorded at the present value of future lease payments discounted using the discount rate that approximates the Company’s incremental borrowing rate for the lease established at the commencement date, and the ROU asset is measured as the lease liability plus any initial direct costs, less any lease incentives received before commencement. The Company recognizes a single lease cost, so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis.

Advertising

Advertising costs are expensed as incurred and included in selling, general and administrative expenses and amounted to $0.4 million and $0.2 million for the three months ended December 31, 2020 and 2019, respectively.

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Income Taxes

Income taxes are recorded in accordance with ASC 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. The Company recognizes any interest and penalties accrued related to unrecognized tax benefits as income tax expense.

Deferred gain on issuance of AirTokens for services

AirTokens issued to vendors for services in connection with raising monies for the purpose of developing the AirToken Project are accounted for in accordance with ASC 845-30-1, Nonmonetary Transactions, which requires that the AirTokens to be recognized at fair value, and resulted in recognizing a deferred gain of approximately $1.7 million in October 2017. The fair value of the AirTokens issued was based on the last price paid ($0.02) by initial investors in acquiring AirTokens towards the development of the AirToken Project (representing a Level 3 non-recurring measurement). The deferred gain will be recognized on a straight-line basis over the estimated development period of the AirToken Project as this represents the best depiction of the measure of progress towards the development of the AirToken Project. The Company will recognize the gain in Other Income beginning October 2017 through the estimated development period of the AirToken Project (i.e. March 2022).

Distinguishing Liabilities from Equity

The Company relies on the guidance provided by ASC 480, Distinguishing Liabilities from Equity, to classify certain redeemable and/or convertible instruments. The Company first determines whether a financial instrument should be classified as a liability. The Company will determine the liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional obligation that the Company must or may settle by issuing a variable number of its equity shares.

Once the Company determines that a financial instrument should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability section and the equity section of the balance sheet. The Company will determine temporary equity classification if the redemption of the financial instrument is outside the control of the Company (i.e., at the option of the holder). Otherwise, the Company accounts for the financial instrument as permanent equity.

The Company records its financial instruments classified as liability, temporary equity or permanent equity at issuance at the fair value, or cash received.

The Company records its financial instruments classified as liabilities at their fair value at each subsequent measurement date. The changes in fair value of these financial instruments are recorded as other expense/income.

Hedging

The Company does not use derivative instruments to hedge exposures to cash flows, market or foreign currency risks. The Company evaluates its financial instruments, including equity-linked financial instruments, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives.

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Stock-based Compensation

The Company accounts for stock-based compensation to employees and non-employees in conformity with the provisions of ASC 718, Compensation - Stock Based Compensation. The Company expenses stock-based compensation to employees and non-employees over the requisite service period based on the estimated grant-date fair value of the awards. The Company accounts for forfeitures as they occur. Stock-based awards are recognized on a straight-line basis over the requisite service period. For stock-based employee compensation cost recognized at any date will be at least equal to the amount attributable to share-based compensation that is vested at that date. The Company estimates the fair value of stock option grants using the Black-Scholes option-pricing model and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.

Common shares issued to third parties for services provided are valued based on the estimated fair value of the Company’s common shares.

All stock-based compensation costs are recorded in selling, general and administrative expenses in the consolidated statements of operations. All stock-based compensation awards were cancelled pursuant to the Transactions which occurred on May 21, 2020.

In August 2020, the Company established the Share Based Payment Program with Cash Settlement - Phantom Shares of Via Varejo S.A. (the "Plan"). Pursuant to the Plan, the Company's Board of Directors may grant cash-settled shares, referred to as "Phantom Shares," to the Company's employees as part of the employees' remuneration package. Each Phantom Share will represent the employee's right to receive the full amount corresponding to the average quotation of 3 (three) common shares of Via Varejo S.A. in the 20 (twenty) trading sessions at B3 - Brazil, Bolsa, Balcão immediately prior to vesting, as established in the Plan. The Phantom Shares vest over a service period of five years.

The Phantom Shares are accounted for as liability awards and are re-measured at fair value each reporting period with the corresponding compensation expense being recognized over the requisite service period. As of December 31, 2020, the aggregate estimated fair value of the Phantom Shares was $0.1 million, and the Company has recognized $5.3 thousand of compensation expense. No Phantom Shares have vested as of December 31, 2020.

Fair Value Measurement

The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable and short and long-term debt. The fair values of cash and cash equivalents, accounts receivable, and accounts payable approximate their stated amounts because of the short maturity of these financial instruments. The Company believes the carrying amount of their simple agreement for future equity approximate fair value based on rates and other terms currently available to the Company for similar debt instruments.

The valuation hierarchy is composed of three levels. The classification within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels within the valuation hierarchy under ASC 820 are described below:

Level 1 — Assets and liabilities with unadjusted, quoted prices listed on active market exchanges. Inputs to the fair value measurement are observable inputs, such as quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar underlying terms, as well as direct or indirect observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 — Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and valuation techniques when little or no market data exists for the assets or liabilities.

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Adoption of Recent Accounting Pronouncements

In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02 (“ASU 2016-02”), which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements; and ASU No. 2018-20, Narrow-Scope Improvements for Lessors. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

The Company adopted ASU 2016-02 effective October 1, 2019 using the modified retrospective approach whereby the Company will continue to present prior period financial statements and disclosures under ASC 840. In addition, the Company elected the transition package of three practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification and initial direct costs. Further, the Company adopted a short-term lease exception policy, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets.

