Rebel Group, Inc. - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 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: 333-177786

REBEL GROUP, INC.

(Exact name of registrant as specified in its charter)

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 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      ☐ 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     ☐ 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. 

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

As of November 27, 2018, the number of shares of the registrant’s common stock, par value of $0.0001 per share, outstanding was 48,009,941.

TABLE OF CONTENTS

PART I -- FINANCIAL INFORMATION

ITEM 1 -- FINANCIAL STATEMENTS

 REBEL GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(Stated in US Dollars)

INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

REBEL GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(Stated in US Dollars)

See accompanying notes to unaudited condensed consolidated financial statements

REBEL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Stated in US Dollars)

See accompanying notes to unaudited condensed consolidated financial statements

REBEL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Stated in US Dollars)

See accompanying notes to unaudited condensed consolidated financial statements

REBEL GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

Rebel Group, Inc. (f/k/a Inception Technology Group, Inc., the “Company”) was incorporated under the laws of the State of Florida on September 13, 2011. The Company organizes, promotes and hosts mixed martial arts (“MMA”) events featuring top level athletic talents. With assistance from contracted production crews, the Company also produces and distributes, through the Internet and social media, and sells the distribution rights to television stations, videos of its MMA events. The Company seeks to promote MMA in Asian countries through hosting events that attract talented fighters from all over the world.

On June 21, 2017, Pure Heart Entertainment Pte Ltd. (“Pure Heart”), a wholly owned subsidiary of the Company, formed Rebel Shanghai Limited (“Rebel Shanghai”), which was incorporated in Shanghai China in order to acquire Qingdao Quanyao Sports Consulting Co. Ltd. (“Qingdao Quanyao”), a company organized under the laws of the People’s Republic of China (the “PRC”), and for its business expansion in the PRC.

On October 1, 2017, the Company entered into a Share Transfer Agreement (the “Transfer Agreement”) with Naixin Qi (the “Shareholder”), an individual and the sole shareholder of Qingdao Quanyao.

Pursuant to the Transfer Agreement, Pure Heart, through Rebel Shanghai agreed to acquire 100% share of the outstanding equity interests (the “Equity Stake”) of Qingdao Quanyao from the Shareholder with the purchase price valued at approximately $7,000,000 consisting of the following: (i) the forgiveness of debt owed by the Target Company to Pure Heart as of October 1, 2017, in the amount of approximately $2,825,000 (the “Forgiven Debts”) and (ii) 12,000,000 shares (the “Shares”) of the common stock of the Company, par value $0.0001 per share (together the “Purchase Price”) (See Note 3 to the unaudited condensed consolidated financial statements for details).

Qingdao Quanyao holds 50% shares of Qingdao Leibo Sports Culture Co., Ltd (“Leibo”).

Basis of presentation and consolidation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared and presented in accordance with generally accepted accounting principles (“U.S. GAAP”) for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included. Operating results for the nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis, and the financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on April 16, 2018.

All significant inter-company transactions and balances have been eliminated upon consolidation.

Liquidity and capital resources

As of September 30, 2018, the Company had cash and cash equivalents of $35,342, which decreased by $5,030 when comparing with $40,372 as of December 31, 2017. The net cash used in operating activities for the period ended September 30, 2018 was $4,114,646, which increased by $1,349,400 when comparing with $2,745,246 for the period ended September 30, 2017. The net decrease in cash and cash equivalents was mainly due to operation activities in China. The Company’s principal sources of liquidity have been cash provided by advances from related parties. The Company’s operating results for future periods are subject to numerous uncertainties and it is uncertain if the Company will be able to achieve profitability and continue growth for the foreseeable future. If management is not able to increase revenue and manage operating expenses in line with revenue forecasts, the Company may not be able to achieve profitability.

The Company will focus on improving operation efficiency and cost reduction, developing core cash-generating business by extending the advances from the major shareholders, seeking additional public and/or private issuance of securities, as well as looking for strategic business partners to optimize our operations. On March 16, 2018, the Company entered into a Subscription Agreement (the “Subscription Agreement”) with a third-party investor (the “Investor”). The Investor is expected to remit three equal installments in the amount of $1 million each, and $3 million in the aggregate, in exchange for such numbers of the Company’s common stock as determined pursuant to the terms and conditions of the Subscription Agreement. As of the date of this report, the Company has not received any of the installments and there is no guarantee that the Company will receive them in the near future, if ever.

