UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended June 30, 20172018

 

or

 

For the transition period from ____________________to ____________________

 

333-194748

 

HotApp International,Blockchain Inc.

 

 

301-971-3940

 

 

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, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

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 ☑

 

Indicate the number of shares outstanding of each the registrant’s classes of common stock, as of the latest practicable date. As of August 14, 2017,July 30, 2018, there were 506,898,576 shares outstanding of the registrant’s common stock $0.0001 par value.

 

 

 

This report contains forward-looking statements that involve a number of risks and uncertainties. Although our forward-looking statements reflect the good faith judgment of our management, these statements can be based only on facts and factors of which we are currently aware. Consequently, forward-looking statements are inherently subject to risks and uncertainties. Actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements.

 

Forward-looking statements can be identified by the use of forward-looking words such as “may,” “will,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. Such forward-looking statements are based on our management’s current plans and expectations and are subject to risks, uncertainties and changes in plans that may cause actual results to differ materially from those anticipated in the forward-looking statements. You should be aware that, as a result of any of these factors materializing, the trading price of our common stock may decline. These factors include, but are not limited to, the following:

 

 

The cautionary statements made in this quarterly report are intended to be applicable to all related forward-looking statements wherever they may appear in this report.

 

We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly update any forward looking-statements, whether as a result of new information, future events or otherwise.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,HotApp Blockchain Inc., formerly Fragmented Industry Exchange,HotApp International, Inc., (the “Company” or “Group”) was incorporated in the State of Delaware on March 7, 2012 and established a fiscal year end of December 31st.31. 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”(“HIP”) from Singapore eDevelopment Limited (“SeD”). HIP owned certain intellectual property relating to instant messaging for portable devices (the “HotApp”(“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). Started from a cross platform mobile application that incorporate messaging and eCommerce, HotApp has evolved as a platform Service provider with application framework serving vertical industry such as multilevel Marketing. The messaging and calling services has been terminated in 2017. HotApp can be used on any mobile platform (i.e. IOS Online or Android).

 

As of June 30, 2017,2018, details of the Company’s subsidiaries are as follows:

 

 

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

 

TheThese 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 $4,944,990$5,400,306 and has net working capital deficit of $522,096$979,688 at June 30, 2017.2018. Management has concluded that due to the conditions described above, there is substantial doubt about the entities ability to continue as a going concern through August 14, 2018.July 30, 2019. 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 provide sufficient capital to continue operation through 2017.2018. 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 itthem for financing. We have increased our efforts to raise additional capital through equity or debt financingfinancings 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.

 

These 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 this uncertainty.

 

 

Basis of presentation

 

The condensed consolidated balance sheet at December 31, 2016 was derived from auditedaccompanying 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 are unaudited but, in the opinion of management, reflect 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.(“U.S. GAAP”). These condensed consolidated 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, 2016.2017. Results of operations for the six month periods ended June 30, 2018 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2018. The other information in these condensed consolidated financial statements is unaudited but, in the opinion of management, reflects 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.

 

 

Basis of consolidation

 

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

 

Use of estimates

 

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

 

Cash and cash equivalents consist of cash on hand andThe Company considers all highly liquid investments which are unrestricted from withdrawal or use, or which have original maturitieswith a maturity of three months or less when purchased.at the date of acquisition to be cash equivalents. There were no cash equivalents as of June 30, 2018 and December 31, 2017.

 

Foreign currency risk

 

Because of its foreign operations, the Company holds cash in non-US dollars. As of June 30, 2017,2018, cash and cash equivalents of the Group include,includes, on an as converted basis to US dollars $51,697, $59,940$47,228, $14,623 and $18,790$19,089 in Hong Kong Dollars (“HK$”), 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.

 

Concentration of credit risk

 

Financial instruments that potentially expose the Group to concentration of credit risk consist primarily of cash. Although the cash andat each particular bank in the United States is insured up to $250,000 by Federal Deposit Insurance Corporation (FDIC), the Group exposes to credit risk due to its concentration of cash equivalents.in foreign countries. The Group places their cash with financial institutions with high-credit ratings and quality. The Group also exposes to credit risk due to its concentration for customers with revenue in excess of 10%.