Adoption of the new standard resulted in the recording of right-of-use assets and lease liabilities related to the Company’s operating leases, totaling $2.3 and $2.4 million, respectively, recorded on the Company’s consolidated balance sheet as of October 1, 2019. The standard did not materially affect the Company's consolidated net earnings or cash flows.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends disclosure requirements on fair value measurements in Topic 820. This amendment modifies the valuation process of fair value measurements by removing the disclosure requirements for the valuation processes for Level 3 fair value measurements, clarifying the timing of the measurement uncertainty disclosure, and including the changes in unrealized gains and losses for recurring Level 3 fair value measurements in other comprehensive income if held at the end of the reporting period. It also allows the disclosure of other quantitative information in lieu of the weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and should be applied prospectively for the most recent period presented in the initial fiscal year of adoption. The Company adopted ASU 2018-13 effective October 1, 2020 and there was no material impact on the Company's results of operations, financial position and cash flows.

In August 2018, the FASB issued ASU 2018-15, Intangibles, Goodwill and Other (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (“ASU 2018-15”), which requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance in ASC 350-40. The new standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted ASU 2018-15 effective October 1, 2020 and there was no material impact on the Company's results of operations, financial position and cash flows.

Recent Accounting Pronouncements

The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company's financial reporting, the Company undertakes a study to determine the consequences of the change to its condensed consolidated financial statements and assures that there are proper controls in place to ascertain that the Company's condensed consolidated financial statements properly reflect the change.

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, that changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for losses. In addition, an entity will have to disclose significantly more information about allowances and credit quality indicators. The new standard is effective for the Company for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of the pending adoption of the new standard on its condensed consolidated financial statements and intends to adopt the standard on October 1, 2023.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which modifies ASC 740 to reduce complexity while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 2019-12 is effective for the Company for interim and annual reporting periods beginning after December 15, 2021. The Company is currently assessing the impact of ASU 2019-12, but it is not expected to have a material impact on the Company’s condensed consolidated financial statement.

In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies an issuer’s accounting for convertible instruments by reducing the number of accounting models that require separate accounting for embedded conversion features. ASU 2020-06 also simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification and makes targeted improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance. This update will be effective for the Company’s fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Entities can elect to adopt the new guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The Company is currently evaluating the impact of the pending adoption of the new standard on its financial statements and intends to adopt the standard as of October 1, 2024.

Note 4 – Mastercard Program Agreement

On December 16, 2019, Airfox Brazil, received R$65 million (approximately $16 million in December 2019) from Mastercard Brasil pursuant to the “Program Agreement” entered into between Airfox Brazil, Mastercard Brasil and Via Varejo Via Varejo on June 12, 2019.

Pursuant to the Program Agreement, Airfox Brazil, as a licensee of MasterCard International, Inc. and a business partner of Mastercard Brasil, entered into the Incentive Program (as defined in the Program Agreement) in order to issue, expand and boost the prepaid card (“Airfox Card”) base of Airfox Brazil as well as the number of transactions and turnover (sales revenue) generated by MasterCard Cards. The Program Incentives monies (as defined in the Program Agreement) cannot be used for the benefit of any product of any Mastercard competitor and/or any card brand other than the Mastercard Network. As an incentive to support the launching of Airfox Card, on December 16, 2019 Mastercard Brasil made to Airfox Brazil the incentive prepayment per sales revenue ("Sales Revenue Incentive Prepayment") totaling R$65 million.

As a Mastercard prepaid card issuer, Airfox Brazil will be entitled to receive Sales Revenue Incentive pursuant to the Program Agreement. As a result, the Sales Revenue Incentive will be used to amortize the Sales Revenue Incentive Prepayment received on December 11, 2019. Upon complete amortization of Incentive Prepayment, Mastercard will make quarterly payments of the Sales Revenue Incentive, calculated according to the value of transactions completed with the prepaid cards issued by the Airfox Brazil. Airfox Brazil will have no minimum commitment of transaction volumes to be completed with the prepaid cards.

The Sales Revenue Incentive Prepayment constitutes the creation of a direct financial obligation on Airfox Brazil since it constitutes prepaid sales revenue from Mastercard Brasil to Airfox Brazil. Via Varejo has agreed to act as a guarantor of Airfox Brazil’s Sales Revenue Incentive Prepayment obligations to Mastercard Brasil pursuant to the Program Agreement and a Guaranty Letter.

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

The Program Agreement has a term of ten years, unless earlier terminated by either party in accordance with specific provisions of the Program Agreement. The Program Agreement also establishes that the remaining balance of the prepaid incentive amount shall be updated every twelve months at 72% of the Brazilian federal funds rate, the "SELIC" rate (or 'over Selic') as of the payment date of the incentive, which turns the incentive agreement into a financial debt instrument. If the Agreement was ever terminated, even as of the ending of the effective term of ten years or before, the Company shall make the full payment of the remaining sales incentive prepaid balance at the actual termination date.

The Company will recognize the revenue as earned on a monthly basis, based on a fixed percentage of the total dollar value of card transactions completed during the month in accordance with the terms in the agreement. Also, the company will recognize finance expenses related to the SELIC adjustment on a yearly basis, as stated by the agreement. The Company has identified one performance obligation that meets the series provision and recognizes revenue over time. The Company Sales incentives totaling $3.4 thousand and $0 have been earned for the three months ended December 31, 2020 and 2019, respectively, and meets the guidance to be classified as a series. The Company's SELIC finance expense for the three months ended December 31, 2020 and 2019 was $0.3 million and $0, respectively.