On August 16, 2018, the Company entered into a subscription agreement with another third-party investor. The investor is expected to remit two equal installments in the amount of $1 million each, and $2 million in the aggregate, in exchange for such numbers of the Company’s common stock as determined pursuant to the terms and conditions of the subscription agreement. On August 17, 2018, the Company received the first installment in the amount of $1 million. The Company expected to receive the second installment in December 2018 or January 2019. The Company also received financial support commitments from the Company’s major shareholder.

The Company believes that available cash and cash equivalents, together with actions as mentioned above, should enable the Company to meet presently anticipated cash needs for at least the next 12 months after the date that the financial statements are issued. However, 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 nine months 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.

Revenue Recognition

The Company adopted Accounting Standards Codification 606, Revenue from Contracts with Customers (“Topic 606”), as of January 1, 2018 using the modified retrospective transition method. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605. Topic 606 prescribes a five-step model for recognizing revenue which includes (i) identifying contracts with customers; (ii) identifying performance obligations; (iii) determining the transaction price; (iv) allocating the transaction price and (v) recognizing revenue.

The Company derives revenues principally from the following sources: (i) advertising and sponsorship sales, (ii) live event ticket sales, and (iii) direct-to-consumer sales of merchandise at the live event venues. The below describes the revenue recognition policies in further detail for each major revenue source of the Company.

Advertising and sponsorships: through the advertising and sponsorship agreements with customers, the Company offers a full range of the promotional vehicles, including online and print advertising, on-air announcements and special appearances by our fighters. The Company allocates the transaction price to all performance obligations contained within a sponsorship and advertising arrangement based upon their relative standalone selling price. Revenues are recognized as each performance obligation is satisfied, which generally occurs when the sponsorship and advertising is aired, exhibited, performed or played on the applicable media platform.

Live event ticket sales: revenues from the live event ticket sales are recognized upon the occurrence of the related live event.

Direct-to-consumer venue merchandise sales: direct-to-consumer merchandise sales consist of sales of merchandise at the live events. Revenues are recognized at the point of sale, as control is transferred to the customer.

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.

Substantially all revenue was from sponsorships in the Company.

Currently, the Company's revenues come from the following sources:

Use of estimates

The preparation of the combined 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 combined financial statements, and the reported amounts of revenues and expenses during the reporting period. Our significant estimates and assumption include depreciation, stock-based compensation, and the valuation allowance relating to the Company’s deferred tax assets. Actual results could differ from those estimates.

Cash and cash equivalents

Cash and cash equivalents consist of bank deposits with original maturities of three months or less, which are unrestricted as to withdrawal and use the Company maintained accounts at banks and have not experienced any losses from such concentrations.

Fair value of financial instruments

Fair value information of financial instruments requires disclosure, whether or not recognized in the balance sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all nonfinancial assets and liabilities are excluded from fair value disclosure requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company.

As of September 30, 2018, and December 31, 2017, financial instruments of the Company primarily comprise of cash, cash equivalents, other receivables, accrued expenses, which the carrying amounts approximated their fair values because of their generally short maturities.

The Company uses quoted prices in active markets to measure the fair value of the long-term investment.

Foreign currency translation and transactions

The reporting currency of the Company is United States Dollars (“US$”), which is also the Company’s functional currency. The Singapore and the PRC subsidiaries maintain their books and records in its local currency, the Singapore dollar (“SGD”) and Renminbi (“RMB”), which are their functional currencies as being the primary currency of the economic environment in which these entities operate.

Transactions in foreign currencies other than functional currencies are initially recorded at the functional currency rate ruling at the date of transaction. Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency transaction in the statements of income. Monetary assets and liabilities denominated in foreign currency are translated at the functional currency rate of exchange ruling at the balance sheet date. Any differences are taken to profit or loss as a gain or loss on foreign currency translation in the statements of income.

The Company translated the assets and liabilities into US dollars using the rate of exchange prevailing at the applicable balance sheet date and the statements of income and cash flows are translated at an average rate during the reporting period. Adjustments resulting from the translation are recorded in investors’ equity as part of accumulated other comprehensive income.

Income taxes

Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the combined 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 (refer to Note 10 and below to the unaudited condensed consolidated financial statements for further discussion on the impact to the newly enacted tax laws in 2017). Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Entities should recognize in the 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 statements of operations.

