NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Note 1. The Company History and Nature of the Business
Hotapp
International Inc., formerly Fragmented Industry Exchange 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. 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 a Purchase Agreement, the Company issued SeD 1,000,000 shares of
common stock and 13,800,000 shares of newly created convertible
preferred stock. See Note 8 for further description.
As of
March 31, 2017, details of the Company’s subsidiaries are as
follows:
Subsidiaries
|
|
Date of
Incorporation
|
|
Place of
Incorporation
|
|
Percentage of
Ownership
|
1st Tier Subsidiary:
|
|
|
|
|
|
|
HotApps
International Pte Ltd (“HIP”)
|
|
May
23, 2014
|
|
Republic of
Singapore
|
|
100%
by Company
|
2nd Tier Subsidiaries:
|
|
|
|
|
|
|
HotApps Call Pte
Ltd
|
|
September 15,
2014
|
|
Republic of
Singapore
|
|
100%
owned by HIP
|
HotApps
Information Technology Co Ltd
|
|
November 10,
2014
|
|
People’s
Republic of China
|
|
100%
owned by HIP
|
HotApp
International Limited*
|
|
July
8, 2014
|
|
Hong
Kong (Special Administrative Region)
|
|
100%
owned by HIP
|
* 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
$4,762,794 and has net working capital deficit of $757,495 at March
31, 2017. 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 May 12, 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 provide
sufficient capital to continue operation through 2017. Our ability
to continue as a going concern is dependent upon achieving sales
growth, management of operating expenses and 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 financings 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.
Note 2. Summary of Significant Accounting Policies
Basis of presentation
The
condensed consolidated balance sheet at December 31, 2016 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 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. 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, 2016.
Basis of consolidation
The
consolidated financial statements of the Group include the
financial statements of Hotapp International 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 and highly liquid
investments, which are unrestricted from withdrawal or use, or
which have original maturities of three months or less when
purchased.
Foreign currency risk
Because
of its foreign operations, the Company holds cash in non-US
dollars. As of March 31, 2017, cash and cash
equivalents of the Group includes, on an as converted basis to US
dollars $25,365, $52,037 and $18,951 in Hong Kong Dollars
(“HK$”), 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 and cash
equivalents. The Group places their cash with financial
institutions with high-credit ratings and quality.
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:
Office
equipment
|
3
years
|
Computer
equipment
|
3
years
|
Furniture
and fixtures
|
3
years
|
Motor
vehicles
|
10
years
|
Fair value
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.
Revenue recognition
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 $66,178 revenue from its services rendered on
projects, and plans to derive its revenue from membership
subscription services, offering 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.
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, 2016 or 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.
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
three months ended March 31, 2017, the Company recorded other
comprehensive loss from translation loss of $84,004 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) includes 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 March 31, 2017, no shares of
preferred stock are eligible for conversion into voting common
stock.
Recent accounting pronouncements not yet adopted
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.
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. The Company
does not expect the adoption of ASU No. 2016-02 to have a material
impact on its financial statements.
Note 3. FIXED ASSETS, NET
Fixed
assets, net consisted of the following:
|
|
|
|
|
|
Computer
equipment
|
$
73,159
|
$
69,442
|
Office
equipment
|
19,821
|
19,671
|
Furniture and
fixtures
|
7,187
|
7,156
|
|
$
100,167
|
$
96,269
|
Less: accumulated
depreciation
|
(58,809
)
|
(50,173
)
|
Fixed assets,
net
|
$
41,358
|
$
46,096
|
Depreciation
expenses charged to the consolidated statements of operations for
the three months ended March 31, 2017 and 2016 were $8,636 and
$14,209, respectively.
Note 4. ACCOUNTS PAYABLE AND ACCRUED
EXPENSES
Accrued
expenses and other current liabilities consisted of the
following:
|
|
|
|
|
|
Accrued
payroll
|
$
175,059
|
$
180,464
|
Accrued
professional fees
|
34,722
|
45,612
|
Other
|
10,295
|
12,239
|
Total
|
$
220,076
|
$
238,315
|
Note 5. SHARE CAPITALIZATION
The
Company is authorized to issue 500 million shares of common stock
and 15 million shares of preferred stock. Both share
types have a $0.0001 par value. As of March 31, 2017 and
2016, the Company had issued and outstanding, 5,909,687 of common
stock, respectively and 13,800,000 shares of preferred stock,
respectively.
Common Shares:
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.
Preferred Shares:
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.
Note 6. COMMITMENTS AND CONTINGENCIES
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 $2,241. The Company was required to put up a security
deposit of $4,482. For the three months ended March 31, 2017, the
Company recorded rent expense of $6,734 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 $3,281. The Company
was required to put up a security deposit of $6,563. For the three
months ended March 31, 2017, the Company recorded rent expense of
$8,088 for these offices.
The
following is a schedule by years of future minimum lease
payments:
2017
|
$
42,366
|
2018
|
9,844
|
Total
|
$
52,212
|
Note 7. RELATED PARTY BALANCES AND
TRANSACTIONS
During
the period covered by this report, Mr. Chan Heng Fai was the
Company’s Chief Executive Officer (CEO) and a member of the
Board. Mr. Chan is also the Chief Executive Officer of Singapore
eDevelopment Limited (“SeD”), a Singapore
company. SeD is the majority shareholder of the
Company. The Company’s other two directors
included 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.
Note 8. SUBSEQUENT EVENT
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
Company’s board of directors and majority stockholder have
approved an increase in the number of the Company’s
authorized shares of common stock from 500,000,000 to 1,000,000,000
by means of an amendment to the Company’s Articles of
Incorporation. This amendment was filed with the State of Delaware
on May 5, 2017. This increase in authorized shares will permit the
Company to issue the 500,988,889 shares of common stock described
above.
On
March 27, 2017, SeD and the Company also 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.
The
terms of the additional shares of common stock will be identical to
those of the currently outstanding shares of Common Stock. However,
because the holders of common stock do not have preemptive rights
to purchase or subscribe for any new issuances of common stock, the
authorization and subsequent issuance of additional shares of
common stock will reduce the current stockholders’ percentage
ownership interest in the total outstanding shares of common stock.
This amendment and the creation of additional shares of authorized
common stock will not alter current stockholders’ relative
rights and limitations.