Note 5 - Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:


	December 31, 2020		September 30, 2020
Service contract	$	—	$	349,000
Research and Development tax credit	610,998		496,965
Prepaid expense	447,689		553,913
Total Prepaid expenses and other current assets	$	1,058,687	$	1,399,878

Note 6 - Intangible Assets, Net

The following table summarizes the Company’s definite-lived intangible assets:


	December 31, 2020
	Estimated Useful Life (Years)	Gross Carrying Amount		Additions		Accumulated Amortization		Net Carrying Value
Domain names	3	$	140,012	$	—	$	(109,692)	$	30,320
Capitalized software costs towards VV Wallet	3	4,855,125		736,594		(1,143,855)		4,447,864
Website	3	282,645		—		(203,007)		79,638
Software	3	42,123		—		(11,185)		30,938
		$	5,319,905	$	736,594	$	(1,467,739)	$	4,588,760


	September 30, 2020
	Estimated Useful Life (Years)	Gross Carrying Amount		Additions		Accumulated Amortization		Net Carrying Value
Domain names	3	$	140,012	$	—	$	(98,137)	$	41,875
Capitalized software costs towards VV Wallet	3	1,500,058		3,355,067		(702,477)		4,152,648
Website	3	272,083		10,562		(185,122)		97,523
Software	3	17,486		24,637		(9,064)		33,059
		$	1,929,639	$	3,390,266	$	(994,800)	$	4,325,105

The Company uses the straight-line method to determine the amortization expense for its definite-lived intangible assets. The amortization expense related to the definite-lived intangible assets was $0.5 million and $36.8 thousand for the three months ended December 31, 2020 and 2019.

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Note 7 - Accrued liabilities

Accrued liabilities consisted of the following:


	December 31, 2020		September 30, 2020
Customer deposits	$	2,763,643	$	1,727,097
Accrued compensation	2,147,008		1,380,419
Other accrued liabilities	894,263		560,460
Accrued accounts payable	662,497		428,760
Related parties' liabilities	607,739		—
Operating third parties' liabilities	382,297		—
Tax and licenses	32,236		10,665
Credit card payable	16,276		23,261
Legal and professional	—		130,347
Total accrued liabilities	$	7,505,959	$	4,261,009

Note 8 - Preferred Stock

Series One and One-A Preferred Stock Purchase Agreement

On July 15, 2016, the Company sold to accredited investors an aggregate of 2,652,072 shares of Series One and 1,046,147 of Series One-A Preferred Shares (collectively, “Preferred Stock”).

The Preferred Stock is convertible into the Company’s Common Stock on a 1 for 1 basis at the holders’ option. The Preferred Stock does not contain any redemption provisions. The Preferred Stock does not pay dividends and vote together with the common stock of the Company as a single class on all actions to be taken by the stockholders of the Company.

On May 21, 2020, in connection with the February 7, 2020 written Call Exercise Notice from Via Varejo (“Call Exercise Notice”), the aggregate of 2,652,072 shares of Series One and 1,046,146 of Series One-A Preferred Shares were converted into the Company’s Common Stock during the Transaction which were subsequently cancelled.

The Company amended its Certificate of Incorporation and filed the Second Restated Certificate of Incorporation (the “Restated Certificate of Incorporation”) with the Delaware Secretary of State on May 21, 2020, to provide for (i) a single class of common stock (and automatic conversion of any and all outstanding shares of preferred stock into common stock) and (ii) no preferential rights in favor of any shareholder.

Note 9 - Common Stock

On January 25, 2016, the Company issued 497,873 shares of common stock to an investor (the “Investor”) for a purchase price of $20 thousand, which at the time represented 6% of the capital stock of the Company. As part of this transaction, the Company agreed to issue additional shares of common stock (for no additional consideration) to maintain the investor’s ownership interest at 6% of the total capital stock upon a subsequent equity financing greater than $250 thousand. This 6% ownership is calculated on a fully diluted basis, including all outstanding shares of common and preferred stock, all outstanding options and warrants, phantom stock, stock appreciation rights, and any shares reserved for issuance under the Company’s equity incentive plans. However, the capital stock does exclude shares issuable, but contingent on conversion of any current or future convertible debt and equity instruments (which would include the SAFE’s). Therefore, as part of any issuance of capital stock to any future investors, the Company must issue additional stock to the Investor, as well, to ensure that they remain at 6% of the Company’s capital stock. There were 133,893 additional shares issued on July 15, 2016 to the Investor in order to maintain their 6% equity interest.

The contingent issuance of shares of common stock to the Investor was evaluated to determine whether the embedded feature would be required to be recorded as a derivative liability. It was determined the embedded feature qualifies for equity classification.

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

On February 28, 2018 the Company repurchased 414,893 shares of common stock which it had previously granted to an independent entity in exchange for $0.2 million. The Company recorded these repurchased shares as Treasury shares in its consolidated balance sheet.

On May 21, 2020, in connection with the Call Exercise Notice, all of the Company’s previously outstanding common stock was purchased by the Buyer, which is included in the total aggregate of 25,265,794 of the Company’s Common Stock that was purchased by the Buyer during the Transaction. All shares of common stock were immediately then cancelled, including the shares held in treasury.

Note 10 - Stock Based Compensation

The Company established a 2016 Equity Incentive Plan (the “Plan”) during 2016 and issued stock-based awards to certain employees and non-employees under this plan. The Plan provided for the issuance of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock units and other stock awards.

On February 3, 2020, the Company’s Board of Directors approved an amendment to the Plan to decrease the aggregate number of shares of the Company’s common stock that may be issued pursuant to Stock Awards (as defined in the Plan) from 2,834,837 to 2,676,126; and waived the restrictions on transfer and right of first refusal in favor of the Company, as set forth in the Company’s Amended and Restated Bylaws, for certain stockholders.

Additionally, on February 3, 2020, the Company’s Board of Directors approved the acceleration of vesting of 751,849 outstanding stock option awards awarded to employees and a third-party.

On February 6, 2020, the Board approved the acceleration of vesting of 149,564 outstanding stock options awarded to a third-party.

On February 26, 2020, the Board approved the acceleration of vesting of 277,564 outstanding stock options awarded to employees and other third-parties.