In January 2018, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) to provide guidance for companies that have not completed their accounting for the income tax effects of the 2017 Tax Act in the period of enactment. Specifically, SAB 118 states that companies that have not completed accounting for the effects of the 2017 Tax Act by financial reporting deadlines may report provisional amounts based on reasonable estimates for items for which the accounting is incomplete. Those provisional amounts will be subject to adjustment during a measurement period that begins in the reporting period that includes the 2017 Tax Act’s enactment date and ends when a company has obtained, prepared and analyzed the information needed to complete the accounting requirements under ASC 740 Income Taxes. The measurement period should not extend beyond one year from the enactment date. Furthermore, SAB 118 states that if a company cannot make a reasonable estimate for an income tax effect, it should not account for that effect until it can make such an estimate.

One-time transitional tax. As part of the 2017 Tax Act, total foreign earnings and profits (“E&P”) after 1986, that were previously deferred from U.S. federal taxation, are subject to a one-time tax on the mandatory deemed repatriation of foreign earnings. The Company’s provisional analysis of the one-time transition tax resulted in no additional taxes being owed due to the overall accumulated E&P deficit for the income tax purpose.

The Company has determined that we cannot make a reasonable estimate of the income tax effect with respect to global intangible low-taxed income (GILTI) provisions of the 2017 Tax Act. The GILTI provisions allow companies to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which the entity is subject to the rules or (ii) account for GILTI in the entity’s measurement of deferred taxes. Our ultimate accounting policy election will depend on our estimates of future taxable income related to GILTI. Refer to the Note 10 for further discussion on the impact of tax laws enacted during 2017.

Earnings (loss) per share

Basic earnings (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. The average market price during the year is used to compute equivalent shares.

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.

Plant and equipment

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

Intangible assets

Intangible assets, comprising trade mark and other intangible assets, which are separable from the fixed assets, are stated at cost less accumulated amortization. Amortization is computed using the straight-line method over the estimated useful lives of 10 years.

Goodwill

Goodwill represents the excess of the consideration over the fair value of the net assets acquired at the date of acquisition. Goodwill is not amortized but rather tested for impairment at least annually at the reporting until level by applying a fair-value based test in accordance with accounting and disclosure requirements for goodwill and other indefinite-lived intangible assets. This test is performed by management annually or more frequently if the Company believes impairment indicators are present.

Impairment of long-lived assets

The Company reviews its long-lived assets, other than goodwill including property and equipment and intangible assets with definite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Company measures impairment by comparing the carrying values of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amounts of the assets, the Company would recognize an impairment loss based on the excess of the carrying value over the assessed discounted cash flow amount.

Impairment of goodwill

The Company reviews the carrying value of intangible assets with indefinite lives not subject to amortization, including goodwill, to determine whether impairment may exist annually or more frequently if events and circumstances indicate that it is more likely than not that an impairment has occurred. The Company has the option to assess qualitative factors to determine whether it is necessary to perform the two-step assessment. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the two-step quantities impairment test described below is required. The first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, the assets are not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business acquisition with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow.

Long-term investment

Investments comprise marketable securities which are classified as available-for-sale securities and are carried at fair value with unrealized gains and losses, net of taxes, reported as a separate component of shareholders’ equity (deficit). The Company determines any realized gains or losses on the sale of marketable securities on a specific identification method and records such gains and losses as a component of other comprehensive loss, net of taxes in the unaudited consolidated statement of operations.

Comprehensive (loss) income

The Company has adopted FASB Accounting Standard Codification Topic 220 (“ASC 220”) “Comprehensive income”, which establishes standards for reporting and the presentation of comprehensive income (loss), its components and accumulated balances. Accumulated other comprehensive income represents the unrealized fair value (loss) gain on long-term investment and the accumulated balance of foreign currency translation adjustments of the Company.

Concentrations and risks

- Foreign currency risk

A majority of the Company’s expense transactions are denominated in RMB and a significant portion of the Company and its subsidiaries’ assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by the Company in China must be processed through the PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to affect the remittance.

Our functional currency is the RMB and Singapore dollars in subsidiaries in China and Singapore, respectively, and our financial statements are presented in U.S. dollars. The Singapore dollars depreciated by 7.6% in fiscal year 2017. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. The change in the value of the RMB relative to the U.S. dollar may affect our financial results reported in the U.S. dollar terms without giving effect to any underlying changes in our business or results of operations. Currently, our assets, liabilities, revenues and costs are denominated in RMB.

To the extent that the Company needs to convert U.S. dollars into RMB for capital expenditures and working capital and other business purposes, appreciation of RMB against U.S. dollar would have an adverse effect on the RMB amount the Company would receive from the conversion. Conversely, if the Company decides to convert RMB into U.S. dollar for the purpose of making payments for dividends, strategic acquisition or investments or other business purposes, appreciation of U.S. dollar against RMB would have a negative effect on the U.S. dollar amount available to the Company.