 

Fixed assets, net

 

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

 

FairThe carrying value isof cash and cash equivalents, accounts payable and accrued liabilities, and borrowings, as reflected in the price that would be received from selling an assetbalance sheets, approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or paid to transferdisclosed in the financial statements together with other information relevant for making a liability in an orderly transaction between market participants at the measurement date. When determiningreasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair value measurements forvalues of financial assets and financial liabilities required or permittedhave been determined and disclosed; otherwise only available information pertinent 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.has been disclosed.

 

Revenue recognition

 

The Group recognizesAccounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue when persuasive evidence of an arrangement exists, delivery has occurred,and cash flows arising from the sales price is fixedentity's contracts to provide goods or determinable, and collectability is reasonably assured. The Group currently has $103,936 revenue from its services rendered on projects, and plans to derive its revenue from membership subscription services, offeringcustomers. Under the platform for Enterprise Collaboration with integration. Revenue is currently recognized under contract accounting due to the significant software production required, and the 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 sharing,new standard, revenue is recognized when a customer obtains control of promised goods or services in accordancean amount that reflects the consideration the entity expects to receive in exchange for those goods or services. The Company adopted this new standard on January 1, 2018 under the modified retrospective method to all contracts not completed as of January 1, 2018 and the adoption did not have a material effect on our financial statements but we expanded our disclosures related to contracts with ASC 985-605-25.customers below.

 

 

Research and development expenses

 

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.

 

Income taxes

 

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, 20162017 or 2015,2016, 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.'

 

Foreign currency translation

 

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, 2017,2018, the Company recorded other comprehensive loss from translation lossgain of $121,667$68,663 in the consolidated financial statements.

 

Operating leases

 

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)

 

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

 

Loss per share

 

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, 2017,2018, no shares of preferred stock are eligible for conversion into voting common stock.

 

 

On Feb. 25, 2016, the Financial Accounting Standards Board (FASB) released Accounting Standards Update No. 2016-02, Leases (Topic 842) (the Update). The new leasing standard presents dramatic changes to the balance sheets of lessees. Lessor accounting is updated to align with certain changes in the lessee model and the new revenue recognition standard. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. The Company does not expect the adoption of ASU No. 2016-02 to have a material impact on its 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, 2018 and 2017 were $10,422 and 2016 were $18,067, and $24,075, respectively.

 

 

Accrued expenses and other current liabilities consisted of the following:

 

 

 

The Company is authorized to issue 1 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, 20172018 and 2016,December 31, 2017, 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.stock.

 

 

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.

 

On March 27, 2017, the Company entered into a Loan Conversion Agreement with SeD, pursuant to which SeD agreed to convert $450,890 of debt owed by Company to SeD into 500,988,889 common shares at a conversion price of $0.0009. The captioned shares were issued on June 9, 2017, and SeD owned 99.979% of the Company after such transactions.

 

 

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).

 

On March 27, 2017, SeD and the Company entered into a Preferred Stock Cancellation Agreement, by which SeD agreed to cancel its 13,800,000 shares Perpetual Preferred Stock issued by the Company. On June 8, 2017, a Certificate of Retirement for 13,800,000 shares of the Perpetual Preferred Stock has been filed to the office of Secretary of State of the State of Delaware.

 

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

 

 

On May 9, 2016, the Company entered into a lease agreement for 1,231 square feet of office space in Guangzhou, China. The lease commenced on May 9, 2016 and runs through May 8, 2018 with monthly payments of $2,279.$2,421. The Company has renewed the lease agreement for another year until May 29, 2019 with monthly payments of $2,542. The Company was required to put up a security deposit of $4,557.$4,666. For the six months ended June 30, 2017,2018, the Company recorded rent expense of $13,513$14,770 for the Guangzhou office.

 

On April 10, 2015, the Company entered into a lease agreement for 347 square feet of office space in Kowloon, Hong Kong. This lease commenced on April 20, 2015 and runs through April 19, 2017 with monthly payments of $2,574. The Company was required to put up a security deposit of $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.$3,253. The Company was required to put up a security deposit of $6,533.$6,501. For the six months ended June 30, 2017,2018, the Company recorded rent expense of $20,721$19,518 for these offices.the office.

 

The following is a schedule by years of future minimum lease payments:payments under non-cancellable operating leases:

 

 

 

As of the date of this report,June 30, 2018, the Company has not entered into any employment arrangement with anyamount due to SeD for $947,592, plus an amount due to a director or officer.of $5,273 and has an amount due from an affiliate for $2,200. The Company has made full impairment provision for the amount due from the affiliate.