On May 21, 2020, concurrently with the consummation of the Transaction and as a condition precedent under the September 11, 2018 convertible note purchase and call option agreement (the “Call Option Agreement”), the Company’s Board of Directors cancelled all outstanding options to purchase the Company’s Common Stock granted under the Plan. All of the holders of the outstanding options issued under the Plan were immediately cancelled and, in consideration for such cancellation were entitled to a lump sum cash payment from the Company.

The Company lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical volatility of a set of publicly traded peer companies. Due to the lack of historical exercise history, the expected term of the Company’s stock options for employees has been determined utilizing the “simplified” method for awards. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The expected dividend yield is zero based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

The fair value of the Company’s common stock was estimated to be $0.29 at September 30, 2019. There was no common stock outstanding at September 30, 2020 and December 31, 2020. In order to determine the fair value, the Company considered, among other things, the Company’s business, financial condition and results of operations; the lack of marketability of the Company’s common stock; the market performance of comparable publicly traded companies; and U.S. and global economic and capital market conditions.

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

The Company used the Black-Scholes option-pricing model to estimate the fair value of options issued using the following assumptions:


	Three Months Ended December 31, 2020			Three Months Ended December 31, 2019
Price of Common Stock	$	—		$	0.29
Volatility	—		%	60		%
Expected term (in years)	—			6.08
Risk free rate	—		%	1.39		%

On May 21, 2020, as a result of the Transaction, there was a change in control when the Company was fully acquired by Via Varejo, and as a condition precedent under the Call Option Agreement, the Company’s Board of Directors cancelled all outstanding options. As noted in the 2016 Equity Incentive Plan Amendment, for instances where a change in control occurs, vesting will be accelerated for all outstanding stock award and a cash payment will be paid to all Option Stockholders by Via Varejo. The total unrecognized compensation cost based on the fair value of the options was recognized as stock-based compensation expense at May 21, 2020 totaling $0.1 million. Additionally, all of the holders of the outstanding options issued under the Plan (“Option Holders”) were immediately cancelled and, in consideration for such cancellation, were entitled to a lump sum cash payment totaling $3.3 million, contributed by Via Varejo to the Company and paid from the Company to the Option Holders. The conversion price per option was determined pursuant to the terms of the Call Exercise Notice. Any additional payment over the original fair value of the stock options ($0.2 million) was recognized by the Company as additional stock-based compensation expense due to the cancellation of stock options, which totaled $3.1 million at May 21, 2020. There were no options issued or outstanding for the three months ended December 31, 2020. The expense for stock-based compensation awards was $0 and $43 thousand for the three months ended December 31, 2020 and 2019 respectively. The expense for stock-based compensation related to the Phantom Shares was $5.3 thousand and $0 for the three months ended December 31, 2020 and 2019.

Note 11 – Concentrations

Accounts Payable

As of December 31, 2020, and September 30, 2020, the Company had approximately 95% and 83%, respectively, of its accounts payable balances held by its top five vendors. During each of the same aforementioned periods, the Company had one and two of its vendors accounting for more than 10% each of the Company’s accounts payables balances, respectively.

Note 12 - Commitments and Contingencies

Operating Leases

The Company has operating leases primarily consisting of office space with remaining lease terms of 1 to 8 years, subject to certain renewal options as applicable.

Leases with an initial term of twelve months or less are not recorded on the balance sheet, and the Company does not separate lease and non-lease components of contracts. There are no material residual guarantees associated with any of the Company’s leases, and there are no significant restrictions or covenants included in the Company’s lease agreements. Certain leases include variable payments related to common area maintenance and property taxes, which are billed by the landlord, as is customary with these types of charges for office space.

The Company determined that the exercise of the renewal option became reasonably certain for its office space in Boston and Brazil; therefore, the payments associated with the renewal are now included in the measurement of the lease liability and ROU asset for those locations. The useful life of the Boston and Brazil office spaces will extend through February 2028 and September 2021, respectively.

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

The Company’s lease agreements generally do not provide an implicit borrowing rate. Therefore, the Company used a benchmark approach to derive an appropriate imputed discount rate. The Company benchmarked itself against other companies of similar credit ratings and comparable quality and derived imputed rates, which were used to discount its real estate lease liabilities. The Company used estimated incremental borrowing rates of 7.52%, 5.73%, and 9.68% on October 1, 2019 for all leases that commenced prior to that date, for two office spaces in Boston, Massachusetts, and one office space in Brazil, respectively.

The Company entered into a sublease agreement with a subtenant on March 1, 2020, the rent commencement date was April 1, 2020, and the lease terminated on December 31, 2020. There was approximately $14 thousand of sublease income recognized related to this agreement for the three months ended December 31, 2020 which was recorded as a reduction to rent expense on the Consolidated Statements of Comprehensive Loss. No related party transactions for lease arrangements have occurred.

Lease Costs

The table below presents certain information related to the lease costs for the Company’s operating leases for the three months ended December 31,2020:


	Three Months Ended December 31, 2020
	Three Months Ended December 31, 2020
Components of total lease cost:
Operating lease expense	$	148,011
Total lease cost	$	148,011

Lease Position as of December 31, 2020

Right of use lease assets and lease liabilities for our operating leases were recorded in the condensed consolidated balance sheet as follows:


	As of December 31, 2020
Assets
Operating lease right of use assets	$	1,872,558
Total lease assets	1,872,558

Liabilities
Current liabilities:
Operating lease liability, current portion	$	342,880
Noncurrent liabilities:
Operating lease liability, net of current portion	1,706,459
Total lease liability	$	2,049,339

Lease Terms and Discount Rate

The table below presents certain information related to the weighted average remaining lease term and the weighted average discount rate for the Company’s operating leases as of December 31, 2020:


Weighted average remaining lease term (in years) – operating leases	6.66
Weighted average discount rate – operating leases	7.7%

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Undiscounted Cash Flows

Future lease payments included in the measurement of lease liabilities on the condensed consolidated balance sheet as of December 31, 2020, for the following five fiscal years and thereafter were as follows:


Year ending September 30,	Operating Leases
Remaining 2021	$	525,434
2022	326,453
2023	333,104
2024	339,755
2025	346,406
2026	353,055
2027	359,714
2028	152,420
Total Minimum Lease Payments	$	2,736,341
Less effects of discounting	(687,002)
Present value of future minimum lease payments	$	2,049,339

Legal Proceedings

The Company may be involved in various lawsuits, claims and proceedings incidental to the ordinary course of business. The Company accounts for such contingencies when a loss is considered probable and can be reasonably estimated.