- Significant customers

For the three and nine months ended September 30, 2018 and 2017, one customer accounted for 99% and 100% of the Company’s total revenues, respectively. As of September 30, 2018, one company accounted for 47% of the Company’s total accounts receivable balance. As of December 31, 2017, one company accounted for 81% of the Company’s total accounts receivable balance.

Statement of Cash Flows

Cash flows from the Company’s operations are formulated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

Risks and Uncertainties

The significant operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s results may be adversely affected by changes in the political, regulatory and social conditions in the PRC. Although the Company has not experienced losses from these situations and believes that it is in compliance with existing laws and regulations including its organization and structure disclosed in Note 1, may not be indicative of future results.

Recently Issued Accounting Guidance

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates guidance for when revenue should be recognized from the exchange of goods or services. ASU No. 2016-08 was issued in March 2016 to clarify the principal versus agent guidance in this new revenue recognition standard. ASU 2016-10 was issued in April 2016 to clarify the guidance on accounting for licenses of intellectual property and identifying performance obligations in the new revenue recognition standard. ASU 2016-12 was issued in May 2016 to clarify the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes in the new revenue recognition standard. ASU 2016-20 was issued in December 2016 to make technical corrections and improvements on narrow aspects of this guidance. ASU No. 2015-14 was issued in August 2015 to defer the effective date of ASU 2014-09 for one year. The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. The new standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted the revenue recognition guidance beginning January 1, 2018 using the modified retrospective method of adoption. The Company has determined that the adoption of Topic 606 did not have a material impact on its consolidated financial statements.

In January 2017 the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This new standard eliminates Step 2 from the goodwill impairment test. Instead, an entity should compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning July 1, 2020 assuming the Company still remains an emerging growth company at that date. Early adoption is permitted. The adoption of ASU No. 2017-04 is not expected to have material impact to the assessment of Goodwill impairment for the Company.

In February 2016, the FASB issued ASU 2016-02, Amendments to the Accounting Standards Codification (“ASC”) 842 Leases. This update requires lessee to recognize the assets and liability (the lease liability) arising from operating leases on the balance sheet for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Twelve months or less lease term, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. If a lessee makes this election, it should recognize lease expense on a straight-line basis over the lease term. In transition, this update will be effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases. Management does not believe the adoption of these ASUs would have a material effect on the Company’s 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 has evaluated the impact of the Act as well as the guidance of SAB 118 and incorporated the changes into the determination of a reasonable estimate of its deferred tax liability and appropriate disclosures in the notes to its unaudited condensed consolidated financial statements (See Note 10).

On June 20, 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting, which aligns the accounting for share-based payment awards issued to employees and nonemployees. Under ASU No. 2018-07, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. The new standard is effective for us on January 1, 2019. Early adoption is permitted, including in interim periods, and should be applied to all new awards granted after the date of adoption. The Company does not believe this guidance will have a material impact on its unaudited condensed consolidated financial statements.

In August 2018, the FASB Accounting Standards Board issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted for any removed or modified disclosures. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Company does not expect this guidance will have a material impact on its condensed consolidated financial statements.

Aside from the above, the Company does not believe other recently issued but not yet effective accounting statements, would have a material effect on the Company’s financial position or on the results of operations.

On October 1, 2017, the Company entered into the Transfer Agreement with the Shareholder, the sole shareholder of Qingdao Quanyao, a company organized under the laws of the PRC.

Pursuant to the Transfer Agreement, Pure Heart, through Rebel Shanghai agreed to acquire the Equity Stake of Qingdao Quanyao from the Shareholder with the Purchase Price valued at approximately $7,000,000 consisting of the following: (i) the Forgiven Debts and (ii) the Shares.

The goodwill of $6,719,542 arising from the acquisition consists largely of synergies and economies of scale expected from combining the operations of Qingdao Quanyao. None of the goodwill recognized is expected to be deductible for income tax purpose.

There is no revenue and earnings of Qingdao Quanyao since the acquisition date, which would be included in the condensed consolidated statements of operations and comprehensive income (loss).

Property and equipment are comprised of:

The depreciation expenses for the nine months ended September 30, 2018 and 2017 were $19,718 and $13,671, respectively. The depreciation expenses for the three months ended September 30, 2018 and 2017 were $6,850 and $4,921, respectively.