 

 

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

 

 

 

 

 

 

 

 

Background

 

Hotapp International,HotApp Blockchain Inc., formerly Fragmented Industry ExchangeHotApp International, Inc., (the “Company” or “Group”) was incorporated in the State of Delaware on March 7, 2012 and established a fiscal year end of December 31st.31. 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). Started from a cross platform mobile application that incorporate messaging and eCommerce, HotApp has evolved as a platform Service provider with application framework serving vertical industry such as multilevel Marketing. The messaging and calling services has been terminated in 2017. HotApp can be used on any mobile platform (i.e. IOS Online or Android). On 1 January 2018, the Company’s new subsidiary, Crypto Exchange Inc., has issued 1,000 shares of its common stock to the Company.

 

As of June 30, 2017,2018, details of the Company’s subsidiaries are as follows:

 

 

* On March 25, 2015, HotApps International Pte Ltd acquired 100% of the issued share capital inand outstanding shares of 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 approvedWith the restructuring ofefforts in 2016, HotApp by which has since reduced by half its personnel resources as compared to 2015. HotApp hasexpense runway significantly and had revamped its business model and technology platform to focus on business-to-business (“B2B”) services, built around enterprise communications and workflow. Its product line will target these industries: (i) network and direct marketing; (ii) enterprise Voice-over-IP; (iii) enterprise messaging; and (iv) real estate; (v) social media; (vi) e-commerce; (vii) investor relations; (viii) healthcare and wellness; and (ix) hospitality, combining HotApp applications with hotel-room management.e-commerce. This strategic shift is intended to create commercial value with a sharper focus.

 

 

HotApp, our softwareThe Company is positioned as a technology platform serving Business to Business (B2B) needs in eCommerce, collaboration and supply chain. The Company has built a number of reusable application is amodules and framework. These properties will help enterprises and 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, andtransform their business model in the process mediate something of value to both parties.

 

 

Mobile is increasingly playing a leading research company for digital business professionals, more than one-quarter ofcritical role in the world’s population will be using mobile messaging apps by 2019. eMarketer also projected that mobile phone messaging apps would be used by more than 1.4 billion people in 2016, an increase of almost 16% from 2015. The Asia-Pacific region is home to more thanB2B customer journey. In fact, 50% of all chat app users worldwide, with more than 805 million consumers in 2016.

 

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

 

 

 

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

 

 

 

Summary of Key Results

 

 

 

Revenue consist primarily of the service rendered on projects which require significant software production. Total revenue for the three months ended June 30, 2018 and 2017 were $82,236 and 2016 were $37,758, including $69,043 and $0$37,582 from related parties respectively.

 

 

Cost of revenue consist primarily of salary and outside consulting expenses incurred directly to the projects. Total cost of revenue for the three months ended June 30, 2018 and 2017 were $43,759 and 2016 were $2,459, and $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 quartersthree months ended June 30, 2018 and 2017 were $0 and 2016 were $50,109, and $65,440, respectively. The decrease was due to the reduction of development staff which is in line witha result from the streamlining and restructuring of the Company.

 

 

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 quartersthree months ended June 30, 2018 and 2017 were $156,159 and 2016 were $200,657 and $124,578,$210,219, respectively. The increase was mainly due to the increase in salary and benefits.

 

 

In the quartersthree months ended June 30, 20172018 and 2016,2017, we have incurred $9,431$(85,156) and $9,866 for depreciation, $17$42,849 in foreign exchange (loss) gain, $0 and $0$(17) for the deposits written off, $6 and $131$1 interest income and $135 and $0 for loss on disposal of fixed assets. In the quarters ended June 30, 2017 and 2016, we have incurred $(42,849) and $(111,750) in foreign exchange gain, and $(1) and $(1) in interestother sundry income.

 

 

 

Revenue consist primarily of the service rendered on projects which require significant software production. Total revenue for the six months ended June 30, 2018 and 2017 were $109,905 and 2016 were $103,936, including $92,089 and $0$69,854 from related parties respectively.

 

 

Cost of revenue consist primarily of salary and outside consulting expenses incurred directly to the projects. Total cost of revenue for the six months ended June 30, 2018 and 2017 were $58,163 and 2016 were $16,564, and $0, respectively.