Between August and October 2017, the Company offered and sold AirTokens pursuant to the 2017 ICO and raised approximately $15 million in capital. The SEC determined that the AirToken offering was an offer and sale of “securities” as defined by Section 2(a)(1) of the Securities Act. On November 16, 2018 the Company settled the 2017 ICO matter with the SEC pursuant to the Settlement Agreement. As part of the Settlement Agreement, Airfox agreed to offer rescission rights to the Potential AirToken Claimants and paid a penalty of $0.3 million to the SEC.

On March 15, 2019, the Company filed an initial registration statement on Form 10 with the SEC under the Exchange Act on a voluntary basis in connection with the Settlement Agreement and to provide current information to Potential AirToken Claimants pursuant to Section 12(a) of the Securities Act. The Form 10 registration statement became effective on May 14, 2019, and on October 18, 2019 we were notified that the SEC had completed its review of the Form 10 registration statement.

In conjunction with the Settlement Agreement, Potential AirToken Claimants were entitled to return their AirTokens to the Company and receive a refund in the amount of consideration paid, plus interest, less the amount of any income received thereon. Pursuant to the Settlement Agreement, as modified in May 2019, our Company timely distributed the claim forms on June 28, 2019. The claims period closed on September 28, 2019. All forms were processed in accordance with the terms and provisions set forth by the Settlement Agreement. The Company received claim forms from 174 Potential AirToken Claimants during the claims period and the Company determined to approve payment on 163 out of the 174 claims, which is approximately 93% of the claim forms received during the claims period. On December 11, 2019, the Company commenced the process of notifying, via email only, all 174 Potential AirToken Claimants of our resolution of their claim.

On or before December 28, 2019 the Company paid all approved claims to approved claimants who returned their AirTokens to us (approximately 93.5% of the total dollar amount of all approved claim refunds). All amounts were refunded in cash and paid through the Company's existing cash and cash equivalent reserves. The total claim amounts including interest, totaled $3.3 million on December 28, 2019. Certain approved claimants did not return their AirTokens to the Company. The Company did not pay approved claims to approved claimants who did not return their AirTokens to the Company. As of September 30, 2020, the amount that was not paid was approximately $0.2 million. All unpaid approved claims are expected to be paid during the 2021 fiscal year upon return to the Company of approved claimants’ AirTokens.

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Additionally, the Settlement Agreement requires our Company to:

Maintain timely filings of all reports required by Section 13(a) of the Exchange Act for at least one year from the date the Form 10 becomes effective (the “Effective Date”) and continue these filings until the Company is eligible to terminate its registration pursuant to Rule 12g-4 under the Securities Exchange Act of 1934.

Provide monthly reports to the SEC which include the amount of the claims paid, and any claims not paid as well as the reasons for non-payment.

Submit to the SEC a final report of its handling of all claims received within seven months from the Effective Date of the Form 10 filing.

Also, on November 16, 2018, The Company entered into a settlement with the Massachusetts Securities Division related to the issuance of AirTokens in the 2017 ICO whereby the Company agreed to pay a penalty of $0.1 million to the Commonwealth of Massachusetts.

As a result of the Company’s inability to timely resolve these accounting issues, the Company did not timely file with the SEC the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019, and the Company’s annual report on Form 10-K for the year ended September 30, 2019, which puts the Company in violation of Section 13(a) of the Exchange Act and the Settlement Agreement. In addition, the Company did not timely file certain Current Reports on Form 8-K. As a result of the Company’s failure to timely file these various reports, the SEC may through civil or administrative actions seek monetary and non-monetary relief from the Company, including fines, penalties, undertakings and conduct-based injunctions, and officer and director bars and suspensions.

On December 30, 2019 a claimant who purchased AirTokens in the 2017 ICO whose claim was denied for failure to comply with the deadlines and the claim process filed a civil lawsuit against the Company in the Supreme Court of the State of New York, County of New York. The lawsuit alleges a claim of sale of unregistered securities to the plaintiff under Section 12(a) of the Securities Act of 1933 in connection with the plaintiff’s purchase of AirTokens in the 2017 ICO. The plaintiff demands a full refund in the amount of consideration paid, plus interest and other costs. On February 25, 2020 the Company settled this claim with the plaintiff and the lawsuit was dismissed.

The claims period officially came to a close on September 28, 2019. All claims were processed in accordance with the terms and provisions set forth in the SEC Order.

Other than with respect to the matters described above, the Company is not aware of any pending or threatened claims that we violated any federal or state securities laws. However, the Company cannot assure that any such claim will not be asserted in the future or that the claimant in any such action will not prevail. The possibility that such claims may be asserted in the future will continue until the expiration of the applicable federal and state statutes of limitations. If the payment of additional rescission claims or fines is significant, it could have a material adverse effect on the Company cash flow, financial condition or prospects and the value of the AirTokens.

