SECURITIES AND EXCHANGE COMMISSION

Washington, DCD.C. 20549

 

FORM 10-Q

 

For the six monthsquarterly period ended June 30, 2016.2017

 

 

For the transition period from  to  .____________________to ____________________

 

 

HotApp International, Inc.

 

 

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

 

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

 

 

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

 

StateIndicate the number of shares outstanding of each of the issuer’sregistrant’s classes of common equity,stock, as of the latest practicable date.

 

 

 

 

 

 

 

The accompanying notes to the consolidated financial statements are an integral part of these statements.

 

 

 

 

The accompanying notes to the consolidated financial statements are an integral part of these statements.

 

 

 

The accompanying notes to the consolidated financial statements are an integral part of these statements.

 

 

HOTAPP INTERNATIONAL, INCINC.

 

 

Hotapp International, Inc,Inc., formerly Fragmented Industry Exchange, Inc,Inc., (the “Company” or “Group”) was incorporated in the State of Delaware on March 7, 2012 and established a fiscal year end of December 31.31st. The Company’s initial business plan was to be a financial acquisition intermediary which would serve buyers and sellers for companies that are in highly fragmented industries. The Company determined it was in the best interest of the shareholders to expand its business plan. On October 15, 2014, through a sale and purchase agreement (the “Purchase Agreement”) the Company acquired all the issued and outstanding stock of HotApps International Pte Ltd (the “HIP”) from Singapore eDevelopment Limited (“SeD”). HIP owned certain intellectual property relating to instant messaging for portable devices (the “HotApp”). HotApp is a cross-platform mobile application that incorporates instant messaging and ecommerce. It provides a messaging and calling services for HotApp users (text, photo, audio). HotApp can be used on any mobile platform (i.e. IOS Online or Android).

 

Pursuant to thea Purchase Agreement, the Company issued SEDSeD 1,000,000 shares of common stock and 13,800,000 shares of newly created convertible preferred stock. See Note 85 for further description.

 

As of June 30, 2016,2017, details of the Company’s subsidiaries are as follows:

  

 

* On March 25, 2015, HotApps International Pte Ltd acquired 100% of issued share capital in HotApp International Limited.

 

The financial statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern, which assumes that the Company will realize its assets and discharge its liabilities in the ordinary course of business. Since inception, the Company has incurred net losses of $4,116,322$4,944,990 and has net working capital deficit of $261,837$522,096 at June 30, 2016.   Accordingly, these factors raise2017. Management has concluded that due to the conditions described above, there is substantial doubt as toabout the Company’sentities ability to continue as a going concern.   These financial statements doconcern through August 14, 2018. We have evaluated the significance of the conditions in relation to our ability to meet our obligations and believe that our current cash balance along with our current operations will not include any adjustments relatingprovide sufficient capital to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.continue operation through 2017. Our ability to continue as a going concern is dependent upon achieving sales growth, the management of operating expenses and the ability of the Company to obtain the necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due, and upon profitable operations.

 

Our majority shareholder has advised us not to depend solely on it for financing. We have increased our efforts to raise additional capital through equity or debt financingsfinancing from other sources. However, we cannot be certain that such capital (from our shareholders or third parties) will be available to us or whether such capital will be available on terms that are acceptable to us. Any such financing likely would be dilutive to existing stockholders and could result in significant financial operating covenants that would negatively impact our business.  If we are unable to raise sufficient additional capital on acceptable terms, we will have insufficient funds to operate our business or pursue our planned growth.

 

 

 

The condensed consolidated balance sheet at December 31, 20152016 was derived from audited financial statement but does not include all disclosures required by accounting principles generally accepted in the United States of America. The other information in these condensed financial statements isare unaudited but, in the opinion of management, reflectsreflect all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These condensed financial statements, including notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These condensed financial statements should be read in conjunction with the financial statements and additional information as contained in our Annual Report on Form 10-K for the year ended December 31, 2015.2016.

 

 

 

The consolidated financial statements of the Group include the financial statements of Hotapp International, IncInc. and its subsidiaries.  All inter-company transactions and balances have been eliminated upon consolidation.

 

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues, cost and expenses in the financial statements and accompanying notes. Significant accounting estimates reflected in the Group’s consolidated financial statements include revenue recognition, the useful lives and impairment of property and equipment, valuation allowance for deferred tax assets and share-based compensation.