Intangible assets are comprised of:

No significant residual value is estimated for these intangible assets. Amortization expense for the nine months ended September 30, 2018 and 2017, totaled $10,026 and $9,911, respectively. Amortization expense for the three months ended September 30, 2018 and 2017, totaled $3,176 and $4,990, respectively. The following table represents the total estimated amortization of intangible assets for the five succeeding years:

The changes in the carrying amount of goodwill were as follows:

The Company performed its goodwill impairment reviews as of September 30, 2018 and December 31, 2017 and determined there was no impairment as of September 30, 2018 and December 31, 2017.

The Company holds 7,782,000 shares in Moxian, Inc. (“MOXC”), a company listed on the NASDAQ capital.

As of September 30, 2018 and December 31, 2017, the fair value of MOXC was $0.82 and $3.85, respectively. For the nine months ended September 30, 2018 and 2017, the fair loss of $11,789,730 and $1,945,500 were recognized respectively. And for the three months ended September 30, 2018 and 2017, the fair loss of $4,431,849 and $1,984,410 were recognized, respectively. The Company has no intention to sell the investment in the near future.

The interest expense for the nine months ended September 30, 2018 and 2017 were $79,511 and $18,947, respectively. The interest expense for the three months ended September 30, 2018 and 2017 were $46,582 and $10,202, respectively.

On March 15, 2017, the Company, the Chairman of the Board of Directors, and one unrelated third-party individual entered into an agreement to document the loan of Singapore Dollars (“S$”) 50,000 ($35,715) that the unrelated third-party individual advanced to the Company on March 15, 2017, and was repayable on March 14, 2018 (“Repayment Date”), with an interest of 10% per annum. The unrelated third-party individual may convert all of the principal amount into 71,430 shares of Company’s common stock after the Repayment Date.

On March 24, 2017, the Company, the Chairman of the Board of Directors, and one unrelated third-party individual entered into an agreement to document the loan of S$200,000 ($142,856) that the unrelated third-party individual advanced to the Company on March 24, 2017, and was repayable on March 23, 2018 (“Maturity Date”), with an interest of 10% per annum. The unrelated third-party individual shall have the option to extend the term of the loan from the Maturity Date to March 23, 2019 (“Extended Maturity Date”). The unrelated third-party individual may convert all of the principal amount, into shares of Company’s common stock (“Conversion Right”) at any time for the period commencing on the date hereof and ending on March 23, 2019 (“Conversion Period”). In the event that the Conversion Right is exercised within seven Business Days immediately following the Maturity Date, the conversion will be based on the share price of $0.50. In the event that the Conversion Right is exercised after the Maturity Date but within seven Business Days immediately following the Extended Maturity Date, the conversion will be based on the share price of $0.60.

As of September 30, 2018, the term loans from the two unrelated third-party individuals were overdue. Subsequent to the first extension of the term loans from the two individuals to August 2018, the Company is currently negotiating with the third-party individuals to further extend the maturity date.

On May 5, 2017, the Company, the Chairman of the Board of Directors, and one independent director of the Company entered into an agreement to document the loan of $300,000 that the independent director advanced to the Company on May 5, 2017, and was repayable on May 4, 2018 (“Maturity Date”), with an interest of 10% per annum. The independent director shall have the option to extend the term of the loan from the Maturity Date to May 4, 2019 (“Extended Maturity Date”). The independent director may convert all of the principal amount, into shares of Company’s common stock (“Conversion Right”) at any time for the period commencing on the date hereof and ending on May 4, 2019 (“Conversion Period”). In the event that the Conversion Right is exercised within seven Business Days immediately following the Maturity Date, the conversion will be based on the share price of $0.50. In the event that the Conversion Right is exercised after the Maturity Date but within seven Business Days immediately following the Extended Maturity Date, the conversion will be based on the share price of $0.60. The term loan was extended to May 2019.

On April 25, 2018, the Company, the Chairman of the Board of Directors and the Company’s CEO and two financial institutions entered into agreements to advance to the Company two short term loans of S$360,000 ($271,368) and S$100,000 ($75,380) respectively. The two short term loans of S$360,000 and S$100,000 are guaranteed by two directors of the Company and bear an effective interest rate of 1.25% and 4% per month, respectively, with 12 equal monthly repayment terms.

