10-Q 1 tv499844_10q.htm FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 

FORM 10-Q  

 

(Mark One)

x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018

 

or

 

¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________________ to __________________

 

Commission File Number:  001-37902   

 

MOXIAN, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   27-3729742
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

Block A, 9/F, Union Plaza, 5022 Binjiang Avenue,

Futian District, Shenzhen City, Guangdong Province, China

(Address of Principal Executive Offices)

 

Tel: +86 (0) 755-66803251

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

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). Yes x      No  ¨

 

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

 

  Large accelerated filer ¨ Accelerated filer ¨
  Non-accelerated filer ¨ Smaller reporting company x
  (Do not check if smaller reporting company) Emerging growth company ¨

 

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 x

 

As of August 13, 2018, the registrant had 67,357,222 shares of common stock, par value $.001 per share, issued and outstanding.

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page No.
     
PART I - FINANCIAL INFORMATION  
     
Item 1. Financial Statements 1
     
  Unaudited Condensed Consolidated Balance Sheets as of June 30, 2018 and September 30, 2017 1
     
  Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended June 30, 2018 and 2017 2
     
  Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2018 and 2017 3
     
  Notes to Unaudited Condensed Consolidated Financial Statements 4
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 19
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 25
     
Item 4. Controls and Procedures. 25
     
PART II - OTHER INFORMATION
     
Item 1. Legal Proceedings. 26
     
Item 1A. Risk Factors. 26
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 26
     
Item 3. Defaults Upon Senior Securities. 26
     
Item 4. Mine Safety Disclosures 26
     
Item 5. Other Information 26
     
Item 6. Exhibits. 26
     
Signatures 27
     
Certifications

 

 

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MOXIAN, INC.

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

    As of  
    June 30, 2018     September 30, 2017  
ASSETS            
CURRENT ASSETS                
Cash and cash equivalents   $ 279,226     $ 18,494  
Restricted cash     170,000       -  
Inventories     -       3,130  
Advances to a related party     302,247       -  
Prepayments, deposits and other receivables, net     907,909       152,548  
Total current assets     1,659,382       174,172  
                 
Restricted cash, long-term     -       500,000  
Property and equipment, net     344,593       686,296  
TOTAL ASSETS   $ 2,003,975     $ 1,360,468  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY                
CURRENT LIABILITIES                
Accruals and other payables   $ 3,141,273     $ 1,861,519  
Loans payable - other     1,352,810       1,347,035  
Loans payable - related parties     5,130,683       1,110,884  
Total current liabilities     9,624,766       4,319,438  
                 
Commitment and Contingencies                
                 
STOCKHOLDERS’ DEFICIENCY                
                 
Preferred stock, $0.001 par value, authorized: 100,000,000 shares. Nil shares issued and outstanding     -       -  
Common stock, $0.001 par value, authorized: 250,000,000 shares. 67,357,222 and 67,007,199 shares issued and outstanding as of June 30, 2018 and September 30, 2017, respectively     67,357       67,007  
Additional paid-in capital     36,483,440       35,475,722  
Accumulated deficit     (44,348,172 )     (38,682,546 )
Accumulated other comprehensive income     176,584       180,847  
Total stockholders’ deficiency     (7,620,791 )     (2,958,970 )
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY   $ 2,003,975     $ 1,360,468  

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 1 

 

 

MOXIAN, INC.

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

   

For the

Three Months Ended June 30,

    

For the

Nine Months Ended June 30,

  
    2018     2017     2018     2017  
                         
Revenues, net   $ 987     $ 28,481     $ 109,315     $ 45,924  
Cost of revenues     (2,463 )     (6,382 )     (13,747 )     (7,773 )
Gross Profit     (1,476 )     22,099       95,568       38,151  
                                 
Depreciation and amortization expenses     195,161       199,945       574,745       894,068  
Research and development     530,347       442,744       940,976       1,794,602  
Impairment charge on intangible assets     -       -       -       2,985,181  
Selling, general and administrative expenses     1,275,510       1,393,206       4,199,355       5,142,842  
Loss from operations     (2,002,494 )     (2,013,796 )     (5,619,508 )     (10,778,542 )
                                 
Interest income (expenses)     (35,318 )     86       (61,258 )     (1,037 )
Other income (expenses), net     (2,216 )     -       15,140       7,841  
Loss before income tax     (2,040,028 )     (2,013,710 )     (5,665,626 )     (10,771,738 )
                                 
Income tax expense     -       -       -       (95,420 )
Net loss     (2,040,028 )     (2,013,710 )     (5,665,626 )     (10,867,158 )
                                 
Other comprehensive income (loss):                                
Foreign currency translation adjustments     298,671       5,086       (4,263 )     (49,543 )
Comprehensive loss   $ (1,741,357 )   $ (2,008,624 )   $ (5,669,889 )   $ (10,916,701 )
                                 
Basic and diluted loss per common share   $ (0.03 )   $ (0.03 )   $ (0.08 )   $ (0.16 )
                                 
Weighted average number of shares                                
Basic and Diluted     67,157,209       67,007,199       67,057,202       66,429,791  

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 2 

 

 

MOXIAN, INC.

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   

For the

Nine Months Ended June 30,

  
    2018     2017  
CASH FLOWS FROM OPERATING ACTIVITIES                
Net loss   $ (5,665,626 )   $ (10,867,158 )
Adjustments to reconcile net loss to cash used in operating activities                
Depreciation and amortization     574,745       894,068  
Loss on disposition of property and equipment     80       10,217  
Impairment charge on intangible assets     -       2,985,181  
Deferred tax expense     -       95,420  
Changes in operating assets and liabilities:                
Restricted cash     -       63,762  
Inventories     3,123       5,635  
Advance to a related party     (310,255 )     -  
Prepayments, deposits and other receivables     (772,549 )     (137,128 )
Accruals and other payables     1,299,375       257,088  
Net cash used in operating activities     (4,871,107 )     (6,692,915 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchases of property and equipment     -       (17,955 )
Payments on construction in progress     (220,045 )     -  
Purchase of intangible assets     -       (11,137 )
Net cash used in investing activities     (220,045 )     (29,092 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from related party loans     5,319,346       4,169,865  
Repayment of related party loans     (191,312 )     (5,704,802 )
IPO proceeds (deposited in) released from an indemnification escrow, restricted cash     330,000       (500,000 )
Gross proceeds from Initial Public Offering - stock issuance     -       10,005,000  
Direct costs disbursed from Initial Public Offering proceeds     -       (927,303 )
Net cash provided by financing activities     5,458,034       7,042,760  
                 
Effect of exchange rates on cash and cash equivalents     (106,150 )     4,472  
Net increase in cash and cash equivalents     260,732       325,225  
Cash and cash equivalents, beginning of period     18,494       76,580  
Cash and cash equivalents, end of period   $ 279,226     $ 401,805  
                 
Supplemental cash flow disclosures:                
Cash paid for interest expense   $ -     $ -  
Cash paid for income taxes   $ -     $ -  
                 
Non-cash investing and financing activities                
Issuance of shares for subscription payable   $ -     $ 2,000,000  
Reclassification of deferred Initial Public Offering costs to additional paid in capital   $ -     $ 290,234  
Warrants issued to placement agents in connection with the Company’s Initial Public Offering   $ -     $ 280,042  
Related party loan converted to common shares   $ 1,008,068     $ -  

 

See accompanying notes to unaudited condensed consolidated financial statements 

 

 3 

 

 

MOXIAN, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Organization and nature of operations

 

Moxian, Inc. (“the Company”) was incorporated in the State of Nevada on October 12, 2010 and was formerly known as SECURE Net CheckIn, Inc. The Company was in the business of offering a cloud-based scheduling and cloud-based product for the medical industry. The Company changed its name to Moxian China, Inc. on December 13, 2013 and to Moxian, Inc. on July 19, 2015.