 

 

Cash and cash equivalents consist of cash on hand and highly liquid investments, which are unrestricted from withdrawal or use, or which have original maturities of three months or less when purchased.

 

 

Because of its foreign operations, the Company holds cash in non-US dollars. As of June 30, 2016,2017, cash and cash equivalents of the Group includes,include, on an as converted basis to US dollars $11,044, $4,591$51,697, $59,940 and $37,296$18,790 in Hong Kong Dollars (“HK$”), Reminbi (“RMB”) and Singapore Dollars (“S$”), respectively.

 

The Renminbi (“RMB”) is not a freely convertible currency. The State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of RMB into foreign currencies. The value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market.

 

 

Financial instruments that potentially expose the Group to concentration of credit risk consist primarily of cash and cash equivalents.  The Group places their cash with financial institutions with high-credit ratings and quality.

 

 

Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the following estimated useful lives:

 

 

 

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

 

 

The Group recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. The Group currently has no$103,936 revenue butfrom its services rendered on projects, and plans to derive its revenue from membership subscription services, offering the platform for Enterprise Collaboration with integrationintegration. Revenue is currently recognized under contract accounting due to the significant software production required, and consulting servicesthe percentage-of-completion method is used in accordance with ASC 605-35. The Company is recognizing the percentage-of-completion based on input measures that measured directly from expenses incurred, and management reviews the progress to completion. In case of the 3% iGalen revenue on project basis.sharing, revenue is recognized in accordance with ASC 985-605-25.

 

 

 

Research and development expenses primarily consist of (i) salaries and benefits for research and development personnel, and (ii) office rental, general expenses and depreciation expenses associated with the research and development activities.  The Company’s research and development activities primarily consist of the research and development of new features for its mobile platform and its self-developed mobile games. Expenditures incurred during the research phase are expensed as incurred.

 

Current income taxes are provided for in accordance with the laws of the relevant tax authorities.  Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Net operating loss carry forwards and credits are applied using enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics.

 

The impact of an uncertain income tax position on the income tax return is recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.  Interest and penalties on income taxes will be classified as a component of the provisions for income taxes. The Group did not recognize any income tax due to uncertain tax position or incur any interest and penalties related to potential underpaid income tax expenses for the years ended December 31, 20152016 or 2014,2015, respectively.

 

Uncertainties exist with respect to the application of the New EIT Law to our operations, specifically with respect to our tax residency.  The New EIT Law specifies that legal entities organized outside of the PRC will be considered residents for PRC income tax purposes if their “de facto management bodies” as “establishments that carry on substantial and overall management and control over the operations, personnel, accounting, properties, etc. of the Company.”  Because of the uncertainties that have resulted from limited PRC guidance on the issue, it is uncertain whether our legal entities outside the PRC constitute residents under the New EIT Law.  If one or more of our legal entities organized outside the PRC were characterized as PRC residents, the impact would adversely affect our results of operations.

 

 

The functional and reporting currency of the Company is the United States dollar (“U.S. dollar”). The financial records of the Company’s subsidiaries located in Singapore, Hong Kong and the PRC are maintained in their local currencies, the Singapore Dollar (S$), Hong Kong Dollar (HK$) and Renminbi ("RMB"), which are also the functional currencies of these entities.

 

Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency during the year are converted into functional currency at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains and losses are recognized in the statement of operations.

 

The Company’s entities with functional currency of Renminbi, Hong Kong Dollar and Singapore Dollar, translate their operating results and financial positions into the U.S. dollar, the Company’s reporting currency. Assets and liabilities are translated using the exchange rates in effect on the balance sheet date. Revenues, expenses, gains and losses are translated using the average rate for the year. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of comprehensive income (loss).

 

For the six months ended June 30, 2016,2017, the Company recorded other comprehensive loss from translation loss of $114,321$121,667 in the consolidated financial statements.

 

 

Leases where the rewards and risks of ownership of assets primarily remain with the lessor are accounted for as operating leases. Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over the lease periods.

 

 

Comprehensive income (loss) includesinclude gains (losses) from foreign currency translation adjustments. Comprehensive income (loss) is reported in the consolidated statements of operations and comprehensive loss.

 

 

 

Basic loss per share is computed by dividing net loss attributable to shareholders by the weighted average number of shares outstanding during the period.