During the nine months ended September 30, 2018, the Company issued 2,622,609 shares of common stock to 27 individuals for net cash consideration of $2,609,331. The Company issued 1,433,460 shares of common stock with total value of $1,130,448 to two placement agents, pursuant to a Consultancy Mandate Agreement entered on August 18, 2017, in connection with fund raising for the Company (the “Consultancy Agreement”). The Company issued 20,400 shares of common stock with total value of $16,320 to one agent pursuant to a Service Agreement entered on January 14, 2018, for consultancy services provided to the Company (the “Service Agreement”). The Company issued 1,000,333 shares of common stock with total value of $870,333 to seven individuals as payments for professional services related to public relations and marketing, director fees, and employment benefits. The value of shares of common stock issued for consideration other than cash was determined by referring to the fair value of common stock issued in connection with prior cash consideration.

The Company and its subsidiaries file separate income tax returns.

The United States of America

The Company is incorporated under the laws of the State of Florida in the U.S. and is subject to U.S. federal corporate income tax. The State of Florida imposes corporate state income tax at 5.5%. As of December 31, 2017, future net operating losses of approximately $2.8 million are available to offset future taxable income through 2036.

On December 22, 2017, the 2017 Tax Act was enacted into law. Beginning January 1, 2018, the 2017 Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, creates new taxes on certain foreign sourced earnings, repeals the Alternative Minimum Tax (“AMT”), and expands the number of individuals whose compensation is subject to a $1.0 million cap on deductibility, amongst other changes. In certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and refundable AMT credit. In other cases, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting and the provisions of the tax laws that were in effect immediately prior to enactment. We will continue to refine our calculations as additional analysis is completed.

With respect to global intangible low-taxed income (“GILTI”) provisions of the 2017 Tax Act, the Company is continuing to evaluate how the provisions will be accounted for. The GILTI provisions allow companies to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which the entity is subject to the rules or (ii) account for GILTI in the entity’s measurement of deferred taxes. As of September 30, 2018, the Company has not elected a method due to its continuing analysis of the GILTI provisions. The elected method will depend, in part, on analyzing global income.

British Virgin Islands

Rebel Holdings Limited (“Rebel FC”) and SCA Capital Limited (“SCA Capital”) were incorporated in the British Virgin Islands and are not subject to income taxes under the current laws of the British Virgin Islands.

Singapore

Pure Heart was incorporated in Singapore and is subject to Singapore corporate income tax at 17%.

PRC

Rebel Shanghai and Qingdao Quanyao were incorporated in the PRC and are subject to statutory Enterprise Income Tax rate of the PRC at 25%.

The Company has a number of open tax years which include the tax years ended December 31, 2014, 2015, 2016 and 2017 that have not been filed. While it is often difficult to predict the final outcome or the timing of uncertain tax position, the Company believes that the accruals for the income taxes reflect the most likely outcome for the unfiled tax years. The Company had approximately $40,000 and $nil of interest and penalties accrued at December 31, 2017 and 2016, respectively.

Based upon management’s assessment of all available evidence, the Company believes that it is more-likely-than-not that the deferred tax assets, primarily for certain of the subsidiaries NOL carry-forwards will not be realizable; and therefore, a full valuation allowance is established for NOL carry-forwards. The valuation allowance for deferred tax assets was approximately $1,738,000 and $904,000 as of September 30, 2018 and December 31, 2017, respectively.

As of September 30, 2018, and December 31, 2017, amounts due to related parties were $2,422,504 and $1,178,675 respectively. The amounts are unsecured, interest free, due on demand and do not have a fixed repayment date.

A summary of changes in the amount due to directors and shareholders of the Company is as follows:

As of September 30, 2018 and December 31, 2017, trade and other receivables – related party was $258,341 and $271,142, respectively. The amounts are unsecured, interest free and do not have any fixed repayment terms.

A summary of changes in the amount due from a related party is as follows:

Operating Lease

The Company’s subsidiaries lease administrative office space under various operating leases whereby the rent expense amounted to $61,347 and $nil for the three months ended September 30, 2018 and 2017, respectively. The Company’s subsidiaries lease administrative office space under various operating leases whereby the rent expense amounted to $191,156 and $nil for the nine months ended September 30, 2018 and 2017, respectively. The leases will expire in November 2020.

Further minimum lease payment under non-cancelable operating leases are as follows:

Legal Proceeding

From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

On November 5, 2018, the Company was served a summon for a complaint filed by Ofsink, LLC (“Ofsink”) on September 13, 2018, in the Supreme Court of the City of New York County of New York against the Company. By filing the complaint, Ofsink alleged, among other claims, that the Company failed to pay for its legal services rendered in the amounts set forth on uncontested invoices in the amount of $252,822, and that it sustained damages in the sum of $252,822 plus interest and attorney’s fees as a result of the non-payment of the invoices rendered. The complaint seek, among other relief, compensatory damages and plaintiff’s counsel’s fees. The Company intends to defend the lawsuit vigorously and has engaged counsel to attend to this matter. Litigation, however, is inherently unpredictable, and the ultimate outcome or effect of this lawsuit cannot be predicted with certainty. The Company accrued $252,822 of legal fees based on the available information and management's best estimates in the year ended December 31, 2017.