 

The Company, through its subsidiaries and its variable interest entity, engages in the business of operating a platform that integrates social media and business transactions into one single platform. The Company continues to devote its efforts to develop mobile applications that facilitate the small and medium size businesses to attract more clients. The Company’s ability to generate sufficient funds to meet its working capital requirements is dependent upon its ability to find additional sources of capital, develop apps and other software applications, generate servicing income, and ultimately, achieve profitable operations (see Note 2).

 

Moxian HK was incorporated on January 13, 2013 and became a subsidiary of Moxian BVI on February 14, 2013.

 

Moxian Shenzhen was incorporated on April 8, 2013 as a wholly-owned subsidiary of Moxian HK and is engaged in the business of internet technology, computer software and commercial information consulting.

 

Shenzhen Moyi Technologies Co. Ltd. (“Moyi”) was incorporated on July 19, 2013 under the laws of the People’s Republic of China. On July 15, 2014, Moxian Shenzhen entered into a series of agreements with Moyi and its shareholders which permit us to operate Moyi and the right to purchase all of its equity interests from its shareholders (collectively “the Moyi Agreements”).

 

On December 18, 2017 the Company entered into a Tripartite Agreement with the original shareholders of Moyi and the new shareholders of Moyi wherein the Company agrees to the transfer of the equity interests of Moyi and all related rights, liabilities and obligations under the Moyi Agreements.

 

Moyi, which is solely owned by Chinese shareholders, has been granted an Internet Content Provider license (“ICP License”). Companies in China that are engaged in the business of internet information services including online advertisement and e-commerce services, are required to obtain an ICP License. Due to Chinese regulatory restrictions on foreign investments in the Internet sector, we operate our marketing platform and conduct our business pursuant to the Moyi Agreements. Under the Moyi Agreements, Moyi will be treated as a variable interest entity in which the Company does not have any direct controlling equity interest but the historical financial results of such entity will be consolidated in our financial statements in accordance with generally accepted accounting principles of the United States (“U.S. GAAP”).

 

Due to the transfer of interests from the Original Moyi Shareholders to the New Moyi Shareholders, the Company's Board of Directors determined that it was appropriate to terminate such Moyi Agreements and to execute substantially similar agreements with the New Moyi Shareholders. Because the Exclusive Business Cooperation Agreement did not include the Original Moyi Shareholders as a party, it has not been terminated. The Share Pledge Agreement, Power of Attorney and Exclusive Option Agreement were officially terminated as to the Original Moyi Shareholders as of January 8, 2018 and a new Share Pledge Agreement, Power of Attorney and Exclusive Option Agreement were entered into with the New Moyi Shareholders at the same date. The parties' intent throughout has been to maintain control of Moyi by Shenzhen Moxian and, by extension, the Company.

 

Moxian Technologies (Beijing) Co., Ltd. (“Moxian Beijing”) was incorporated on December 10, 2015, as a wholly-owned subsidiary of Moxian Shenzhen. Moxian Beijing is engaged in the business of internet technology, computer software and commercial information consulting.

 

On November 14, 2016, the Company announced the completion of a public offering of 2,501,250 shares of its common stock at a public offering price of $4.00 per share. The net proceeds from the offering were approximately $8.5 million after deducting placement agents' commissions and other offering expenses. In connection with the offering, the Company's common stock began trading on the NASDAQ Capital Market on November 15, 2016 under the symbol "MOXC".

 

 4 

 

 

MOXIAN, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Organization and nature of operations (Continued)

 

On January 30, 2018, a wholly-owned subsidiary of Moxian Shenzhen, Moxian Information Technologies (Shanghai) Co. Ltd. (“Moxian Shanghai”) was incorporated under the laws of the People’s Republic of China. Moxian Shanghai will extend the business operations of the Company to Shanghai, China.

 

As of June 30, 2018, only Moxian Shenzhen, Moyi and Moxian Beijing have business operations and the other affiliated companies are all dormant.

 

2. Summary of principal accounting policies

 

Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and reflect the activities of the following subsidiaries and the VIE: Moxian CN Samoa, Moxian BVI, Moxian HK, Moxian Shenzhen, Moxian Malaysia, Moyi, Moxian Beijing, Moxian Shanghai and Moxian IP Samoa. All intercompany transactions and balances have been eliminated in the consolidation.

 

The unaudited interim condensed consolidated financial information as of June 30, 2018 and for the three and nine months ended June 30, 2018 and 2017 have been prepared, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited interim condensed consolidated financial information should be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company’s Form 10-K for the fiscal year ended September 30, 2017, previously filed with the SEC on January 8, 2018. 

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s unaudited condensed consolidated financial position as of June 30, 2018 and its unaudited condensed consolidated results of operations for the three and nine months ended June 30, 2018 and 2017, and its unaudited condensed consolidated cash flows for the nine months ended June 30, 2018 and 2017, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the fiscal year or any future periods.

 

The following assets and liabilities of the VIE are included in the accompanying unaudited condensed consolidated financial statements of the Company as of June 30, 2018 and September 30, 2017:

 

    June 30, 2018     September 30, 2017  
             
Current assets   $ 190,928     $ 3,082  
Non-current assets     -       -  
Total assets   $ 190,928     $ 3,082  
                 
Current liabilities   $ 1,105,607     $ 732,910  
Non-current liabilities     -       -  
Total liabilities   $ 1,105,607     $ 732,910  

 

 5 

 

 

MOXIAN, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. Summary of principal accounting policies (Continued)

 

Reclassification

 

Certain prior period amounts have been reclassified to conform to the current period presentation.

 

Going Concern

 

In assessing the Company’s liquidity and its ability to continue as a going concern, the Company monitors and analyzes its cash and cash equivalents and its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations. As of June 30, 2018, the Company’s current liabilities exceeded the current assets by approximately $8.0 million, its accumulated deficit was approximately $44.3 million, and the Company has incurred losses since inception.

 

On November 14, 2016, the Company completed its initial public offering (“IPO”) with net proceeds of $8.5 million after deducting placement agents’ commission and other offering costs. However, as of the date of this report, the Company has utilized all of the IPO proceeds and is not generating sufficient revenue to support its operations. The Company hopes to fund its cash flow shortfalls as follows: 

 

  ● Financial support commitments from the Company’s major stockholders and a related party; and
     
  ● Seeking additional public and/or private issuance of securities.

 

On November 10, 2017, the Company and Ms. Liu Shu Juan, a director of the Company, entered into a loan agreement for a line of credit of $1,000,000 or the RMB equivalent. Pursuant to the loan agreement, the Company issued an unsecured convertible promissory note, bearing an interest rate of 4.75% per annum and maturing one year from the date of issuance. Ms. Liu Shu Jian had the right to convert all or any portion of the outstanding and unpaid principal and interest of the note into shares of the Company’s common stock at the conversion price set forth in the convertible debt agreement, as amended.