On January 29, 2020 Gad Red Propaganda Ltda. (“GAD”) filed a civil lawsuit against the Company’s operating subsidiary banQi Instituição de Pagamento Ltda (dba “banQi”) in 41o Civil Court of Justice of the Estate of Sao Paulo. The lawsuit alleges that banQi failed to fully compensate GAD for certain marketing and other services GAD performed on behalf of banQi pursuant to an alleged strategic partnership GAD entered into with banQi. GAD demands payments of up to approximately U.S. $691 thousand for services performed. banQi filed an answer to the claim on May 15, 2020. The Company accounts for contingencies when a loss is considered probable or possible (more likely than not) and can be reasonably estimated. banQi filed an answer to the claim on May 15, 2020 denying any liability for any payments GAD is seeking.

CARRIER EQ, LLC d/b/a AIRFOX AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Note 13 - Income Taxes

A nominal provision for taxes has been recorded as the Company has incurred net operating losses since inception. Significant components of the Company’s net deferred income tax assets as of December 31, 2020 and September 30, 2020 consist of income tax loss carryforwards. These amounts are available for carryforward indefinitely for use in offsetting taxable income. Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carry-forward period. Prior to May 21, 2020 the Company was organized as a C Corporation for tax purposes. As of May 21, 2020, the Company was converted from a C Corporation to a limited liability company ("LLC"). As a result of this transaction the Company believes it has lost the right to utilize its net operating loss carryovers, non-refundable tax credits and charitable contribution carryover assets associated with the original corporation with which the Company was organized within. Generally, only a Company that has generated a net operating loss should be able to then utilize that net operating loss to reduce its own future profits. In late December 2020, the Company filed Form 8832 with the Internal Revenue Service in order to elect C corporation tax classification for the LLC. The Company filed this request within the 90-day time period allowed for automatic approval of the Company’s tax classification request. On May 21, 2020, the Company was fully acquired by Via Varejo S.A, a corporation organized under the laws of the Federative Republic of Brazil (“Via Varejo”) through Lake Niassa Empreendimentos e Participações Ltda., a limited liability company duly organized under the laws of the Federative Republic of Brazil and wholly-owned by Via Varejo (“Transaction”). As a result of the Transaction, the utilization of some of the net operating loss carryforwards generated in both prior and the current fiscal years may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. As of the date of these financial statements, the Company has not undertaken an effort to convince the IRS that the Company’s net operating losses prior to and through May 21, 2020 should be maintained and available for the Company’s future benefit. The Company may or may not do this in the future. The Company may also have lost the use of the net operating loss assets as a result of IRC 382. The Company may undertake an Internal Revenue Code (“IRC”) 382 study to estimate the amount of the net operating losses that may be utilized in the future. However, whatever the outcome of the IRC 382 study is, the IRS would still have to approve the Company’s right to utilize such carryovers in the future. However, throughout the Company’s history the Company has generated substantial net operating losses. These deferred tax assets arising from the future tax benefits are currently considered not likely to be realized and are thus reduced to zero by an offsetting valuation allowance. As a result, there is no provision for income taxes other than those amounts required to properly accrued for the various state minimum income taxes owed by the Company to the jurisdictions in which it operates.

Brazil Income Taxation

The Company operates a subsidiary in Brazil. All Brazilian resident companies are taxed on their world-wide income. Corporate income tax (IRPJ) is generally assessed at a fixed rate of 15% on annual taxable income, using either the 'actual profits' method (APM) or the 'presumed profits' method (PPM). All legal entities are further subject to Social Contribution on Net Income (CSLL) at the rate of 9% (except for financial institutions, private insurance, as well as certain other prescribed entities, who are taxed at a 15% rate). This amount is not deductible for IRPJ purposes. The tax base is therefore the profit before income tax, after some adjustments, depending on the calculation method (i.e. APM or PPM).

Corporate taxpayers may also be subject to a surcharge of 10% on annual taxable income in excess of 240,000 Brazilian reais (BRL).

Note 14 – Related Party Transaction

The related party transactions between the Company and Via Varejo were revenue totaling $12.2 thousand recognized from the upfront payment for software development services and $151.1 thousand from transactional fees related to the Via Varejo service agreement as of December 31, 2020.

Note 15 – Subsequent Events

On January 6, 2021, Lake Niassa made a capital contribution to Airfox in the amount of $500,000, with no additional membership interests issued or ownership rights granted.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains, and our officers and representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections about the Company’s industry, management’s beliefs, and certain assumptions made by management. Forward-looking statements include our expectations regarding product, services, and maintenance revenue, and short- and long-term cash needs. In some cases, words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “estimates,” variations of these words, and similar expressions are intended to identify forward-looking statements. The statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any forward-looking statements. Risks and uncertainties of our business include those set forth under “Risk Factors” in our Annual Report on Form 10-K (“Form 10-K”) as of and for the year ended September 30, 2020, as filed with the United States Securities and Exchange Commission (“SEC”) on January 8, 2021. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. However, readers should carefully review the risk factors set forth in other reports or documents we file from time to time with the Securities and Exchange Commission, particularly any future Annual Reports on Form 10-K, any Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

COVID-19

During this uncertain time, our critical priorities are the health and safety of our employees and contractors, all of whom began working from home and reduced travel to essential business needs. We currently have a Company-wide work-from-home program. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, local authorities, or that we determine are in the best interests of our employees.

The COVID-19 pandemic has had and continues to have a significant impact on local, state, national and global economies. The actions taken by governments, as well as businesses and individuals, to limit the spread of the disease has significantly disrupted the Company’s normal activities. Numerous businesses, including our contractors, collaborative partners and suppliers have either shut down or are operating on a limited basis, employees have been furloughed or laid off and social distancing has been mandated through stay-in-place orders. The Company expects these actions to have a significant impact on the Company’s results of operations, particularly with respect to research and development, and financial position. The full extent of the impact to the Company due to the impact of the COVID-19 pandemic cannot be reasonably estimated at this time. The extent to which the COVID-19 pandemic will impact the Company will depend on future developments, which are highly uncertain and cannot be reasonably predicted, including the duration of the outbreak, the increase or reduction in governmental restrictions to businesses and individuals, the potential for a resurgence of the virus and other factors.

