NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Organization and nature of operations
|
Moxian, Inc. (formerly known as Moxian
China, Inc., hereinafter referred as “Moxian,” together with its subsidiaries and variable interest entity, the “Company”),
was incorporated under the laws of the State of Nevada on October 12, 2010. The Company, through its subsidiaries and variable
interest entity, engages in the business of operating a social network platform that integrates social media and business into
one single platform. The Company is currently devoting its efforts to develop mobile application and online platform that facilitate
the small to 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 develop additional sources of capital, develop apps and websites,
generate servicing income, and ultimately, achieve profitable operations (see Note 2).
On February 17, 2014, the Company incorporated
Moxian CN Group Limited (“Moxian CN Samoa”) under the laws of Samoa.
On February 21, 2014, Moxian acquired Moxian
Group Limited (“Moxian BVI”), together with its subsidiaries, Moxian (Hong Kong) Limted (“Moxian HK”),
Moxian Technology (Shenzhen) Co., Ltd. (“Moxian Shenzhen”), and Moxian Malaysia Sdn. Bhd.(“Moxian Malaysia”)
through our wholly owned subsidiary, Moxian CN Samoa from Rebel Group, Inc. (“REBL”), a company incorporated in the
State of Florida and of which our previous Chief Executive Officer, Tan Meng Dong, is a promoter as the term is defined under Rule
405 of Regulation C promulgated under the Securities Act, by entering into a License and Acquisition Agreement (the “License
and Acquisition Agreement”) in consideration of $1,000,000 (“Moxian BVI Purchase Price”). As a result, Moxian
BVI, together with its subsidiaries, Moxian HK, Moxian Shenzhen, and Moxian Malaysia, became the Company’s subsidiaries.
Under the License and Acquisition Agreement, REBL also agreed to grant us the exclusive right to use REBL’s intellectual
property rights (collectively, the “IP Rights”) in Mainland China, Malaysia, and other countries and regions where
REBL conducts its business (the “Licensed Territory”), and the exclusive right to solicit, promote, distribute and
sell REBL products and services in the Licensed Territory for five years (the “License,”) and in consideration of such
License, the Company agreed to pay to REBL (i) $1,000,000 as license maintenance royalty each year commencing on the first anniversary
of the date of the License Agreement; and (ii) 3% of the gross profits resulting from the distribution and sale of the products
and services on behalf of the Company as an earned royalty.
Moxian BVI was incorporated on July 3,
2012 under the laws of British Virgin Islands. REBL owned 100% equity interests of Moxian BVI prior to the closing of the License
and Acquisition Agreement, among the Company, Moxian BVI and REBL.
Moxian HK was incorporated on January 18,
2013 and became Moxian BVI’s subsidiary since February 14, 2013. Moxian HK is currently engaged in the business of online
social media. Moxian HK operates through two wholly owned subsidiaries: Moxian Shenzhen and Moxian Malaysia.
Moxian Shenzhen was invested and wholly
owned by Moxian HK. Moxian Shenzhen was incorporated on April 8, 2013 and is engaged in the business of internet technology, computer
software, commercial information consulting
Moxian Malaysia was incorporated on March
1, 2013 and became Moxian HK’s subsidiary since April 2, 2013. Moxian Malaysia was previously in the business of IT services
and media advertising but have ceased operations since June 2015..
Shenzhen Moyi Technologies Co., Ltd. (“Moyi”)
was incorporated on July 19, 2013 under the laws of the People’s Republic of China and became a variable interest entity
(“VIE”) of Moxian Shenzhen since July 15, 2014. Moxian Shenzhen controls Moyi through arrangement that absorbs operations
risk, as if Moyi is a wholly owned subsidiary of Moxian Shenzhen.
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 o the equity interests of Moyi and all related rights, liabilities and obligations under the Moyi Agreements such
that the new shareholders stand in place of the old shareholders in all aspects of the Moyi Agreements.
MOXIAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Organization and nature of operations (continued)
|
Moxian Technologies (Beijing) Co., Ltd.
(“Moxian Beijing”) was incorporated on December 10, 2015 under the laws of the People’s Republic of China and
is a wholly owned subsidiary of Moxian Shenzhen. Moxian Shenzhen made the capital injection of RMB 10 million (approximately USD
$1.5 million) to Moxian Beijing during the year ended September 30, 2017.
On January 30, 2015, the Company entered
into an Equity Transfer Agreement (the “Equity Transfer Agreement,” such transaction, the “Equity Transfer Transaction”)
with REBL, to acquire from REBL 100% of the equity interests of Moxian Intellectual Property Limited, a company incorporated under
the laws of Samoa and a wholly owned subsidiary of REBL (“Moxian IP Samoa”) for $6,782,000 (the “Moxian IP Samoa
Purchase Price”) (see Note 9). Moxian IP Samoa owns all the intellectual property rights relating to the operation, use and
marketing of the Moxian Platform, including all of the trademarks, patents and copyrights that are used in the Company’s
business. As a result of the Equity Transfer Transaction, Moxian IP Samoa became a wholly owned subsidiary of the Company.
As of September
30, 2018. only Moxian Shenzhen, Moyi and Moxian Beijing have business operations. The other companies are all dormant.
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 gross proceeds from the offering were approximately $10,005,000 before deducting placement agents’ commissions and other
offering expenses, resulting in net proceeds of approximately $8.5 million. In connection with the offering, the Company’s common
stock began trading on the NASDAQ Capital Market beginning on November 15, 2016 under the symbol “MOXC”.
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, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of principal accounting policies
|
Basis of presentation and consolidation
The accompanying 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 VIE: Moxian CN Samoa, Moxian BVI,
Moxian HK, Moxian Shenzhen, Moxian Malaysia, Moyi, Moxian Beijing and Moxian IP Samoa. All intercompany transactions and balances
have been eliminated in the consolidation.
On May 24, 2016, the Board of approved
a reverse stock split of the Company’s issued and outstanding shares of common stock, par value $0.001 per share (the “Common
Stock”), at a ratio of 1-for-2 (the “Reverse Stock Split”). The Reverse Stock Split was effective on June 20,
2016 (the “Effective Date”). Simultaneously with the Reverse Stock Split, the number of shares of the Company’s
authorized Common Stock was reduced from 500,000,000 shares to 250,000,000 shares without changes in par value per share. The Company
has retroactively restated all shares and per share data for all the periods presented.
In accordance with U.S. GAAP, variable
interest entities (“VIEs”) are generally entities that lack sufficient equity to finance their activities without additional
financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which the Company
is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary
is required to consolidate the VIE for financial reporting purposes.
Accounting Standards Codification (“ASC”) 810-10
“Consolidation” addresses whether certain types of entities referred to as VIEs, should be consolidated in a company’s
consolidated financial statements. Pursuant to an Exclusive Business Cooperation Agreement by and between Moxian Shenzhen and Moyi,
dated July 15, 2014, Moxian Shenzhen has the exclusive right to provide to Moyi technical and systems support, marketing consulting
services, training for technical personnel and technical consulting services. As payment for these services, Moyi has agreed to
pay Moxian Shenzhen a service fee equal to 100% Moyi’s pre-tax profit. In addition, Moxian Shenzhen will also absorb losses
from Moyi, if any, based on the service agreement. In accordance with the provisions of ASC 810, the Company has determined that
Moyi is a VIE of Moxian Shenzhen and that the Company is the primary beneficiary, and accordingly, the financial statements of
Moyi are consolidated into the results of the Company.