 

On May 8, 2018, the Company received a notice of conversion from Ms. Liu to convert an outstanding amount of $1,008,068 comprising $1 million of principal and $8,068 of interest into 350,023 shares of common stock at a volume-weighted price of $2.88 per share. As of June 30, 2018, the shares were converted and issued to Ms. Liu.

 

On May 11, 2018, the board of directors ratified a credit facility of $4 million previously granted by Ms. Liu for the purpose of working capital for the Company bearing interest of 4.75% per annum on the amount outstanding at the end of each month. The facility is due to be repaid by May 11, 2020. As of June 30, 2018, the Company has drawn down approximately $4 million. (See Note 8)

 

If the Company is unable to obtain the necessary additional capital on a timely basis and on acceptable terms, it will be unable to implement its current plans for expansion, repay debt obligations or respond to competitive pressures. Any of these factors would have a material adverse effect on its business, prospects, financial condition and results of operations and raise substantial doubts about the ability of the Company to continue as a going concern.

 

The unaudited condensed consolidated financial statements for the three and nine months ended June 30, 2018 have been prepared on a going concern basis due to the Company’s expectation that it may be able to receive further financial support from its major stockholders and related parties. They do not include any adjustments to reflect the possible future effects on the recoverability and classifications of assets, or the amounts and classifications of liabilities that may result from the inability of the Company to continue as a going concern. 

 

 6 

 

 

MOXIAN, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

2. Summary of principal accounting policies (Continued)

 

Risks and Uncertainties

 

The Company’s operations are substantially carried out in the People’s Republic of China (“PRC”). Accordingly, the Company’s business, financial condition and results of operations will be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

Fair value of financial instruments

 

The Company follows the provisions of Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures.” ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows: 

 

Level 1- Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2- Inputs other than quoted prices that are observable for the asset or liability in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

Level 3- Inputs are unobservable inputs which reflect management’s assumptions based on the best available information.

 

The carrying value of cash and cash equivalents, restricted cash, prepayments, deposits and other receivables, accruals and other payables and, loans from related parties approximate their fair values because of the short-term nature of these instruments.  

 

Use of estimates

 

The preparation of the unaudited condensed consolidated 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 disclosures of contingent assets and liabilities at the date of the accompanying unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates required to be made by management include but not limited to, useful lives of property and equipment, intangible assets valuation, inventory valuation and deferred tax assets. Actual results could differ from those estimates.

 

Restricted cash

 

Restricted cash represents cash held in an indemnification escrow account pursuant to the financing agreement signed with the placement agents.

 

Under the terms of the placement agreement, $500,000 in cash funded an escrow account for a period of two years after the completion of the IPO; this amount was recorded as restricted cash, long-term as of September 30, 2017. On November 9, 2017, $330,000 was released from this escrow account with the approval of the placement agents and the escrow agents. 

 

 7 

 

 

MOXIAN, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. Summary of principal accounting policies (Continued)

 

Property and Equipment, net

 

Property and equipment are recorded at cost less accumulated depreciation and impairment. Significant additions or improvements extending useful lives of assets are capitalized. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives as follows:

 

Electronic equipment 3-6 years
Furniture and fixtures 3-6 years
Leasehold improvements Shorter of estimated useful life or term of lease

 

Impairment of long-lived assets

 

The Company classifies its long-lived assets into: (i) computer and office equipment; (ii) furniture and fixtures, (iii) leasehold improvements, and (iv) finite – lived intangible assets.

 

Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be fully recoverable. It is possible that these assets could become impaired as a result of technology, economy or other industry changes. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, relief from royalty income approach, quoted market values and third-party independent appraisals, as considered necessary.

 

The Company makes various assumptions and estimates regarding estimated future cash flows and other factors in determining the fair values of the respective assets. The assumptions and estimates used to determine future values and remaining useful lives of long-lived assets are complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as the Company’s business strategy and its forecasts for specific market expansion.

 

Due to the continuing losses from operations with minimal revenues, the Company recorded a valuation reserve against its remaining intangible assets in 2017.

 

 8 

 

 

MOXIAN, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. Summary of principal accounting policies (Continued)

 

Revenue recognition

 

The Company currently recognizes revenue from the sale of merchandise through its online platforms. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. Revenue is recorded on a gross basis, net of surcharges and value added tax ("VAT"). The Company recorded revenue on a gross basis because the Company has the following indicators for gross reporting: it is the primary obligor of the sales arrangements, is subject to inventory risks of physical loss, has latitude in establishing prices, has discretion in suppliers' selection and assumes credit risks on receivables from customers.

 

Revenue from advertising is recognized as advertisements are displayed. Revenue from software development services comprises revenue from time and material and fixed price contracts. Revenue from time and material contracts are recognized as related services are performed. Revenue on fixed price contracts is recognized in accordance with percentage of completion method of accounting.

 

Income taxes

 

The Company utilizes ASC Topic 740 (“ASC 740”) “Income taxes”, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the unaudited condensed consolidated financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

ASC 740 “Income taxes” clarifies the accounting for uncertainty in tax positions. This interpretation requires that an entity recognizes in the unaudited condensed consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as part of income tax expense in the unaudited consolidated statements of operations and comprehensive losses.  The Company evaluates the level of authority for each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measure the unrecognized benefits associated with the tax positions. As of June 30, 2018 and September 30, 2017, the Company did not have any unrecognized tax benefits. The Company does not anticipate any significant increase to its liability for unrecognized tax benefit within the next 12 months.

 

As of June 30, 2018, the tax years ended December 31, 2012 through December 31, 2017 for the Company’s PRC entities remain open for statutory examination by the PRC tax authorities. 

 

Foreign currency transactions and translation

 

The reporting currency of the Company is United States Dollars (the “USD”) and the functional currency of Moxian Shenzhen, Moyi and Moxian Beijing is Renminbi (the “RMB”) as China is the primary economic environment in which they operate, the functional currency of Moxian HK is Hong Kong Dollar (the “HKD”), and the functional currency of Moxian Malaysia is Malaysia Ringgit (the “RM”).

 

 9 

 

 

MOXIAN, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. Summary of principal accounting policies (Continued)

 

Foreign currency transactions and translation (continued)

 

For financial reporting purposes, the financial statements of Moxian Shenzhen, Moyi, Moxian Beijing, Moxian HK and Moxian Malaysia, which are prepared using their respective functional currencies, are translated into the reporting currency, USD, so to be consolidated with the Company’s. Monetary assets and liabilities denominated in currencies other than the reporting currency are translated into the reporting currency at the rates of exchange ruling at the balance sheet date. Revenues and expenses are translated using average rates prevailing during the reporting period. Adjustments resulting from the translation are recorded as a separate component of accumulated other comprehensive income (loss) in stockholders’ deficiency. Transaction gains and losses are recognized in the unaudited consolidated condensed statements of operations and comprehensive loss. 

