Notes to Consolidated Financial Statements
(Unaudited)
(1)
Condensed Interim Financial Statements
The Company
- Holly Brothers Pictures, Inc. (“we”, “our” or the “Company”) was incorporated in the State of Nevada on February 22, 2013 as PowerMedChairs, and is considered to be an emerging growth company under applicable federal securities laws. On June 2, 2017, the Company changed its name to Holly Brothers Pictures, Inc. On February 1, 2018, the Company acquired 100% of the equity interests in Power Blockchain, LLC (“Power Blockchain”) through an exchange agreement in a transaction that resulted in the transition from the Company’s existing business of repairing and selling wheelchairs to a planned new business of mining crypto-currency.
Interim Financial Information
- The accompanying consolidated financial statements have been prepared by the Company, without audit, in accordance with accounting principles generally accepted in the Unites States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position of the Company as of June 30, 2018, the results of its operations for the three month periods ended June 30, 2018 and 2017, and cash flows for the three month periods ended June 30, 2018 and 2017. These financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended March 31, 2018.
(2)
Summary of Significant Accounting Policies
Basis of Accounting
- The basis is United States generally accepted accounting principles. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Power Blockchain, since February 1, 2018.
Cash and Cash Equivalents
- The Company considers all short-term investments with a maturity of three months or less at the date of purchase to be cash and cash equivalents.
Earnings per Share
- The basic earnings (loss) per share is calculated by dividing the Company’s net income (loss) available to common shareholders by the weighted average number of common shares issued and outstanding during the year. The diluted earnings (loss) per share is calculated by dividing the Company’s net income (loss) available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted as of the first year for any potentially dilutive debt or equity.
The Company has not issued any options or warrants or similar securities since inception.
Revenue recognition
- We recognize revenue when all of the following conditions are satisfied: (1) there is a persuasive evidence of an arrangement; (2) the product or service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.
The Company records revenue when it is realizable and earned and the services have been rendered to the customers. Based on such criteria, the Company has not recorded any revenues from Inception on February 22, 2013 through June 30, 2018.
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Bitcoin
- Internally-generated Bitcoin is recorded at the lower of cost or market value based on industry standard quoted prices for Bitcoin.
Income Taxes
- The provision for income taxes is the total of the current taxes payable and the net of the change in the deferred income taxes. Provision is made for the deferred income taxes where differences exist between the period in which transactions affect current taxable income and the period in which they enter into the determination of net income in the financial statements.
Use of Estimates
- The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
- In the three months ended June 30, 2018, the Financial Accounting Standards Board issued several new Accounting Standards Updates which the Company believes will have little or no applicability to the Company.
(3)
Going Concern
The Company's consolidated financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has not generated any revenues and has suffered recurring losses totaling $2,762,913 since inception. In order to obtain the necessary capital, the Company is seeking equity and/or debt financing. There are no assurances that the Company will be successful, without sufficient financing it would be unlikely for the Company to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from the outcome of this uncertainty.
(4)
Acquisition of Power Blockchain
Effective February 1, 2018, the Company acquired 100% of the equity interests in Power Blockchain through an exchange agreement between the Company and the two owners of Power Blockchain. Pursuant to the exchange agreement, the sole consideration in this transaction was the issuance by the Company of unsecured notes payable to the two owners of Power Blockchain in the amount of $2,200,000. Such notes payable were structured to: (i) mature five years from the date of issuance, (ii) accrue interest at the rate of 5% per annum, (iii) require repayment in four equal installments beginning on the second anniversary of issuance, and (iv) are convertible into the Company’s common stock at a conversion price of $0.13 per share, subject to certain limitations.
We have accounted for the acquisition of Power Blockchain as a business combination, with the Company treated as the acquirer, in accordance with the provisions of ASC 805, Business Combinations. At the time of the transaction, Power Blockchain was a start-up venture with little or no identifiable assets or operations, therefore, we allocated the entire merger consideration in the amount of $2,200,000 to the category of Goodwill for accounting purposes. No pro forma financial information has been presented since Power Blockchain was a start-up venture.
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Due to unforeseen economic and market conditions that arose soon after the acquisition, the results of the Company’s initial bitcoin mining operations through the Power Blockchain entity should be considered inconclusive to date, with no revenues yet generated. As a result of these conditions, we determined that it was appropriate to recognize an impairment adjustment in the amount of $2,200,000, in order to reduce the carrying value of the Goodwill to zero as of March 31, 2018. Additionally, we recognized an impairment adjustment in the amount of $170,186 to reduce the carrying value of the property and equipment deployed in the bitcoin mining operations to zero as of March 31, 2018.
(5)
Stockholders’ Equity
On January 25, 2018, in conjunction with the acquisition of Power Blockchain, the Company purchased a total of 2,661,172 shares of its common stock from the former management group for a negotiated payment in the amount of $340,000, which has been accounted for as Treasury Stock.