The following assets and liabilities of
the VIE are included in the accompanying consolidated financial statements of the Company as of September 30, 2018 and 2017:
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Current assets
|
|
$
|
-
|
|
|
$
|
3.082
|
|
Non-current assets
|
|
|
-
|
|
|
|
-
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
3,082
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
2,043,779
|
|
|
$
|
732,910
|
|
Non-current liabilities
|
|
|
-
|
|
|
|
-
|
|
Total liabilities
|
|
$
|
2,043,779
|
|
|
$
|
732,910
|
|
As of September 30, 2018 the Commerce
Bureau of the Shenzhen Government has suspended the licenses of Shenzhen Moxian and Moyi because certain ex-employees have reported
that their claims for salary arrears and long-service compensation have not been paid. As of September 30, 2018, the Company is
in the process of resolving these through arbitration. (See Note 12)
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 September
30, 2018, the Company’s current liabilities exceeded the current assets by approximately $10 million, its accumulated deficit
was approximately $47.3 million and the Company has incurred losses since inception.
MOXIAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of principal accounting policies (continued)
|
Going Concern
(continued)
On November 14,
2016, the Company completed its initial public offering (“IPO”) with net proceeds of $8.50 million after deducting
placement agents’ commission and other offering costs, which helped the Company’s cash flow in fiscal 2017. 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
|
|
●
|
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 convertible loan agreement of $1,000,000
or its RMB equivalent. Pursuant to the loan agreement, the Company issued an unsecured convertible promissory note, carrying an
interest rate of 4.75% per annum and due in one year. On May 8, 2018, Liu converted the total outstanding of $1,008,068 into 350,023
shares of the Company’s common stock at a price of $2.88 per share. The conversion price was calculated using the price
of daily volume weighted average price per share for the 20 consecutive business days prior to the conversion.
On May 11, 2018, the Company and Ms. Liu
entered into a loan agreement for a line of credit of $4,000,000 or its RMB equivalent, bearing interest of 4.75% per annum and
due in two years. As of September 30, 2018, the line has been fully drawn down and the total outstanding to Ms. Liu is $ 5,032,760. This
amount exceeded the agreed loan of $4,000,000 and is not covered by any agreement.
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 consolidated financial statements for the years ended September
30, 2018 and 2017 have been prepared on a going concern basis and 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.
Risks and Uncertainties
The Company’s
operations are substantially carried out in the PRC. Accordingly, the Company’s business, financial condition and results
of operations maybe substantially 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 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 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 that reflect management’s assumptions based on the best available information.
MOXIAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of principal accounting policies (continued)
|
Fair value of financial instruments
(continued)
The carrying value
of cash and cash equivalents, prepayments, deposits and other receivables, accruals and other payables, loans from related parties
and unrelated party approximate their fair values because of the short-term nature of these instruments.
Use of estimates
The preparation of the 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 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, provision for doubtful accounts, intangible
assets valuation, inventory valuation, value added recoverable valuation and deferred tax assets valuation. Actual results could
differ from those estimates.
Cash and cash equivalents
The Company considers all short-term highly
liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less to
be cash equivalents. As of September 30, 2018 and 2017, substantially all of the Company’s cash and cash equivalents were
deposited in financial institutions located in the PRC. To limit exposure to credit risk relating to bank deposits, the Company
primarily places bank deposits with large financial institutions in the PRC with acceptable credit rating.
Restricted cash
Restricted cash represented cash held by
depository banks in order to comply with the provisions of certain debt agreements, as well as the cash held in an indemnification
escrow account pursuant to the financing agreement signed with the placement agents.
Under the terms of the placement agreement,
the cash of $500,000 in the escrow account must be kept for a period of two years after the completion of the IPO, therefore,
recorded as restricted cash, long-term as of September 30, 2017. On November 9, 2017, $330,000 was released from this account
with the approval of the placement agents and the escrow agents.
On January, the balance of
$170,000 was released.