 

The exchange rates applied are as follows:

 

Balance sheet items, except for equity accounts  June 30,
2018		   September 30,
2017		 
RMB:USD   6.6171    6.6549 
HKD:USD   7.8463    7.8116 
RM:USD   4.0380    4.2225 

 

Items in the unaudited condensed consolidated statements of operations and comprehensive loss, and unaudited condensed consolidated statements of cash flows:

 

    Nine Months Ended June 30,  
    2018     2017  
RMB:USD     6.4463       6.8614  
HKD:USD     7.8282       7.7681  
RM:USD     4.0078       4.3683  

 

Research and Development

 

Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other related expenses associated with product development. Research and development expenses also include third-party development, programming costs, and localization costs incurred to translate software for local markets. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached. Once technological feasibility is reached, such costs are capitalized and amortized as part of the cost of revenue over the estimated lives of the product.

 

Recent accounting pronouncements

 

On October 2, 2017, The FASB has issued Accounting Standards Update (ASU) No. 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments.” The ASU adds SEC paragraphs to the new revenue and leases sections of the Codification on the announcement the SEC Observer made at the 20 July 2017 Emerging Issues Task Force (EITF) meeting. The SEC Observer said that the SEC staff would not object if entities that are considered public business entities only because their financial statements or financial information is required to be included in another entity’s SEC filing use the effective dates for private companies when they adopt ASC 606, Revenue from Contracts with Customers, and ASC 842, Leases. This would include entities whose financial statements are included in another entity’s SEC filing because they are significant acquirees under Rule 3-05 of Regulation S-X, significant equity method investees under Rule 3-09 of Regulation S-X and equity method investees whose summarized financial information is included in a registrant’s financial statement notes under Rule 4-08(g) of Regulation S-X. The ASU also supersedes certain SEC paragraphs in the Codification related to previous SEC staff announcements and moves other paragraphs, upon adoption of ASC 606 or ASC 842. The Company does not expect that the adoption of this guidance will have a material impact on its unaudited condensed consolidated financial statements.

 

 10 

 

 

MOXIAN, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. Summary of principal accounting policies (Continued)

 

Recent accounting pronouncements (continued)

 

On November 22, 2017, the FASB ASU No. 2017-14, “Income Statement—Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606): Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 116 and SEC Release 33-10403.” The ASU amends various paragraphs in ASC 220, Income Statement — Reporting Comprehensive Income; ASC 605, Revenue Recognition; and ASC 606, Revenue From Contracts With Customers, that contain SEC guidance. The amendments include superseding ASC 605-10-S25-1 (SAB Topic 13) as a result of SEC Staff Accounting Bulletin No. 116 and adding ASC 606-10-S25-1 as a result of SEC Release No. 33-10403. The Company does not expect that the adoption of this guidance will have a material impact on its unaudited condensed consolidated financial statements.

 

In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income.” The ASU amends ASC 220, Income Statement — Reporting Comprehensive Income, to “allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act.” In addition, under the ASU, an entity will be required to provide certain disclosures regarding stranded tax effects. The ASU is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company does not expect that the adoption of this guidance will have a material impact on its unaudited condensed consolidated financial statements.

 

In March 2018, the FASB issued ASU 2018-05 — Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“ASU 2018-05”), which amends the FASB Accounting Standards Codification and XBRL Taxonomy based on the Tax Cuts and Jobs Act (the “Act”) that was signed into law on December 22, 2017 and Staff Accounting Bulletin No. 118 (“SAB 118”) that was released by the Securities and Exchange Commission. The Act changes numerous provisions that impact U.S. corporate tax rates, business-related exclusions, and deductions and credits and may additionally have international tax consequences for many companies that operate internationally. The Company does not believe this guidance will have a material impact on its unaudited condensed consolidated financial statements.

 

In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases.” The ASU addresses 16 separate issues which include, for example, a correction to a cross reference regarding residual value guarantees, a clarification regarding rates implicit in lease contracts, and a consolidation of the requirements about lease classification reassessments. The guidance also addresses lessor reassessments of lease terms and purchase options, variable lease payments that depend on an index or a rate, investment tax credits, lease terms and purchase options, transition guidance for amounts previously recognized in business combinations, and certain transition adjustments, among others. For entities that early adopted Topic 842, the amendments are effective upon issuance of this Update, and the transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842, the effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842. The Company does not believe this guidance will have a material impact on its unaudited condensed consolidated financial statements.

 

In July 2018, the FASB issued ASU 2018-11 - Leases (Topic 842): Targeted Improvements. The ASU simplifies transition requirements and, for lessors, provides a practical expedient for the separation of nonlease components from lease components. Specifically, the ASU provides: (1) an optional transition method that entities can use when adopting ASC 842 and (2) a practical expedient that permits lessors to not separate nonlease components from the associated lease component if certain conditions are met. For entities that have not adopted Topic 842 before the issuance of this Update, the effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Update 2016-02. For entities that have adopted Topic 842 before the issuance of this Update, the transition and effective date of the amendments in this Update are as follows: 1) The practical expedient may be elected either in the first reporting period following the issuance of this Update or at the original effective date of Topic 842 for that entity. 2) The practical expedient may be applied either retrospectively or prospectively. All entities, including early adopters, that elect the practical expedient related to separating components of a contract in this Update must apply the expedient, by class of underlying asset, to all existing lease transactions that qualify for the expedient at the date elected. The Company does not believe this guidance will have a material impact on its unaudited condensed consolidated financial statements.

 

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the unaudited condensed consolidated financial position, statements of operations and cash flows.

 

 11 

 

 

MOXIAN, INC

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3. Prepayments, deposits and other receivables, net

 

   

June 30,

2018

    

September 30,

2017

  
             
Prepayments to suppliers   $ 567,934     $ 57,551  
Rental and other deposits     341,674       107,040  
Employee advances and others     32,240       21,393  
Sub total     941,848       185,984  
Less:  allowance for doubtful accounts     (33,939 )     (33,436 )
Prepayments, deposits and other receivables, net   $ 907,909     $ 152,548  

 

No provision was recorded for the three and nine months ended June 30, 2018 and 2017, respectively.

  

4. Property and equipment, net

  

  

June 30,

2018

  

September 30,

2017

 
         
Electronic equipment  $2,319,595   $2,333,401 
Furniture and fixtures   70,596    80,780 
Leasehold improvements   363,609    361,544 
Construction in progress   214,365    - 
Total property and equipment   2,968,165    2,775,725 
Less: Accumulated depreciation and amortization   (2,623,572)   (2,089,429)
Total property and equipment, net  $344,593   $686,296 

 

Depreciation and amortization expense for the three and nine months ended June 30, 2018 were $195,161 and $574,745 respectively. Depreciation and amortization expense for the three and nine months ended June 30, 2017 were $199,945 and $617,366, respectively.

 

5. Intangible assets

  

  

June 30,

2018

  

September 30,

2017

 
         
IP rights  $1,410,335   $1,410,335 
Other intangible assets   394,883    394,883 
    1,805,218   $1,805,218 
Less: accumulated amortization   (1,805,218)   (1,805,218)
Net intangible assets  $-   $- 

 

Due to continuing losses from operations, the Company impaired the remaining intangible assets in 2017. Amortization expense for the three and nine months ended June 30, 2018 was $Nil. During the nine months ended June 30, 2017, the Company recognized an impairment loss of $2,985,181 for the IP rights and other intangible assets. Amortization expense for the three and nine months ended June 30, 2017 totaled $Nil and $276,702, respectively.