13. Subsequent events

In October 2018, the Company issued 136,131 shares of common stock with total value of $175,817 for professional services pursuant to service agreements entered with consultants. The value of shares of common stock issued for consideration other than cash was determined by referring to the value of common stocks issued for cash consideration.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS

CERTAIN STATEMENTS IN THIS REPORT, INCLUDING STATEMENTS IN THE FOLLOWING DISCUSSION, ARE WHAT ARE KNOWN AS “FORWARD-LOOKING STATEMENTS”, WHICH ARE BASICALLY STATEMENTS ABOUT THE FUTURE. FOR THAT REASON, THESE STATEMENTS INVOLVE RISK AND UNCERTAINTY SINCE NO ONE CAN ACCURATELY PREDICT THE FUTURE. WORDS SUCH AS “PLANS”, “INTENDS”, “WILL”, “HOPES”, “SEEKS”, “ANTICIPATES”, “EXPECTS “AND THE LIKE OFTEN IDENTIFY SUCH FORWARD-LOOKING STATEMENTS, BUT ARE NOT THE ONLY INDICATION THAT A STATEMENT IS A FORWARD-LOOKING STATEMENT. SUCH FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS CONCERNING OUR PLANS AND OBJECTIVES WITH RESPECT TO THE PRESENT AND FUTURE OPERATIONS OF THE COMPANY, AND STATEMENTS WHICH EXPRESS OR IMPLY THAT SUCH PRESENT AND FUTURE OPERATIONS WILL OR MAY PRODUCE REVENUES, INCOME OR PROFITS. NUMEROUS FACTORS AND FUTURE EVENTS COULD CAUSE THE COMPANY TO CHANGE SUCH PLANS AND OBJECTIVES OR FAIL TO SUCCESSFULLY IMPLEMENT SUCH PLANS OR ACHIEVE SUCH OBJECTIVES, OR CAUSE SUCH PRESENT AND FUTURE OPERATIONS TO FAIL TO PRODUCE REVENUES, INCOME OR PROFITS. THEREFORE, THE READER IS ADVISED THAT THE FOLLOWING DISCUSSION SHOULD BE CONSIDERED IN LIGHT OF THE DISCUSSION OF RISKS AND OTHER FACTORS CONTAINED IN THIS REPORT ON FORM 10-Q AND IN THE COMPANY’S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. NO STATEMENTS CONTAINED IN THE FOLLOWING DISCUSSION SHOULD BE CONSTRUED AS A GUARANTEE OR ASSURANCE OF FUTURE PERFORMANCE OR FUTURE RESULTS.

The “Company”, “we,” “us,” and “our,” in this Management’s Discussion and Analysis of Financial Condition and Plan of Operation refer to the combined business of (i) Rebel FC; (ii) Pure Heart; (iii) SCA Capital; (iv) Rebel Shanghai; and (v) Qingdao Quanyao.

Overview

The Company, through Rebel FC, organizes, promotes and hosts Mixed Martial Arts events featuring top-level athletic talents with assistance from contracted production crews. The Company also seeks to produce and distribute videos of its MMA events, through the internet, social media, and selling the rights to such videos to distribute to television stations.

The Company seeks to promote MMA in China through hosting top quality matches, live TV broadcast and inspiring reality series that attract talented fighters from all over the world. MMA is unarmed combat involving the use of a combination of techniques from different disciplines of martial arts, including, without limitation, grappling, submission holds, kicking and striking. The styles of martial arts involved range from Brazilian Jiu-Jitsu, Judo, Karate, Boxing, Muay Thai, Wrestling, Jeet Kune Do, Taekwondo, Sanshou and various other forms of martial arts. Unlike boxing, where athletes can only strike with their fists and can only target above the belt, the fighters in MMA can use punches, kicks, elbows, knee strikes, takedowns and submissions to win a contest.

The Company successfully held two events in 2017. On August 12, 2017, an event titled Battle Royal: Quest for Glory was held at Kerry Hotel in Pudong, Shanghai together with Qingdao Quanyao. On September 2, 2017, the Company held another event titled China vs. The World at Shenzhen Stadium in Shenzhen together with Qingdao Quanyao. This event was broadcast live on Qingdao TV and several major social media platforms. For the two events held in the year 2017, Qingdao Quanyao paid Pure Heart USD200,000 per event for royalty and management fee in accordance with 2017 Cooperation Agreement.