Inventories
Inventories consist of merchandise and
are stated at the lower of cost or market value, and cost is calculated on the moving weighted average basis. The cost of inventories
comprises all costs of purchases and other costs incurred in bringing the inventories to their present condition. As of September
30, 2018 and 2017, there was no lower of cost or market adjustment because the carrying value of the Company’s inventories
was lower than the current and expected market price.
Prepayments, deposits and other receivables
Prepayments and deposits
represent amounts advanced to suppliers. The suppliers usually require advance payments or deposits when the Company makes purchase
or orders service and the prepayments and deposits will be utilized to offset the Company’s future payments. Other receivables
mainly consist of various cash advances to employees for business needs. These amounts are unsecured, non-interest bearing and
generally short-term in nature.
Allowances are recorded when utilization
and collection of amounts due are in doubt. Delinquent prepayments, deposits and other receivables are written-off after management
has determined that the likelihood of utilization or collection is not probable and known bad debts are written off against the
allowances when identified.
MOXIAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of principal accounting policies (continued)
|
Deferred offering costs
Deferred offering costs consisted principally
of legal, underwriting and registration costs in connection with the IPO of the Company’s ordinary shares. Such costs are
deferred until the closing of the offering, at which time the deferred costs are offset against the offering proceeds.
Property and Equipment, net
Property and equipment are recorded at
cost less accumulated depreciation and amortization. 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
|
Intangible assets,
net
Intangible assets,
comprising Intellectual property rights (“IP rights”) and software, which are separable from property and equipment,
are stated at cost less accumulated amortization. Amortization is computed using the straight-line method over the estimated useful
lives of 3- 10 years.
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 recognized impairment
losses of $3,009,732 for the IP rights and other intangible assets during the years ended September 30, 2017 resulting in a nil
value as of September 30, 2018 and 2017.
MOXIAN, INC.
NOTES TO 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 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 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 consolidated statements of operations. The Company evaluate 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 September 30, 2018 and 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 September
30, 2018, the tax years ended December 31, 2011 through to December 31, 2017 for the Company’s PRC entities remain open for
statutory examination by the PRC tax authorities.
MOXIAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of principal accounting policies (continued)
|
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”).The functional currency of Moxian HK is Hong Kong Dollar (the “HKD”), and
the functional currency of Moxian Malaysia is Malaysia Ringgit (the “RM”).
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 in stockholders’ deficiency. Translation gain of $164,758 and a translation loss of $42,522 are recognized in the statements of operations
and comprehensive loss for the years ended September 30, 2018 and 2017, respectively.
The exchange rates
applied are as follows:
Balance sheet items, except for equity accounts
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
RMB:USD
|
|
|
6.8686
|
|
|
|
6.6549
|
|
HKD:USD
|
|
|
7.8259
|
|
|
|
7.8116
|
|
RM:USD
|
|
|
4.1370
|
|
|
|
4.2225
|
|
Items in the statements
of operations and comprehensive loss, and statements cash flows:
|
|
Years
Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
RMB:USD
|
|
|
6.5368
|
|
|
|
6.8135
|
|
HKD:USD
|
|
|
7.8324
|
|
|
|
7.7799
|
|
RM:USD
|
|
|
4.0288
|
|
|
|
4.3418
|
|
MOXIAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of principal accounting policies (continued)
|
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 products.
Loss per share
Basic loss per share
is based on the weighted average number of common shares outstanding during the period while the effects of potential common shares
outstanding during the period are included in diluted earnings per share.
FASB Accounting Standard
Codification Topic 260 (“ASC 260”), “Earnings Per Share,” requires that employee equity share options,
non-vested shares and similar equity instruments granted to employees be treated as potential common shares in computing diluted
earnings per share. Diluted earnings per share should be based on the actual number of options or shares granted and not yet forfeited,
unless doing so would be anti-dilutive. The Company uses the “treasury stock” method for equity instruments granted
in share-based payment transactions provided in ASC 260 to determine diluted earnings per share. Antidilutive securities represent
potentially dilutive securities which are excluded from the computation of diluted earnings or loss per share as their impact was
antidilutive. Due to the Company’s net loss for the years ended September 30, 2018 and 2017, the basic and diluted loss per
share are same for the years ended September 30, 2018 and 2017.