 

 12 

 

 

MOXIAN, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6. Accruals and other payables

 

   

June 30,

2018

    

September 30,

2017

  
             
Salary payable                                                                               $ 323,963     $ 379,902  
Advance from customers                                                                          43,000       61,078  
Other tax payable                                                                               4,637       28,625  
Accrued expenses                                                                               2,628,800       1,275,466  
Other payables                                                                           140,873       116,448  
Total   $ 3,141,273     $ 1,861,519  

 

7.Loan payable – other

 

On May 15, 2017, the Company and Shenzhen Bayi Consulting Co. Ltd. (“Bayi”) entered into a line of credit agreement. Pursuant to the agreement, Bayi agreed to provide a line of credit in the maximum amount of $3 million to the Company on an as needed basis to support the Company’s working capital needs. Any withdrawal from this line is non-interest bearing and shall be repaid on the maturity date of the line of credit. The maturity date of the unsecured line of credit is May 15, 2018. The Company is in the process of negotiating with Bayi on an extension of this loan.

 

As of June 30, 2018 and September 30, 2017, the loan payable balance to Bayi was $1,352,810 and 1,347,035, respectively. When the line of credit agreement was entered and funded, Bayi was a related party of the Company. Bayi is no longer a related party to the Company as of September 30, 2017.

 

8.

Related party transactions and balances

 

The table below sets forth related parties having transactions during the nine months ended June 30, 2018 and balances as of June 30, 2018 and September 30, 2017, respectively.

 

Name   Relationship with the Company
Moxian China Limited   A below 5% shareholder of the Company
Beijing Xinhua Huifeng Equity Investment Center (“Xinhua”)   A Shareholder of the Company
Zhongtou Huifeng Investment Management (Beijing) Co. Ltd (“Zhongtou”)   Affiliated company of Xinhua
Vertical Venture Capital Group Limited   A below 1% shareholder of the Company
Zhang Ying   A below 1% shareholder of the Company as of September 30, 2017. Not a shareholder as of June 30, 2018
Liu Shu Juan   A director of the Company and legal representative of Shanghai Shewn Wine Co. Ltd.
Shanghai Shewn Wine Co. Ltd. (“Shewn”)  

Controlled by one of the Company’s directors – Liu Shu Juan

 

On January 3, 2017, the Company issued 500,000 shares of its common stock to Shenzhen Bayi Consulting Co. Ltd. (“Bayi”) and Moxian China Limited at a price of $4.00 per share in full settlement of stock subscription payable in accordance to the note conversion agreements signed on September 7, 2016. As of September 30, 2017, Bayi was no longer a related party of the Company.

 

 13 

 

 

MOXIAN, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8.

Related party transactions and balances (Continued)

 

Details of advances to a related party and loans payable– related parties are as follows:

 

Nature and Company   June 30, 2018     September 30, 2017  
Advances to a related party                
Shewn   $  302,247     $  -  
    $ 302,247     $ -  
Loan payable – related parties                
Vertical Venture Capital Group Limited   $ 1,143,183     $ 1,133,228  
Liu Shu Juan     4,011,680       -  
Xinhua     (24,180)       (24,042)  
Zhang Ying     -       1,698  
    $ 5,130,683     $ 1,110,884  

 

For the nine months ended June 30, 2018, the Company obtained additional borrowings, net of repayments, aggregating $5,128,034 from related parties, of which $1,008,068 was converted into common shares.

 

For the nine month period ended June 30, 2017, the Company repaid the loans, net of additional borrowings, aggregating $1,534,937 from related parties.

 

The loans and advances made by the related parties (except for the loans from Liu Shu Juan) to Moxian HK, Moxian Shenzhen, Moyi, Moxian Beijing and Moxian Malaysia are unsecured, interest free and due on various dates specified on the loan agreements.  The loans made to Shewn and Xinhua by the Company are unsecured, interest free and due on demand. Advances to a related party was the operating expenses paid by the Company on behalf of the related party for business purpose.

 

Convertible Debt - Liu Shu Juan

 

On November 10, 2017, the Company and Ms. Liu Shu Juan, a director of the Company, entered into a convertible loan agreement for a line of credit of $1,000,000 or the RMB equivalent. Pursuant to the loan agreement, the Company issued an unsecured convertible promissory note, bearing an interest rate of 4.75% per annum and maturing one year from the date of issuance. Ms. Liu Shu Jian had the right to convert all or any portion of the outstanding and unpaid principal and interest of the note into shares of the Company's common stock at the conversion price set forth in the convertible debt agreement, as amended.

 

On May 8, 2018, the Company received a notice from Ms. Liu to convert the total sum outstanding of $1,000,000 in principal and interest of $8,068 into 350,023 shares of common stock at a conversion price of $2.88 per share. As of June 30, 2018, the shares were converted and issued to Ms. Liu.

 

As of June 30, 2018, the Company had drawn down $3,950,342 of the facility from the new credit facility line granted by Ms. Liu (see detail at Note 2) and accrued interest of $61,338 due to Ms. Liu. The Company recorded $34,497 and $61,338 as the interest expense for this loan for the three and nine month period ended June 30, 2018, respectively.

 

 14 

 

 

MOXIAN, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9. Capital stock

 

Public Offering Warrants

 

In connection with and upon closing of the Public Offering on November 14, 2016, the Company issued warrants (the “Public Offering Warrants”) equal to four percent (4%) of the shares issued in the Public Offering, totaling 100,050 units, to the placement agents for the offering. The warrants carry a term of five years, and shall not be exercisable for a period of nine months from the closing of the Public Offering and shall be exercisable at a price equal to $4.60 per share. Management determined that these warrants meet the definition of a derivative under ASC 815-40, however, they fall under the scope exception which states that contracts issued that are both a) indexed to its own stock; and b) classified in stockholders' equity are not considered derivatives. The warrants were recorded at their fair value on the date of grant as a component of additional paid-in capital.

  

The aggregated fair value of the Public Offering Warrants on November 14, 2016 was $280,042.  The fair value has been estimated using the Black-Scholes pricing model with the following weighted-average assumptions: market value of underlying stock of $4.09; risk free rate of 1.66%; expected term of 5 years; exercise price of the warrants of $4.60; volatility of 90.7%; and expected future dividends of Nil. As of June 30, 2018, 100,050 warrants  were issued and outstanding; and none of the warrants has been exercised.

 

10. Income taxes

 

The Company and its subsidiaries file separate income tax returns.

 

The United States of America

 

Moxian is incorporated in the State of Nevada in the U.S. and is subject to U.S. federal corporate income taxes. The State of Nevada does not impose any state corporate income tax. As of June 30, 2018, future net operation losses of approximately $8.9 million are available to offset future operating income through 2036.

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a U.S. corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. As the Company has a September 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal rate of approximately 24.5% for our fiscal year ending September 30, 2018, and 21% for subsequent fiscal years. Accordingly, we have to remeasure our deferred tax assets on net operating loss carryforward in the U.S. at the lower enacted cooperated tax rate of 21%. However, this re-measurement has no effect on the Company’s income tax expenses as the Company has provided a 100% valuation allowance on its deferred tax assets previously.