 

The Company's convertible preferred shares are not participating securities and have no voting rights until converted to common stock. As of June 30, 2016,2017, no shares of preferred stock are eligible for conversion into voting common stock.

 

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. We do not expect the adoption of this guidance to have a significant effect on our consolidated financial statements.

 

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The updated standard is effective for us beginning on January 1, 2017. We do not expect the adoption of this guidance to have a significant effect on our consolidated financial statements.

 

 

Fixed assets, net consisted of the following:

 

 

Depreciation expenses charged to the consolidated statements of operations for the six months ended June 30, 2017 and 2016 were $18,067 and 2015 were $24,075, and $15,817, respectively.

 

 

Accrued expenses and other current liabilities consisted of the following:

 

 

 

 

The Company is authorized to issue 500 million1 billion shares of common stock and 15 million shares of preferred stock. The authorized share capital of the Company’s common stock was increased from 500 million to 1 billion on May 5, 2017.  Both share types have a $0.0001 par value.  As of June 30, 20162017 and 2015,2016, the Company had issued and outstanding, 506,898,576 and 5,909,687 of common stock, respectively and 0 and 13,800,000 shares of preferred stock, respectively.

 

 

On July 13, 2015, SED acquired 777,687 shares of the Company common stock by converting outstanding loans made to the Company into common stock of the Company at a rate of $5.00 per share (rounded to the nearest full share). After such transactions SED owned 98.17% of the Company.

 

 

Pursuant to the Purchase Agreement, dated October 15, 2014, the Company issued 1,000,000 shares of common stock to SED.   Such amount represented 19% ownership in the Company.  Pursuant to the Purchase Agreement, dated October 15, 2014, the Company issued 13,800,000 shares of a class of preferred stock called Perpetual Preferred Stock (“Preferred Stock”) to SED. The Preferred Stock has no dividend or voting rights. The Preferred Stock is convertible to common stock of the Company dependent upon the number of commercial users of the Software. For each 1,000,000 commercial users of the Software (without duplication), SED shall have the right to convert 1,464,000 shares of Perpetual Preferred Stock into 7,320,000 shares of Common Stock, so that there must be a minimum of 9,426,230 commercial users in order for all of the shares of the Perpetual Preferred Stock to be converted into common stock of the Company (13,800,000 shares of Preferred Stock convertible into 69,000,000 shares of common stock).

 

Other than the conversion rights described above, the Preferred Stock has no voting, dividend, redemption or other rights.

 

 

 

On April 10, 2015, the Company entered into a lease agreement for 347 square feet of office space in Kowloon, Hong Kong. TheseThis lease commenced on April 20, 2015 and runs through April 19, 2017 with monthly payments of $2,581.$2,574. The Company was required to put up a security deposit of $5,162.$5,147. On March 16, 2017, the Company entered into a lease agreement for 1,504 square feet of office space in Kowloon, Hong Kong. This lease commenced on March 16, 2017 and runs through March 31, 2019 with monthly payments of $3,266. The Company was required to put up a security deposit of $6,533. For the six months ended June 30, 2016,2017, the Company recorded rent expense of $16,266$20,721 for this office.these offices.

 

The following is a schedule by years of future minimum lease payments:

 

 

TheFor the period up to June 21, 2017 covered by this report, Mr. Chan Heng Fai was the Company’s Chief Executive Officer (CEO) and Directora member of the Board. Mr. Chan is also the Chief Executive Officer of SED.   SEDSingapore eDevelopment Limited (“SeD”), a Singapore company.   SeD is the majority shareholder of the Company. On June 21, 2017, Mr. Chan voluntarily resigned as CEO and President of the Company, and will remain as Chairman of the Board. On June 21, 2017, the Company appointed Mr. Lum Kan Fai as the Company’s CEO and President. The Company’s other two directors one beingincluded Mr. Lum Kan Fai, who served as the Company’s Chief Technology Officer during the period covered by this report and who has entered into an employment arrangement with the Company’s wholly owned subsidiary, HotApp International Limited. As of the date of this report, the Company has not entered into any employment arrangement with any director or officer.

 

 

The Company has evaluated subsequent events through the date that the financials were issued.