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.
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.
MOXIAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of principal accounting policies (continued)
|
Recent accounting
pronouncements
(continued)
The Company does not believe other recently
issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial
position, statements of operations and cash flows.
3.
|
Prepayments, deposits and other receivables, net
|
|
|
September 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
|
|
|
(941,848
|
)
|
|
|
(33,436
|
)
|
Prepayments, deposits and other receivable, net
|
|
$
|
-
|
|
|
$
|
152,548
|
|
The bad debt provision for the years ended
September 30, 2018 and 2017 was $ 908,412 and $33,436 respectively.
MOXIAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4.
|
Property and equipment, net
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
Electronic equipment
|
|
$
|
2,319,545
|
|
|
$
|
2,333,401
|
|
Furniture and fixtures
|
|
|
70.596
|
|
|
|
80,780
|
|
Leasehold improvements
|
|
|
263,609
|
|
|
|
361,544
|
|
Total property and equipment
|
|
|
2,653,750
|
|
|
|
2,775,725
|
|
Less: Accumulated depreciation and amortization
|
|
|
(2,653,750
|
)
|
|
|
(2,089,429
|
)
|
Total property and equipment, net
|
|
$
|
-
|
|
|
$
|
686,296
|
|
Depreciation
and amortization for the years ended September 30, 2018 and 2017 were
$681,596
and $1,097,046, respectively.
5.
|
Intangible assets, net
|
As of September
30, 2018 and 2017, the Company has the following amounts related to intangible assets:
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
IP rights
|
|
$
|
1,410,335
|
|
|
$
|
1,410,355
|
|
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
|
|
$
|
-
|
|
|
$
|
-
|
|
No
significant residual value is estimated for these intangible assets. Amortization expense for the years ended September 30, 2018
and 2017 totaled Nil and $278,158, respectively.
Due to the continuing losses from operations, the Company recognized an impairment loss of $3,009,732
for the IP rights and other intangible assets for the year ended September 30, 2017.
6.
|
Accruals and other payables
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
Salary payable
|
|
$
|
403,986
|
|
|
$
|
379,902
|
|
Advances from customers
|
|
|
-
|
|
|
|
61,078
|
|
Other tax payable
|
|
|
-
|
|
|
|
28,625
|
|
Accrued expenses
|
|
|
2,691,684
|
|
|
|
1,275,466
|
|
Other payables
|
|
|
285,482
|
|
|
|
116,448
|
|
Total
|
|
$
|
3,381,152
|
|
|
$
|
1,861,519
|
|
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. Any withdrawal from this line is non-interest bearing and shall be repaid on demand and before the maturity date
of the line of credit. The maturity date of the unsecured line of credit was May 15, 2018 but has been extended indefinitely. As
of September 30, 2018 and 2017, the loan payable to Bayi was $1,310,772 and $1,347,035, respectively.
MOXIAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8.
|
Related party transactions and balances
|
The table below sets forth the entities
that are regarded as related parties having transactions for the year ended September 30, 2017 and of the balances as of September
30, 2018 and 2017, respectively.