 

Additionally, the Tax Act imposes a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries, and future foreign earnings are subject to U.S. taxation. The change in rate has caused us to remeasure all U.S. deferred income tax assets and liabilities for temporary differences and net operating loss (NOL) carryforwards and recorded one time income tax payable to be paid in 8 years. However, this one-time transition tax has no effect on the Company’s income tax expenses as the Company has no undistributed foreign earnings prior to June 30, 2018, as the Company has cumulative foreign losses as of June 30, 2018.

 

 15 

 

 

MOXIAN, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10. Income taxes (Continued)

 

British Virgin Islands

 

Moxian BVI is incorporated in the British Virgin Islands. Under the current laws of the British Virgin Islands, Moxian BVI is not subject to tax on income or capital gains. In addition, upon payments of dividends by Moxian BVI, no British Virgin Islands withholding tax is imposed.

 

Hong Kong

 

Moxian HK is incorporated in Hong Kong and Hong Kong’s profits tax rate is 16.5%. Moxian HK did not earn any income that was derived in Hong Kong for the three and nine months ended June 30, 2018 and 2017, and therefore, Moxian HK was not subject to Hong Kong Profits Tax.

 

Malaysia

 

Moxian Malaysia did not have taxable income for the three and nine months ended June 30, 2018 and 2017. Management estimated that Moxian Malaysia will not generate any taxable income in the future.

 

PRC

 

Effective from January 1, 2008, the PRC’s statutory income tax rate is 25%. The Company’s PRC subsidiaries are subject to an income tax rate of 25%, unless otherwise specified.

 

As of June 30, 2018, the Company had net operating loss carry forwards of approximately $22.2 million in PRC tax jurisdiction, which expires in the years 2018 through 2022.

 

Moxian Shenzhen was incorporated in the People’s Republic of China. Moxian Shenzhen did not generate taxable income in the People’s Republic of China for the period from April 8, 2013 (date of inception) to June 30, 2018. Management estimated that Moxian Shenzhen will not generate any taxable income in the future.

 

Moyi was incorporated in the People’s Republic of China. Moyi did not generate taxable income in the People’s Republic of China for the period from July 19, 2013 (date of inception) to June 30, 2018.

 

Moxian Beijing was incorporated in the People’s Republic of China. Moxian Beijing did not generate taxable income in the People’s Republic of China for the period from December 10, 2015 (date of inception) to June 30, 2018.

 

 16 

 

 

MOXIAN, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10. Income taxes (Continued)

 

The Company’s effective income tax rates were 0% and 0.7% for the nine months ended June 30, 2018 and for the year ended September 30, 2017, respectively. Income tax mainly consists of foreign income tax at statutory rates and the effects of permanent and temporary differences.

 

   June 30,
2018		   September 30, 
2017		 
         
U.S. statutory rate   24.5%   34.0%
Foreign income not registered in the U.S.   (24.5)%   (34.0)%
PRC statutory rate   25.0%   25.0%
Changes in valuation allowance and others   (25.0)%   (24.3)%
Effective tax rate   0%   0.7%

 

Because of the uncertainty regarding the Company’s ability to realize its deferred tax assets, a 100% valuation allowance has been established as of June 30, 2018 and September 30, 2017, respectively.

 

As of June 30, 2018 and September 30, 2017, the valuation allowance was approximately $8.9 million and $9.0 million, respectively. For the three and nine months ended June 30, 2018, there was an increase of $0.1 million and an increase of $0.2 million in the valuation allowance, respectively. For the three and nine months ended June 30, 2017, the increase in valuation allowance was approximately $1.5 million and $2.8 million, respectively.

 

    June 30,
2018		     September 30, 
2017		  
             
Deferred tax asset from net operating loss and carry-forwards   $ 8,863,255     $ 9,032,129  
Valuation allowance     (8,863,255 )     (9,032,129 )
Deferred tax asset, net     -                        -  

 

11. Commitments and contingencies

 

Operating Lease

 

The Company leases a number of properties under operating leases. Rental expenses under operating leases for the three and nine months ended June 30, 2018 were $165,495 and $487,202, respectively. Rental expenses under operating leases for the three and nine months ended June 30, 2017 were $164,075 and $492,480 respectively.

 

On January 12, 2018, Moxian Shenzhen signed a 5 year lease agreement to rent office buildings located in Pudong New District, Shanghai, China, as the research and development center for the Company’s newly incorporated subsidiary, Moxian Information Technologies (Shanghai) Co. Ltd. (“Moxian Shanghai”). The average annual rent is approximately $0.7 million (RMB4.52 million).

 

As of June 30, 2018, the Company was obligated under non-cancellable operating leases for minimum rentals as follows:

 

For the Twelve Months Ending June 30,    
2019  $1,276,496 
2020   725,431 
2021   676,868 
2022   720,861 
2023 and thereafter   832,486 
Total minimum lease payments  $4,232,142 

 

 17 

 

 

MOXIAN, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

11. Commitments and contingencies (Continued)

 

Arrangement with Xinhua New Media Co., Ltd

 

The Company entered into an exclusive advertising agency agreement and sponsor agreement with Xinhua New Media Co., Ltd (“Xinhua New Media”). Pursuant to the agreements, the Company, as an exclusive agent, is authorized to operate and sell advertisements in the gaming channel of Xinhua New Media’s mobile application and sponsor related advertising events. The exclusive advertising agency agreement and sponsor agreement expired on December 31, 2020 and December 31, 2017, respectively. The Company entered into amendments with Xinhua News Media for both the agency agreement and sponsor agreement in December 2016. The fees payable under the amended exclusive advertising agency agreement and sponsor agreement have been reduced. The amended payment schedule as of June 30, 2018 for the exclusive agency agreement and sponsor agreement is listed below:

 

For the Twelve Months Ended    
June 30, 2019  $1,249,168 
June 30, 2020   1,551,277 
June 30, 2021   1,085,894 
Total agency payments  $3,886,339 

 

For the three and nine months ended June 30, 2018, the Company incurred $390,265 and $1,156,258 advertising agent fee expense, respectively. For the three and nine months ended June 30, 2017, the Company incurred $364,357 and $485,351 advertising agent fee expense, respectively.

 

For the three and nine months ended June 30, 2018, the Company incurred $692 and $109,760 sponsor expense, respectively. For the three and nine months ended June 30, 2017, the Company incurred $103,120 and $148,951 sponsor expense, respectively. These expenses were included in the selling, general and administrative expense.

 

Legal Proceedings

 

As of June 30, 2018, the Company is not aware of any material outstanding claim and litigation against them.  

  

 18 

 

 

ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those financial statements appearing elsewhere in this Report. 

 

Certain statements in this Report constitute forward-looking statements. These forward-looking statements include statements, which involve risks and uncertainties, regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategy, (c) anticipated trends in our industry, (d) our future financing plans, and (e) our anticipated needs for, and use of, working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” or the negative of these words or other variations on these words or comparable terminology. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.

 

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.