On January 29, 2018, also in conjunction with the acquisition of Power Blockchain, the Company issued a total of 1,000,000 shares of common stock, at a purchase price of $0.001 per share, to two new officers who were engaged to affect the transition to the business of bitcoin mining. These stock grants were structured so that they are fully vested over a three year period and are subject to buyback by the Company if either officer should leave the Company before then. We have valued the stock grants at an incremental amount of $129,000, based on the negotiated price of the simultaneously purchased treasury stock noted above (see Note 4), and are amortizing that amount as stock compensation expense over a period of three years (of that amount, $10,750 was amortized in the three months ended June 30, 2018).
Taking the above transactions into consideration, as well as the conversion of a $45,000 note payable into 155,172 shares of common stock in December 2017, the Company had a total of 1,204,000 shares of common stock issued and outstanding as of June 30, 2018.
There have been no issuances of stock options or warrants. However, in March 2018, the Board approved the establishment of a new 2018 Stock Option Plan with an authorization for the issuance of up to 1,000,000 shares of common stock. The Plan is designed to provide for future discretionary grants of stock options, stock awards and stock unit awards to key employees and non-employee directors.
(6)
Notes Payable
As of June 30, 2018 and March 31, 2018, the Company had the following long-term debt obligations:
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June 30,
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March 31,
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2018
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2018
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Promissory notes issued to former owners in acquisition of Power Blockchain, accruing interest at 5% per annum, principal repayments due in four equal installments on 2nd, 3rd, 4th and 5th anniversaries, convertible into common stock at $0.13 per share.
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$
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2,200,000
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$
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2,200,000
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Other short term notes issued to various affiliates of the former owners of Power Blockchain for acquisition of Treasury Stock, computers and equipment, and working capital financing, at stated interest rates of 10%.
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717,335
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645,335
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Total long term debt
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2,917,335
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2,845,335
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Current portion of long term debt
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(717,335)
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(645,335)
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Long term debt, net of current portion
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$
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2,200,000
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$
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2,200,000
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Future maturities of long-term debt as of June 30, 2018 are as follows:
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Year ending June 30, 2019
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$
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-
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Year ending June 30, 2020
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550,000
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Year ending June 30, 2021
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550,000
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Year ending June 30, 2022
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550,000
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Year ending June 30, 2023
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550,000
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$
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2,200,000
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At the time of the Power Blockchain acquisition, Power Blockchain had outstanding unsecured notes payable to the two owners in the amount of $570,000, which were overdue and in default. Shortly thereafter, the Company entered into negotiations with the note holders in an attempt to settle these obligations. As a result of those efforts, a settlement agreement was reached in March 2018 to convert the notes payable into the right for the two note holders to receive periodic issuances of the Company’s common stock of up to approximately 3,000,000 shares each, that would be exempted from registration pursuant to Section 3(a)(10) of the Securities Act of 1933. The settlement agreement stipulated that the issuance of such shares shall occur in respective tranches such that the resulting number of shares owned by each holder would not exceed 4.99% of the Company’s then outstanding shares of common stock. To date, no such shares have been issued. Post-settlement, the Company has no further obligation to repay the notes, therefore, no accounting recognition was given to them in the purchase price allocation for the acquisition. No value has been given to the note holders’ rights to receive shares due to the wide range of possible variables that would need to be quantified in order to make such a valuation and the resulting inherent imprecision.
(7)
Related Party Transactions
The Company has entered into several transactions with various related parties to: (i) purchase shares of Treasury Stock from the former management team, (ii) issue new shares of common stock to officers, and (iii) to provide short-term borrowings for various purposes, as more fully described herein.
The Company does not lease or rent any property. Office services are provided without charge by a director. Such costs are immaterial to the consolidated financial statements and, accordingly, have not been reflected therein. The officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities. If a specific business opportunity becomes available, such persons may face a conflict in selecting between the Company and their other business interests. The Company has not formulated a policy for the resolution of such conflicts.
(8)
Provision for Income Taxes
As of June 30, 2018, the Company had net operating loss carry forwards of approximately $545,000, after taking certain non-deductible items into account, as compared to $420,800 at March 31, 2018, that may be available to reduce future years' taxable income. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these tax loss carry-forwards. Net operating losses will begin to expire in 2038.
(9)
Operating Leases and Other Commitments
The Company has no lease or other obligations.
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(10)
Litigation
From time to time in the ordinary course of our business, we may be involved in legal proceedings, the outcomes of which may not be determinable. The results of litigation are inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in diversion of significant resources. We are not able to estimate an aggregate amount or range of reasonably possible losses for those legal matters for which losses are not probable and estimable, primarily for the following reasons: (i) many of the relevant legal proceedings are in preliminary stages, and until such proceedings develop further, there is often uncertainty regarding the relevant facts and circumstances at issue and potential liability; and (ii) many of these proceedings involve matters of which the outcomes are inherently difficult to predict. We have insurance policies covering potential losses where such coverage is cost effective.
We are not at this time involved in any legal proceedings.
(11)
Subsequent Events
In the month of December 2018, the Company made additional short-term borrowings from a related party in the total amount of $20,200 on the same terms as the borrowings made through June 30, 2018. There have been no other reportable subsequent events that have occurred since June 30, 2018.
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