Name
|
|
Relationship
with the Company
|
|
|
|
Beijing Xinhua Huifeng Equity Investment Center
Limited Partnership (“Xinhua”)
|
|
A Shareholder of the Company
|
|
|
|
Hao Qing Hu
|
|
Chief Executive Officer and Director of the Company
|
Vertical Venture Capital
Group Limited
|
|
A below 5% shareholder of the Company
|
|
|
|
Liu Shu Juan
|
|
A less than 1% Shareholder of the Company, Ex-Director
and Legal Representative of Shanghai Shewn Wine Co. Ltd.
|
Details of loans payable (receivable) –
related parties are as follows:
|
|
September 30,2018
|
|
|
September 30,
2017
|
|
Loan payable
(receivable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vertical Venture Capital Group Limited
|
|
$
|
979,907
|
|
|
$
|
1,133,228
|
|
Liu Shu Juan
|
|
|
5,032,760
|
|
|
|
(24,042
|
)
|
Xinhua
|
|
|
(23,296
|
)
|
|
|
1,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,989,371
|
|
|
|
1.110.884
|
|
MOXIAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8.
|
Related party transactions and balances (continued)
|
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 of $1,000,000 or its RMB equivalent. Pursuant
to the loan agreement, the Company issued an unsecured convertible promissory note, carrying an interest rate of 4.75% per annum
and due in one year. On May 8, 2018, Liu converted the total outstanding of $1,008,068 into 350,023 shares of the Company’s
common stock at a price of $2.88 per share. The conversion price was calculated using the price of daily volume weighted average
price per share for the 20 consecutive business days prior to the conversion.
On May 11, 2018, the Company and Ms. Liu
entered into a loan agreement for a line of credit of $4,000,000 or its RMB equivalent, bearing interest of 4.75% per annum and
due in two years. As of September 30, 2018, the line has been fully drawn down and the total outstanding to Ms. Liu $ 5,032,760. This
amount exceeded the agreed loan of $4,000,000 and is not covered by any agreement.
The following
details relate to the year ended September 30, 2071 and are only given for comparison purposes.
For the year
ended September 30, 2017, the Company made repayments, net of borrowings, aggregating $113,732 to related parties. .
The loans and
advances made by the related parties to Moxian HK, Moxian Shenzhen, Moyi, Moxian Beijing and Moxian Malaysia and are unsecured,
interest free and due on various dates specified on the loan agreements.
During
the year to September 30, 2017, details of the related party transactions are as follows:
Bayi
|
2018
|
|
2017
|
|
Borrowings
|
|
Repayments
|
|
Borrowings
|
|
Repayments
|
|
|
|
|
|
|
|
|
Moxian Shenzhen
|
-
|
|
-
|
|
$3,928,164 (RMB26,764,695)
|
|
$3,328,102
(RMB
22,676,148)
|
Moyi
|
-
|
|
-
|
|
$96,866
(RMB
660,000)
|
|
$96,866
(RMB
660,000)
|
Moxian HK
|
-
|
|
-
|
|
$190,233
(HKD
1,479,990)
|
|
-
|
As
of September 30, 2018 and 2017, the loan payable balance to Bayi was $1,310,772 and $1,347,035, respectively. As of September
30, 2017, Bayi was no longer a related party of the Company since Bayi is no longer a shareholder of the Company. As a result,
the loan payable to Bayi was recorded separately on the Company’s consolidated balance sheets (see Note 7).
Vertical
Venture
|
2018
|
|
2017
|
|
Borrowings
|
|
Repayments
|
|
Borrowings
|
|
Repayments
|
|
|
|
|
|
|
|
|
Moxian HK
|
$4,976
(HKD 38,945)
|
|
-
|
|
$552,298
(HKD 4,296,810)
|
|
$1,335,990 (HKD10,393,844)
|
Moxian SZ
|
-
|
|
-
|
|
$987,739
(RMB 6,730,000)
|
|
-
|
As
of September 30, 2018 and 2017, the loan payable balance to Vertical Venture was $1,111,530 and $1,133,228, respectively.
MOXIAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note Conversion
On September 7, 2016, the Company entered
into two note conversion agreements with Bayi and Moxian China Limited. The note conversion agreements permitted the conversion
of promissory notes in the aggregate amount of $2 million payable by the Company into shares of the Company’s common stock
at the IPO price. The Company announced a successful completion of its IPO on November 14, 2016 with an IPO price of $4.00 per
share. As of September 30, 2016, the Company included the $2 million worth of shares to be issued as stock subscription payable
in accordance with ASC 480-10-25-14. On January 3, 2017, the Company issued 500,000 shares of its common stock to Bayi and Moxian
China Limited at a price of $4.00 per share in full settlement of stock subscription payables in accordance to the note conversion
agreements signed on September 7, 2016.
MOXIAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9.
|
Capital stock (continued)
|
Public Offering Warrants
In connection with and upon closing of
the Public Offering on November 14, 2016, the Company issued 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 stockholders’ deficiency.
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 September 30, 2018, 100,0
60 shares of warrants were issued and outstanding; and none of the warrants has
been exercised.
Stock reverse split
As of September 30, 2018, there were no
warrants or options outstanding to acquire any additional shares of Common Stock of the Company.
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 September 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 September 30, 2018, as the Company has cumulative foreign losses as of September
30, 2018.
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 years ended September 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 years ended September 30, 2018
and
2017. The management estimated that Moxian Malaysia will not generate any taxable income in the future.
MOXIAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10.
|
Income taxes (continued)
|
PRC
Effective from January
1, 2008, the PRC’s statutory income tax rate is 25%. The Company’s PRC subsidiaries are subject to income tax rate
of 25%, unless otherwise specified.
As of September
30, 2018, the Company had net operating loss carry forwards of approximately of $20.2 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 September 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 September 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 September 30, 2018.
The
Company’s effective income tax rates were 0% and 0.7% for the years ended September 30, 2018 and 2017, respectively. Income
tax mainly consists of foreign income tax at statutory rates and the effects of permanent and temporary differences.
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
U.S. statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Foreign income not registered in the U.S.
|
|
|
(34.0
|
)%
|
|
|
(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 September 30, 2017.
As of September
30, 2018 and 2017, the valuation allowance was approximately $9.0 million, For the year ended September 30, 2018 and 2017, there
was an increase of Nil and $$3,254,146 in the valuation allowance.
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
Deferred tax asset from net operating loss and carry-forwards
|
|
$
|
9,032,129
|
|
|
$
|
9,032,129
|
|
Valuation allowance
|
|
|
(9,032,129
|
)
|
|
|
(9,032,129
|
)
|
Deferred tax asset, net
|
|
$
|
-
|
|
|
$
|
-
|
|
MOXIAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11.
|
Commitments and contingencies
|
Operating Lease
The Company leases a number of properties under operating leases. Rental expenses under operating leases
for the years ended September 30, 2018 and 2017 were $652,315 and $652,315 respectively. As of September 30, 2018, the Company
was obligated under non-cancellable operating leases minimum rentals as follows:
Twelve months ended September 30,
2019
|
|
$
|
252,000
|
|
2020
|
|
|
231,000
|
|
Total minimum lease payments
|
|
$
|
483,000
|
|
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 expires on December 31, 2020
and the sponsor agreement expired on December 31, 2017,
The Company entered into amendments with
Xinhua New Media for both the agency agreement and sponsor agreement during the year ended December 31, 2017. The
fees
payable under the amended exclusive advertising agency agreement and sponsor agreement have been reduced. In April 2018, the Company
further negotiated with Xinhua New Media and the fees for the year ended December 31, 2018 have been waived on the understanding
that past arrears have to be made good.
Legal Proceeding
As of September 30, 2018, the Company is not aware of any material outstanding claim and litigation against
them.
Arbitration proceedings
Because certain ex-employees of Shenzhen
Moxian and Moyi were not paid their salary arrears and long-service compensation, they reported their claims to the Shenzhen Labor
Tribunal for arbitration. As a result, the licenses of these two companies have been suspended by the Commerce Bureau and their
bank accounts frozen. On January 9, 2019, the Company settled the bulk of these claims in the amount of RMB 845,000 (approximately
$123,000) and will be applying for a lifting of the suspension.