 

The “Company,” “we,” “us,” “our” or “Moxian” are references to the combined business of

  

(i)

Moxian, Inc., a company incorporated under the laws of the state of Nevada;

   
(ii)

Moxian CN Group Limited, a company incorporated under the laws of Samoa (“Moxian CN Samoa”),

 

(iii)

Moxian Intellectual Property Limited, a company incorporated under the laws of Independent State of Samoa (“Moxian IP Samoa”);

 

(iv)

Moxian Group Limited, a company incorporated under the laws of the British Virgin Islands (“Moxian BVI”),

 

(v) Moxian (Hong Kong) Limited, a limited liability company incorporated under the laws of Hong Kong (“Moxian HK”),

 

(vi)

Moxian Technologies (Shenzhen) Co., Ltd., a company incorporated under the laws of the People’s Republic of China (“Moxian Shenzhen”),

 

(vii) Moxian Malaysia Sdn.Bhd. (“Moxian Malaysia”), a company incorporated under the laws of Malaysia (“Moxian Malaysia”),

 

(viii) Moxian Technologies (Beijing) Co., Ltd., a company incorporated under the laws of the People’s Republic of China (“Moxian Beijing”) and

 

(ix)

Moxian Technologies (Shanghai) Co. Ltd., a company incorporated under the laws of the People’s Republic of China (“Moxian Shanghai”) and

 

(x)Shenzhen Moyi Technologies Co. Ltd., a contractually controlled affiliate of Moxian Shenzhen formed under the laws of People’s Republic of China (“Moyi”).

 

Overview

 

We are in the O2O (“Online-to-Offline”) business. While there are many definitions of O2O, with respect to our business, O2O means providing an online platform for small and medium sized enterprises (“SMEs”) with physical stores to conduct business online, interact with existing customers and obtain new customers. We refer to our customers as “Merchant Clients” and the existing and potential users of our platform as “Users.” Through our platform and the products and services offered through it, we seek to create interaction between our Users and Merchant Clients by allowing Merchant Clients to study consumer behavior. Our products and services are designed to allow Merchant Clients to conduct targeted advertising campaigns and promotions which are more effective because they are geared for those customers that a Merchant Client wishes to reach. Our platform is designed to encourage Users to return and to recruit new Users, each of which is a potential customer for our Merchant Clients.

 

We believe we are different from other companies in that our plan is to sign up merchants first and build our user base utilizing their customers. 

 

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The current version of our platform is called “Moxian+” which consists of our user mobile application (“App”) called the Moxian+ User App and a separate App for our Merchant Clients called the Moxian+ Business App. Both versions of the App are currently available in the Google Play Store and the Apple App Store and can be downloaded free of charge. We also have a website that can be accessed at www.moxian.com where either App can also be downloaded.

 

Moxian principally operates in Shenzhen and Beijing. As of June 30, 2018, we had a total of 42 employees, of which 15 are in research and development, 7 in sales and marketing and the rest in other functions, including finance and administration.

 

Going Concern

  

The Company has incurred losses since incorporation and has not been able to generate a steady revenue stream.

 

As of June 30, 2018, and September 30, 2017, our accumulated deficiency was approximately $44.3 million and $38.7 million, respectively. Our stockholders’ deficit was $7.62 million as of June 30, 2018 and $2.96 million as of September 30, 2017.

 

We have generated $109,315 and $45,924 of revenue for the nine months ended June 30, 2018 and 2017, respectively. Our losses have been attributed to a lack of recurrent revenue to cover operating overhead such as selling, general and administrative, advertising agency fees, depreciation and amortization and research and development.

 

The Company has been dependent on the financial support given by a related party, Ms. Liu Shu Juan who is an Executive Director and the controlling shareholder of Shanghai Shewn Wine Co. Ltd. On May 11, 2018, the board of directors ratified a new unsecured credit facility line of $4 million, after having converted her previous $1 million loan into 350,023 shares of common stock. As of June 30, 2018, this credit line facility was fully drawn-down and the Company is now in the process of formalizing an additional credit facility of $5 million. The terms of this additional credit line are expected to be identical to that of previous loans, with interest bearing at 4.75% per annum on the outstanding balance at the end of each month.

  

Since the start of this fiscal year, the Company has been collaborating with Ms. Liu and her associates from Shanghai Shewn Wine Co. Limited to tap into the commercial experience of the latter and build software applications that satisfy market needs. The Company is also reviewing its business model and its operating strategies. The Company expects to launch new products before the close of 2018. Even though the Company is cautiously optimistic that its income streams will improve, the Company will still require additional funding in the foreseeable future.

 

If the Company is unable to obtain the necessary additional funding on a timely basis from Ms. Liu or any third party and on acceptable terms, it will be unable to implement its revised business plans, pay debt obligations or respond to competitive pressures. Any of these factors would have a material adverse effect on its business, prospects, financial condition and results of operations and raise substantial doubts about the ability of the Company to continue as a going concern. The unaudited condensed consolidated financial statements for the period ended June 30, 2018 have been prepared on a going concern basis due to the Company’s expectation of further financial support from its major shareholders and related parties. They do not include any adjustments to reflect the possible future effects on the recoverability and classifications of assets, or the amounts and classifications of liabilities that may result from the inability of the Company to continue as a going concern.

 

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Results of Operations

 

For the three months ended June 30, 2018 compared with the three months ended June 30, 2017

 

Overview

 

In the quarter ended June 30, 2018, the Company continued to rationalize its operating overheads  as it seeks a different strategy in its approach towards research and development of mobile applications and marketing these products. The Company believes its platform is sufficiently developed and robust and new applications are best developed by outsourcing to specialists with specific skills and technical knowhow. As a result, staff headcounts continue to drop with a corresponding decrease in operating overhead expenses.

 

In the quarter ended June 30, 2018, the Company began negotiations with an unrelated third party that sought platform services to allow its members to make online purchases. Several pilot runs on the Company’s revised V3.0 proved to be highly successful and the Company hopes to formalize an agreement with this third party in late 2018. The Company’s management expects that agreements with such third parties could lead to an improved financial performance for the Company.

 

Operating Expenses

 

Operating expenses in both the quarters ended June 30, 2018 and 2017 were approximately $2.0 million, of which the selling and general administrative expenses accounted for about $1.3 million with the current quarter showing a higher level of general administration costs. Research and development expenses were slightly higher at $0.53 million for this reporting quarter compared with $0.44 million in the quarter ended June 30, 2017 due to higher initial outlays on the initial engagement of a US-based software developer.

 

Depreciation and amortization expense for the three month period ended June 30, 2018 was $195,161, a decrease from the depreciation and amortization expense of $199,945 incurred in the same period of last year.

 

We expect that our operating expenses will still fluctuate due to the Company’s restructuring of its operations in the coming quarters.

 

Net Loss

 

The net loss for both the three months ended June 30, 2018 and 2017 was approximately $2.0 million.

 

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For the nine months ended June 30, 2018 compared with the nine months ended June 30, 2017

 

Revenues

 

The Company had revenues of $109,315 in the nine months ended June 30, 2018 compared to $45,924 in the comparable period in 2017. The increase in revenue was the result of one-off sales of tailored-made application packages that the Company sold to its clients.  

 

Operating Expenses

 

Operating expenses for the nine months ended June 30, 2018 and 2017 were approximately $5.7 million and $10.8 million, respectively. The Company recorded an impairment charge of approximately $3.0 million in the quarter ended June 30, 2017. There has been a significant reduction in both research and development expenses as well as selling and general administration costs as a result of a conscious policy of maintain a low level of key core staff and outsourcing specialist skills from the beginning of this fiscal year. This is reflected in the selling and general administration expenses which fell to $4.2 million from $5.1 million in the corresponding period in 2017 while research and development expenses were halved in this period, against $1.6 million in the corresponding period in 2017.