 

 

Research and development expenses consists primarily of salary and benefits. Expenditures incurred during the research phase are expensed as incurred. Total research and development for the six months ended June 30, 2018 and 2017 were $0 and 2016 were $102,771, and $203,887, respectively. The decrease was mainly due to the reduction of development staff which is in line witha result from the streamlining and restructuring of Company.

 

 

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 six months ended June 30, 2018 and 2017 were $279,580 and 2016 were $388,159 and $370,283,$406,357, respectively.

 

 

In the six months ended June 30, 20172018 and 2016,2017, we have incurred $18,067$0 and $24,075 for depreciation, $2,680 and $0$(2,680) for the deposits written off, and $131$(45,851) 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)$108,421 in foreign exchange (loss) gain, $7 and $(1) and $(1)$1 in interest income and $340 and $0 in other sundry income.

 

 

At June 30, 2017,2018, we had cash of $144,720$82,018 and working capital deficit of $522,096.$979,688. Cash had increaseddecreased during the six months ended June 30, 20172018 primarily due to operating losses incurred during the receipt of payment for the revenue earned.quarter.

 

We had a total stockholders’ deficit of $485,106$966,160 and an accumulated deficit of $4,944,990$5,400,306 as of June 30, 20172018 compared with a total stockholders’ deficit of $498,315$761,481 and an accumulated deficit of $4,628,976$5,126,964 as of December 31, 2016.2017. This difference is primarily due to the net loss incurred during the periodperiod.

We had net cash used in operating activities of $192,278 for the six months ended June 30, 2018. We had a positive change of $41,892 due to accounts receivable, a positive change of $122 due to security deposit and the issuanceother receivables, and a negative change of 500,988,889 shares$1,529 due to prepaid expenses. We had a negative change of common stock by debt conversion.$15,694 due to accounts payable and accrued expenses.

 

For the six months ended June 30, 2017, we recorded a net loss of $316,014.

We made a positive adjustmenthad net cash used in operating activities 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.$449,809 for the six months ended June 30, 2017. 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, 2016,2018, we recorded a net lossspent $1,013 on the acquisition 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 and franchise fees. We had a negative change of $40,003 due to accounts payable and accrued expenses. As a result, we hadfixed assets, resulting in net cash used in operatinginvesting activities of $522,467$1,013 for the six months ended June 30, 2016.period.

 

For the six months ended June 30, 2017, we spent $9,092 on the acquisition of fixed assets, resulting in net cash used in investing activities of $9,092 for the period.

 

For the six months ended June 30, 2016,2018, we received $93,768 on the disposal of fixed assets, resulting inhad net cash provided by investingfinancial activities of $92,100 for the period.$127,758 due to advances from an affiliate.

 

For the six months ended June 30, 2017, we had net cash provided by financial activities of $514,091 due to advances from an affiliate amounting to $514,091.

 

As of June 30, 2017,2018, we have fixed operating office lease agreements for Guangzhou’s office amounting to $11,393 from 2017 to$12,710 in 2018, Hong Kong’s officesoffice minimum lease commitments of $29,399 from 2017 to 2019.$3,253 in 2018.

 

We will need to raise additional capital through equity or debt financing.financings. 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 termterms that isare 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.

 

Revenue recognition

 

The Group recognizesAccounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue when persuasive evidence of an arrangement exists, delivery has occurred,and cash flows arising from the sales price is fixedentity's contracts to provide goods or determinable, and collectability is reasonably assured. The Group currently has $103,936 revenue from its services rendered on projects, and plans to derive its revenue from membership subscription services, offeringcustomers. Under the platform for Enterprise Collaboration with integration. Revenue is currently recognized under contract accounting due to the significant software production required, and the 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 sharing,new standard, revenue is recognized when a customer obtains control of promised goods or services in accordancean amount that reflects the consideration the entity expects to receive in exchange for those goods or services. The Company adopted this new standard on January 1, 2018 under the modified retrospective method to all contracts not completed as of January 1, 2018 and the adoption did not have a material effect on our financial statements but we expanded our disclosures related to contracts with customers below.

Based on our contracts, we normally invoice customers once our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our contracts do not give rise to contract assets or liabilities under ASC 985-605-25.606. Accounts receivable are recorded when the right to consideration becomes unconditional.

 

Research and development expenses

 

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.