 

 

Certain matters discussed herein are forward-looking statements. Such forward-looking statements contained in this Form 10-Q involve risks and uncertainties, including statements as to:

 

 

These forward-looking statements can generally be identified as such because the context of the statement will include words such as we “believe,” “anticipate,” “expect,” “estimate” or words of similar meaning.   Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements.   Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which could cause actual results to differ materially from those anticipated as of the date of filing of this Form 10-Q.   Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.  The forward-looking statements included herein are only made as of the date of filing of this Form 10-Q, and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

 

This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those anticipated in these forward-looking statements.

 

Background

 

Hotapp International, Inc,Inc., formerly Fragmented Industry Exchange Inc,Inc., (the “Company” or “Group”) was incorporated in the State of Delaware on March 7, 2012 and established a fiscal year end of December 31.31st. The Company’s initial business plan was to be a financial acquisition intermediary which would serve buyers and sellers for companies that are in highly fragmented industries. The Company determined it was in the best interest of the shareholders to expand its business plan. On October 15, 2014, through a sale and purchase agreement (the “Purchase Agreement”) the Company acquired all the issued and outstanding stock of HotApps International Pte Ltd (the “HIP”) from Singapore eDevelopment Limited (“SeD”). HIP owned certain intellectual property relating to instant messaging for portable devices (the “HotApp”). HotApp is a cross-platform mobile application that incorporates instant messaging and ecommerce. It provides a messaging and calling services for HotApp users (text, photo, audio). HotApp can be used on any mobile platform (i.e. IOS Online or Android).

 

 

 

* On March 25, 2015, HotApps International Pte Ltd acquired 100% of issued share capital in HotApp International Limited.

 

The Group has relied significantly on SeD as its principal sources of funding during the year. The Board has, in the meantime, reviewed and approved the restructuring of HotApp, by which has since reduced by half its personnel resources as compared to 10 currently from 40 previously. As part of the revamp,2015. HotApp will integratehas revamped its business model and technology platform to focus on business-to-business (“B2B”) functions on its platform, transforming it from a business-to-consumer (“B2C”) to anservices, built around enterprise B2Bcommunications and workflow. Its product focusing on threeline will target these industries: (i) network marketing businesses;and direct marketing; (ii) enterprise messagingVoice-over-IP; (iii) enterprise messaging; (iv) real estate; (v) social media; (vi) e-commerce; (vii) investor relations; (viii) healthcare and collaboration solution;wellness; and (iii)(ix) hospitality, application platform.combining HotApp applications with hotel-room management. This strategic shift is intended to create commercial value with a sharper focus.

 

 

 

OurHotApp, our software application, (“HotApp”) is a community communications ecosystem (the “Platform”), connecting users who wish to seek out both local and global communities (“Users” or “Communities”) and equipping them with necessary tools to communicate effectively across borders. HotApp will monetize the relationship between brands, Online-2-Offline (“O2O”) operators and service providers (collectively, “Enterprises”) and the HotApp Communities, and in the process mediate something of value to both parties. By targeting communities beyond demographics (ie. topical interest, common activities) Enterprises will be able to create targeted marketing campaigns with the expectation of higher conversion rates. The respective features of HotApp like HotNearby and HotChat and HotRoom enable peer to peer buying decision influence more effectively compared to generic social media. HotApp business partners actually have reason to believe they can market their product or service as a solution to the customer and their marketing network.

 

With our platformPlatform, users can discover and build their own communities and create valuable content. Our platformPlatform tools empower these communities to share their thoughts and words across multiple channels. As these communities grow, they provide the critical mass that attracts enterprises. Enterprises in turn enhance user experience with premium contents, all of which are facilitated by the transactions of every stakeholder via e-commerce.

 

 

MobileAccording to a November 2016 forecast by eMarketer, a leading research company for digital business professionals, more than one-quarter of the world’s population will be using mobile messaging apps by 2019. eMarketer also projected that mobile phone messaging apps willwould be used by more than 1.4 billion consumerspeople in 2015, up 31.6% on the previous year according2016, an increase of almost 16% from 2015. The Asia-Pacific region is home to eMarketer’s forecast for these services.

In addition to the substantial opportunities in consumer messaging market, Enterprise Messaging and Collaboration Services and Apps are widely deployed in Small Medium Enterprises (SMEs) and Large Enterprise as an alternative to Email and Intranet. This emerging need in Enterprise Messaging and Collaboration offers a huge opportunity for IT service providers in offering development, integration and white label services for SMEs and Corporations. According to Statista, global messaging platform service providers are expected to bring in US$1.8 billion and represent 80%revenue riding on the growth in growing demand of smartphone users.Enterprise Messaging.