 

Depreciation and amortization expense for the nine months ended June 30, 2018 were lower, at $0.6 million, a decrease of $0.3 million because intangible assets had been fully impaired as of June 30, 2017.

  

Net Loss

 

The net loss for the nine months ended June 30, 2018 was $5.7 million compared with a loss of $10.9 million in the comparable period in 2017 as a result of an overall reduction in the major expenses of the Company, as outlined above.

 

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Liquidity and Capital Resources

 

As of June 30, 2018, we had a working capital deficit of $8.0 million as compared to $4.1 million as of September 30, 2017.

 

Net cash used in operating activities for the nine months ended June 30, 2018 was approximately $4.9 million as compared to net cash used in operating activities of approximately $6.7 million for the nine months ended June 30, 2017. The decrease in cash used in operating activities for the nine months ended June 30, 2018 was mainly due to the reduced expenses and the lower losses of the Company.

 

Net cash used in investing activities for the nine months ended June 30, 2018 was $220,045 as compared to $29,092 for the nine months ended June 30, 2017. The higher spending for the nine months ended June 30, 2018 was mainly due to the Company’s expenditures on its office renovation in Moxian Shenzhen.

 

Net cash provided by financing activities for the nine months ended June 30, 2018 was approximately $5.5 million as compared to approximately $7.0 million for the nine months ended June 30, 2017. During the nine months ended June 30, 2018, the Company obtained related parties loans of $5,319,346 from related parties, of which $1,008,068 was converted into common shares and repaid related party loans of $191,312. The Company also received $330,000 from the escrow account maintained after the completion of the IPO.

 

During the nine months ended June 30, 2017, the Company completed a public offering with gross proceeds of approximately $10 million, deducting placement agents' commissions and other offering expenses of approximately $1.0 million, resulting in net proceeds of approximately $9.0 million, of which $500,000 was placed in an indemnification escrow account. In addition, during the nine months ended June 30, 2017, the Company also received proceeds of approximately $4.2 million from various related party loans and repaid a majority of all related party loans of approximately $5.7 million with IPO proceeds.   

 

Following this strategic review and collaboration with Shewn, the Company expects to launch new apps in the market to increase its sales revenue gradually over the course of fiscal year 2018.  However, if the revenue does not reach the level anticipated in the Company’s plan, the Company expects to fund any cash flow shortfalls as follows:

 

  ● Financial support commitments from the Company’s major stockholders and a related party; and

 

  ● Public and/or private issuance of our securities.

 

If we are not able to obtain the necessary funding on a timely basis, on acceptable terms, or at all, we may be unable to implement operational plans, repay our debt obligations or respond to competitive pressures. Any of these factors would have a material adverse effect on our business, prospects, financial condition and results of operations and raise concerns on the ability of the Company to continue as a going concern. The unaudited condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. 

 

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Critical Accounting Policies and Estimates

 

Use of estimates

 

The preparation of the unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the accompanying unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates required to be made by management include but not limited to, useful lives of property and equipment, intangible assets valuation, inventory valuation and deferred tax assets. Actual results could differ from those estimates. 

 

Recently Issued Accounting Pronouncements

 

Reference is made to the “Recent Accounting Pronouncements” in Note 2 to the Unaudited Condensed Consolidated Financial Statements included in this Report for information related to new accounting pronouncements, as well as the related impact of those recent accounting pronouncements. 

 

Off-Balance Sheet Arrangements

 

As of June 30, 2018, we did not have any off-balance sheet arrangements.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosures Control and Procedures

 

As of June 30, 2018, the Company carried out an evaluation, under the supervision of and with the participation of management, including our Company’s chief executive officer, of the effectiveness of the design and operation of our Company’s disclosure controls and procedures under the 2013 COSO framework. Based on the foregoing, the chief executive officer concluded that our Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were ineffective in timely alerting management to information required to be included in the Company’s periodic filings to the Securities and Exchange Commission filings.

 

Management’s Remediation Initiatives

 

To mediate the identified material weaknesses and other deficiencies, we have introduced the following measures:

 

  (1) Ensured that the Audit Committee meets regularly, either through conference calls or at physical meetings and reviewed all related party transactions to ensure that they are in the best interest of the Company

 

  (2) Kept all board members regularly informed of all major developments in the Company through circularization of resolutions on important issues, followed by explanatory telephone calls or emails

 

  (3) Reviewed and documented several key operating cycles of the Company, ensuring that there are sufficient internal controls at key points and segregation of important duties.

 

  (4) Designed and monitored controls over financial reporting, including the introduction of a proper checklist of cut-off procedures to ensure proper accounting of accruals and payables.

 

  (5) Continued to provide training to financial staff on U.S. GAAP and educate management staff and directors on NASDAQ Listing Rules and SEC Reporting Requirements.

 

  (6)

Continued to engage an external accounting firm to prepare consolidation and the preparation of financial statements in accordance with the requirements of U.S. GAAP.

 

Changes in internal controls over financial reporting

 

There have been no changes in our internal controls over financial reporting that occurred during the period covered by this Report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

None.

 

ITEM 1A. RISK FACTORS.

 

Not applicable to a smaller reporting company.

 

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

 

(a)

On November 10, 2017, the Company and Ms. Liu Shu Juan, a director of the Company, entered into a loan agreement for a line of credit of $1,000,000 or the RMB equivalent. Pursuant to the loan agreement, the Company issued an unsecured convertible promissory note, bearing an interest rate of 4.75% per annum and maturing one year from the date of issuance. Ms. Liu Shu Jian had the right to convert all or any portion of the outstanding and unpaid principal and interest of the note into shares of the Company’s common stock at the conversion price set forth in the convertible debt agreement, as amended.

 

On May 8, 2018, the Company received a notice of conversion from Ms. Liu to convert an outstanding amount of $1,008,068, comprising $1 million of principal and $8,068 of interest, into 350,023 shares of common stock at a volume-weighted price of $2.88 per share.

 

On May 11, 2018, we issued in aggregate 350,023 shares of our common stock upon conversion of the note to Ms. Liu. No underwriter was involved in the issuance. Because the shares were issued upon conversion of the notes, we did not receive any proceeds from the sale but instead saw a decrease in debt as a result. The above issuance was made pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act and/or Regulation S promulgated under the Securities Act.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS.

 

31.1*   Rule 13(a)-14(a)/15(d)-14(a) Certification of principal executive officer
31.2*   Rule 13(a)-14(a)/15(d)-14(a) Certification of principal financial officer
32.1*   Section 1350 Certification of principal executive officer
32.2*   Section 1350 Certification of principal financial officer
101*   XBRL data files of Financial Statements and Notes contained in this Quarterly Report on Form 10-Q.

 

*Filed herewith

 

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SIGNATURES

 

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

 

  Moxian, Inc.
     
Date: August 14, 2018 By: /s/ Yin Yi Jun
  Name: Yin Yi Jun
  Title: Chief Executive Officer
    (Principal Executive Officer)

 

  Moxian, Inc.
     
Date: August 14, 2018 By: /s/ Tan Wan Hong
  Name: Tan Wan Hong
  Title: Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

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