OVERVIEW

Beginning in February 2017, the Company began exploring consumer applications of its legacy prepaid mobile applications. The Company initiated a business plan to introduce a mobile application that would allow users to earn digital tokens, exchange them for free or discounted mobile data and, ultimately, other goods and services in South America as part of a new international business and ecosystem, the AirToken Project. The AirToken Project included the issuance of AirTokens. The AirToken is an ERC-20 token issued on the Ethereum blockchain.

The Company obtained Digital Assets in August 2017 through early October 2017 from those interested in obtaining AirTokens. The Company raised approximately $15.4 million for the purpose of developing the AirToken Project.

The Company’s digital wallet application, branded as banQi, is a digital banking application capable of leveraging machine learning capabilities to build alternative, smartphone-based credit risk models. This application, currently available on Android and iOS, aims to eliminate the need for traditional financial institutions allowing the underbanked without bank accounts or credit cards to more easily and quickly make many everyday transactions using a smartphone. It will also enable the Company to create an alternative credit scoring system for its users for use in connection with its alternative credit scoring and lending application.

RESULTS OF OPERATIONS

The following comparative analysis of results of operations for the three months ended December 31, 2020 and 2019 are based on the comparative unaudited condensed consolidated financial statements, footnotes, and related information for the periods identified. This analysis should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this filing.

The following table shows our results of operations for the periods indicated. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.


	For the Three Months Ended December 31,				Change
	2020		2019		Dollars		Percentage
Revenue	$	1,620,383	$	1,254,739	$	365,644	29	%
Selling, general and administrative	7,138,651		5,206,039		1,932,612		37	%
Operating expenses	7,138,651		5,206,039		1,932,612		37	%
Loss from operations	(5,518,268)		(3,951,300)		(1,566,968)		40	%
Other (expense) income, net	(202,934)		5,386		(208,320)		(3,868)	%
Income tax benefit	114,033		46,631		(46,631)		145	%
Net loss	$	(5,607,169)	$	(3,899,283)	$	(1,821,919)	44	%

Revenue

Revenue for the three months ended December 31, 2020 was $1.6 million, representing an increase of $0.4 million or a 29% increase, as compared to $1.3 million for the three months ended December 31, 2019 primarily from the Company's recognition of the deferred revenue related to the remaining proceeds received from the AirToken Project which will be recognized, on a straight-line basis, over the remaining estimated development period through March 2022.

Operating expenses

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses for the three months ended December 31, 2020 was $7.1 million representing an increase of $1.9 million or a 37% increase, as compared to $5.2 million for the three months ended December 31, 2019. The primary components of the increase include: general and administrative expenses increased by $1.3 million due to the overall increase of our operating activities, depreciation & amortization increased by $0.4 million due to the current quarter's amortization of Via Varejo capital software, and advertising expenses increased by $0.2 million due to increased activity in Brazil and the increased spend related to marketing efforts.

Other (expense) income, net

Other (expense) income, net for the three months ended December 31, 2020 and 2019 was ($0.2 million) and $5.4 thousand, respectively. The decrease in other (expense) income, net was primarily attributable to an increase in foreign currency transaction loss of $(0.4) million. Interest income increased by $0.2 million primarily due to interest earned from funds in interest bearing accounts.

Income Tax Benefit

Income tax benefit for the three months ended December 31, 2020 and 2019 was $114.0 thousand and $46.6 thousand, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Our working capital deficit decreased $4.9 million or 77%, to $11.3 million as of December 31, 2020 from $6.4 million as of September 30, 2020. The increase in working capital deficit is mainly attributable to the increase in accrued liabilities and due to related party.

We have historically experienced recurring losses and negative cash flows from operations. At December 31, 2020, we had a working capital deficit of $11.4 million which included cash and cash equivalents of $4.7 million. The following table summarizes total current assets, liabilities and working capital deficit for the periods indicated:


	December 31, 2020		September 30, 2020		Change Dollars		Change Percentage
Current assets	$	6,516,978	$	5,530,443	$	986,535	18	%
Current liabilities	17,795,146		11,920,093		5,875,053		49	%
Working capital deficit	$	(11,278,168)	$	(6,389,650)	$	(4,888,518)	77	%

Cash Flows

We have historically financed operations through cash flows from investing and financing activities. At December 31, 2020, our principal source of liquidity was $4.7 million in cash and cash equivalents. Other uses of cash may include capital expenditures and products technology expansion.


	For the Three Months Ended December 31,
	2020		2019
Net cash (used in) provided by operating activities	$	(1,048,622)	$	9,362,354
Net cash used in investing activities	$	(736,355)	$	(1,340,616)
Net cash provided by financing activities	$	2,916,007	$	33,923

Operating Activities

Net cash used in operating activities for the three months ended December 31, 2020 was $1.0 million. Cash was consumed from operations by the loss of $5.6 million, non-cash items consisting primarily of amortization totaling $0.5 million, net of recognizing $39.7 thousand of a deferred gain on AirTokens. Changes in other working capital accounts had a positive impact of $4.0 million on cash, including deferred revenue – Mastercard Program Agreement of $1.2 million, offset by $1.3 million in deferred revenue – AirToken Project.

Net cash provided by operating activities for the three months ended December 31, 2019 was $9.4 million. Cash was consumed from operations by the loss of $3.9 million, non-cash items consisting primarily of amortization totaling $36.8 thousand, stock-based compensation totaling $42.6 thousand, net of recognizing $39.7 thousand of a deferred gain on AirTokens. Changes in other working capital accounts had a positive impact of $13.2 million on cash, including deferred revenue - Master Program Agreement of $16.1 million, offset by $2.7 million in AirToken refund liability and $1.3 million in deferred revenue - AirToken Project.