Based upon the above trends, we believe significant opportunities exist for:

 

 

Our Plan of Operations and Growth Strategy

 

We believe that we have significant opportunities to further enhance the value we deliver to our Users.    We intend to pursue the following growth strategy:

 

 

 

 

 

 

Revenue consist primarily of the service rendered on projects which require significant software production. Total revenue for the three months ended June 30, 2017 and 2016 were $37,758 and 2015 $0 respectively. 

 

 

Research and development expenses consists primarily of salary and benefits.   Expenditures incurred during the research phase are expensed as incurred.   We expect our research and development expenses to maintain with moderate changes in line with business activities.  Total research and development for the quarters ended June 30, 2017 and 2016 were $50,109 and 2015 were $65,440, and $285,527, respectively.  The decrease was due to the reduction of development staff which is in line with the streamlining and restructuring of the Company.

 

 

Sales and marketing expenses consist primarily of third party professional service providers. We expect our sales and marketing expenses to maintain with moderate changes in line with business activities. Total sales and marketing expenses for the quarters ended June 30, 2017 and 2016 were $0 and 2015 were ($59) and $119,636,, respectively. The negative ($59) was due to a reversal of $65,252 provision for HotApp Credit Points because the program was eliminated.

Sales and marketing expenses consist primarily of third party professional service providers. We expect our sales and marketing expenses to maintain with moderate changes in line with business activities. Total sales and marketing expenses for the six months ended June 30, 2017 and 2016 were $0 and ($64,635), respectively. The negative ($64,635) was due to a reversal of $65,252 provision for HotApp Credit Points because the program was eliminated.

 

 

General and administrative expenses consist primarily of salary and benefits, professional fees and rental expense.  We expect our general and administrative expenses to maintain with moderate changes in line with business activities.  Total general and administrative expenses for the quarters ended June 30, 2016 and 2015 were $124,578, and $233,771, respectively. 

 

 

In the six months ended June 30, 20162017 and 2015,2016, we have incurred $112,504$18,067 and $426$24,075 for depreciation, $2,680 and $0 for the deposits written off, and $131 and $0 for loss on disposal of fixed assets. In the six months ended June 30, 2017 and 2016, we have incurred $(108,421) and $(112,504) in foreign exchange gain, and $1$(1) and $0$(1) in interest income.

 

 

At June 30, 2016,2017, we had cash of $62,952$144,720 and working capital deficit of $261,837.$522,096. Cash had decreasedincreased during the six months ended June 30, 20162017 primarily due to operating losses incurred during the first halfreceipt of payment for the year.revenue earned.

 

We had a total stockholders’ deficit of $179,371$485,106 and an accumulated deficit of $4,116,322$4,944,990 as of June 30, 20162017 compared with a total stockholders’ equitydeficit of $363,092$498,315 and an accumulated deficit of $3,688,180$4,628,976 as of December 31, 2015.2016. This difference is primarily due to the net loss incurred during the first halfperiod and the issuance of 500,988,889 shares of common stock by debt conversion.

For the year.six months ended June 30, 2017, we recorded a net loss of $316,014. We made a positive adjustment of $18,067 due to depreciation, a positive adjustment of $2,680 due to deposits written off, a positive adjustment of $131 due to loss on disposal of fixed asset, and a negative adjustment of $108,421 due to foreign currency transaction gain. We had a negative change of $7,270 due to costs in excess of billings and account receivable, a positive change of $3,684 due to security deposit and other receivables, and a negative change of $10,337 due to prepaid expenses. We had a negative change of $32,329 due to accounts payable and accrued expenses. As a result, we had net cash used in operating activities of $449,809 for the six months ended June 30, 2017.

 

For the six months ended June 30, 2016, we recorded a net loss of $428,142. We made a positive adjustment of $24,075 due to depreciation and a negative adjustment of $112,504 due to foreign currency transaction gain. We had a positive change of $27,071 due to prepaid expenses and a positive change of $7,036 due to accrued taxes payable.payable and franchise fees. We had a negative change of $40,003 due to accounts payable and accrued expenses. As a result, we had net cash used in operating activities of $522,467 for the six months ended June 30, 2016.