Investing Activities

Net cash used in investing activities during the three months ended December 31, 2020 was $0.7 million which substantially consisted of the acquisition of capitalized software costs relating to the Via Varejo Services Agreement.

Net cash used in investing activities during the three months ended December 31, 2019 was $1.3 million which substantially consisted of the acquisition of capitalized software costs relating to the Via Varejo Services Agreement.

We expect to make investments in our personnel, systems, corporate facilities, and information technology infrastructure in Fiscal 2021 and thereafter. However, the amount of our capital expenditures has fluctuated materially and may continue to fluctuate on an annual basis.

Financing Activities

Net cash provided by financing activities related primarily to $2.9 million in proceeds from a related party for the three months ended December 31, 2020.

Net cash provided by financing activities related to $33.9 thousand in proceeds from the exercise options for the three months ended December 31, 2019.

SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies, including the assumptions and judgements underlying them, are disclosed in the Notes to the Condensed Consolidated Financial Statements. We have consistently applied these policies in all material respects. We do not believe that our operations to date have involved uncertainty of accounting treatment, subjective judgement, or estimates, to any significant degree.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2020, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were not effective at the reasonable assurance level.

The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board include the following:

For the year ended September 30, 2020, we did not effectively apply the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO framework, due primarily to an insufficient complement of personnel possessing the appropriate accounting and financial reporting knowledge and experience to determine the appropriate accounting for non-recurring transactions and transactions requiring more complex accounting judgment. The Company has not established an audit committee which led to ineffective oversight in the establishment and monitoring of required internal controls and procedures.

We did not maintain an appropriate level of evidence of the effectiveness of controls over the preparation and review of certain reconciliations utilized in the financial close processes to ensure that the information recorded in the general ledger was complete and accurate, including the stock-based compensation process. In addition, we did not maintain effective controls over the preparation and review of the condensed consolidated financial statements to ensure that we identified and accumulated all required supporting information to ensure the completeness and accuracy of the information contained in the condensed consolidated financial statements.

Lastly, we did not implement appropriate general information technology controls as the Company did not maintain effective logical access and program change controls over our third-party systems, including the general ledger system.

Management’s Remediation Initiatives:

In an effort to remediate the identified material weakness and enhance our internal controls, we have initiated the following measures:

As we secure additional working capital, we intend to create additional full-time accounting staff positions in order to increase our personnel resources and technical accounting expertise within the accounting function, to oversee the accounting function and assist with implementing and enhancing our internal controls over financial reporting.

We will continue to utilize an accounting and financial reporting advisory firm with significant experience with publicly held companies to assist our management in evaluating significant transactions and conclusions reached regarding technical accounting matters and financial reporting disclosures for the foreseeable future until our internal team is fully staff.

Changes in Internal Control Over Financial Reporting

Except as set forth above, there were no changes to our internal control over financial reporting during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On January 29, 2020 Gad Red Propaganda Ltda. (“GAD”) filed a civil lawsuit against our Company’s operating subsidiary banQi Instituição de Pagamento Ltda (dba “banQi”) in 41o Civil Court of Justice of the Estate of Sao Paulo. The lawsuit alleges that banQi failed to fully compensate GAD for certain marketing and other services GAD performed on behalf of banQi pursuant to an alleged strategic partnership GAD entered into with banQi. GAD demands payments of up to approximately U.S.$690,820 for services performed. banQi filed an answer to the claim on May 15, 2020 denying any liability for any payments GAD is seeking. This proceeding remains pending.

We are not aware of any pending or threatened claims that we violated any federal or state securities laws. However, we cannot assure you that any such claim will not be asserted in the future or that the claimant in any such action will not prevail. The possibility that such claims may be asserted in the future will continue until the expiration of the applicable federal and state statutes of limitations. If the payment of additional rescission claims or fines is significant, it could have a material adverse effect on our cash flow, financial condition or prospects and the value of the AirTokens. For additional information, see Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources, and also see Note 12 - Commitments and Contingencies - Legal Proceedings in the notes to the condensed consolidated financial statements appearing elsewhere in this Report.

ITEM 1A. RISK FACTORS

Not Applicable

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not Applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5. OTHER INFORMATION

On December 31, 2020, our Company’s Chief Technology Officer, Emanuel Moecklin, resigned from our Company.

ITEM 6. EXHIBITS

INDEX TO EXHIBITS

Incorporated by Reference

Filed or Furnished

Exhibit #

Exhibit Description

Form

Date Filed

Number

Herewith

2.1

Certificate of Ownership and Merger

8-K

5/28/20

2.1

3.1.

Restated Certificate of Incorporation

8-K

5/28/20

3.1

3.2

Certificate of Conversion

8-K

5/28/20

3.2

3.3

Certificate of Formation

8-K

5/28/20

3.3

4.1

Limited Liability Company Agreement

8-K

5/28/20

4.1

4.4

Amended and Restated AirToken Terms & Conditions

10/A

9/25/19

4.4

31.1

Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, executed by the Principal Executive Officer of the Company

Filed

31.2

Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, executed by the Principal Financial Officer of the Company

Filed

32.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Principal Executive Officer of the Company

Filed

32.2

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Principal Financial Officer of the Company

Filed

101

XBRL data files of Financial Statements and Notes contained in this Quarterly Report on Form 10-Q

Filed

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Carrier EQ, LLC.

Date: February 16, 2021	By:	/s/ Douglas de Carvalho Lopes
		Douglas de Carvalho Lopes
		Chief Financial Operating Officer (Principal Financial and Accounting Officer)

Carrier EQ, LLC - FORM 10-Q - February 16, 2021

Attached files

Carrier EQ, LLC Reports