 

For the six months ended June 30, 2015,2017, we recorded a net lossspent $9,092 on the acquisition of $1,113,645. We made a positive adjustment of $15,817 due to depreciation. We had a negative change of $97,098 due to accounts payable and accrued expenses and $13,943 due to security deposits and other assets. We had a negative change of $3,648 due to prepaid expenses and $3,564 due to accrued taxes payable. As a result, we hadfixed assets, resulting in net cash used in operatinginvesting activities of $1,216,081$9,092 for the six months ended June 30, 2015.period.

 

For the six months ended June 30, 2016, we received $93,678$93,768 on the disposal of fixed assets, resulting in net cash provided by investing activities of $92,100 for the period.

 

For the six months ended June 30, 2015,2017, we spent $38,803 on the acquisition of fixed assets, resulting inhad net cash used in investingprovided by financial activities of $38,803 for the period.$514,091 due to advances from an affiliate amounting to $514,091.

 

For the six months ended June 30, 2016, we did not pursue any financing activities.

 

 

We will need to raise additional capital through equity or debt financings.financing. However, we cannot be certain that such capital (from SED or third party) will be available to us or whether such capital will be available on a term that is acceptable to us. Any such financing likely would be dilutive to existing shareholders and could result in significant financial and operating covenants that would negatively impact our business. If we are unable to raise sufficient additional capital on acceptable terms, we will have insufficient funds to operate our business and pursue our business plan.

 

 

Consistent with Section 144 of the Delaware General Corporation Law, it is our current policy that all transactions between us and our officers, directors and their affiliates will be entered into only if such transactions are approved by a majority of the disinterested directors, are approved by vote of the stockholders, or are fair to us as corporation as of the time it is authorized, approved or ratified by the board. We will conduct an appropriate review of all related party transactions on an ongoing basis.

 

 

Our discussion and analysis of the financial condition and results of operations are based upon the Company’s financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for revenue recognition, allowance for doubtful accounts, inventory reserves and income taxes. These policies require that we make estimates in the preparation of our financial statements as of a given date.

 

Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

 

 

The CompanyGroup recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. The Group currently has no$103,936 revenue butfrom its services rendered on projects, and plans to derive its revenue from membership subscription services, offering the platform for mobile games developed by third partiesEnterprise Collaboration with integration. Revenue is currently recognized under contract accounting due to the significant software production required, and other services, including the usepercentage-of-completion method is used in accordance with ASC 605-35. The Company is recognizing the percentage-of-completion based on input measures that measured directly from expenses incurred, and management reviews the progress to completion. In case of the paid emoticons and mobile marketing services.3% iGalen revenue sharing, revenue is recognized in accordance with ASC 985-605-25.

 

 

Research and development expenses primarily consist of (i) salaries and benefits for research and development personnel, and (ii) office rental, general expenses and depreciation expenses associated with the research and development activities.  The Company’s research and development activities primarily consist of the research and development of new features for its mobile platform and its self-developed mobile games. Expenditures incurred during the research phase are expensed as incurred.

 

 

Current income taxes are provided for in accordance with the laws of the relevant tax authorities.  Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Net operating loss carry forwards and credits are applied using enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics.

 

Uncertainties exist with respect to the application of the New EIT Law to our operations, specifically with respect to our tax residency.  The New EIT Law specifies that legal entities organized outside of the PRC will be considered residents for PRC income tax purposes if their “de facto management bodies” as “establishments that carry on substantial and overall management and control over the operations, personnel, accounting, properties, etc. of the Company.”  Because of the uncertainties resulted from limited PRC guidance on the issue, it is uncertain whether our legal entities outside the PRC constitute residents under the New EIT Law.  If one or more of our legal entities organized outside the PRC were characterized as PRC residents, the impact would adversely affect our results of operations.

 

Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of SEC Regulation S-KS-K.

 

Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures for the Company.

 

 

Based on the evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SECs”) rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

 

Other than described above, thereThere have been no changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  

 

 

We are not a party to any legal proceedings. Management is not aware of any legal proceedings proposed to be initiated against us. However, from time to time, we may become subject to claims and litigation generally associated with any business venture operating in the ordinary course.

 

 

 

The following exhibits are incorporated intofiled with this Form 10-Q Quarterly Report:

 

SIGNATURES

 

In accordance with Section 13 or 15(d)Pursuant to the requirements of the ExchangeSecurities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.