On June 21, 2017, Pure Heart formed Rebel Shanghai, which was incorporated in Shanghai China in order to acquire Qingdao Quanyao and to facilitate its business expansion in the PRC.

On October 1, 2017, the Company entered into a Transfer Agreement with the sole shareholder of Qingdao Quanyao, a company organized under the laws of the PRC.

Pursuant to the Transfer Agreement, Pure Heart, through Rebel Shanghai, agreed to acquire 100 % of the equity of Qingdao Quanyao from its sole Shareholder with the Purchase Price valued at approximately $7,000,000 consisting of the following: (i) the Forgiven Debts and (ii) the Shares.

The Company held two events in 2018 with one in Shanghai and one in Guangzhou. At the time of this report, the Company does not contemplate holding another event in 2018.

The first event in 2018 was held on April 29, 2018 at Kerry Hotel in Shanghai. The event was broadcast live by Guangdong Sports TV, other satellite TV stations and major social media platforms. The viewership for the event from television and social media, respectively, were 4.06 million and 8.33 million.

The second event in 2018 took place at Guangzhou Tianhe Stadium in Guangzhou on May 30, 2018. The event was broadcast live by Guangdong Sports TV and major satellite TV stations such as Tianjin Sports and Qinghai Satellite TV. The event was also broadcast live by major digital streaming platforms such as Youku, PP Sports and YY.com. The viewership for the event from television and social media, respectively, were 4.99 million and 8.15 million.

Results of Operations

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

Gross Revenues

The Company received revenues of $nil and $399,683 in the three months ended September 30, 2018 and three months ended September 30, 2017, respectively.

Operating Expenses

Operating expenses for the three months ended September 30, 2018 and three months ended September 30, 2017 were $1,175,553 and $509,559, respectively. The expenses for each such period consisted of filing fees, professional fees, payroll and benefits, and other general expenses. The increase in expenses was largely due to an increase in headcounts for operational expansion in China.

Net Loss

Net loss for the three months ended September 30, 2018 and three months ended September 30, 2017 were $1,294,684 and $126,040, respectively. Basic and diluted net loss per share amounted to $0.027 and $0.004 for the three months ended September 30, 2018 and three months ended September 30, 2017, respectively. The increase in net loss was due to operational expansion in China.

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

Gross Revenues

The Company received revenues of $223,783 in the nine months ended September 30, 2018 and $399,683 in the nine months ended September 30, 2017.

Operating Expenses

Operating expenses for the nine months ended September 30, 2018 and nine months ended September 30, 2017 were $3,591,624 and $1,241,881, respectively. The expenses for each such period consisted of filing fees, professional fees, payroll and benefits, and other general expenses. For the nine months ended September 30, 2018, the operating expenses mainly consisted of payroll expenses amounted to $1,103,019, rental expenses amounted to $191,156 and agents and professional fees amounted to $1,478,933 related to share issued. The increase in expenses was due to operational expansion in China.

Net Loss

Net loss for the nine months ended September 30, 2018 and nine months ended September 30, 2017 were $5,395,817 and $884,937, respectively. Basic and diluted net loss per share were $0.116 and $0.03 for the nine months ended September 30, 2018 and nine months ended September 30, 2017, respectively. The increase in net loss was due to operational expansion in China.

Liquidity and Capital Resources

On September 30, 2018, we had a working capital deficit of $3,514,745 and cash on hand of $35,342 as compared to working capital deficit of $1,739,033 and cash on hand of $40,372 as of December 31, 2017.

Net cash used in operating activities for the nine months ended September 30, 2018 was $4,114,646 as compared to net cash used in operating activities of $2,745,246 for the nine months ended September 30, 2017. The increase in net cash used in operating activities was primarily due to an increased net loss.

Net cash provided by financing activities for the nine months ended September 30, 2018 was $3,958,181 as compared to $2,934,220 for the nine months ended September 30, 2017. The increase in net cash provided by financing activities was primarily due to increased advances from related parties.

On March 16, 2018, the Company entered into a Subscription Agreement with a third-party investor. The Investor is expected to remit three equal installments of $1 million each, totaling $3 million, in exchange for such numbers of the Company’s common stock as determined pursuant to the terms and conditions of the Subscription Agreement. As of the date of this report, the Company has not received any of the installments and there is no guarantee that the Company will receive them in the near future, if ever.

On August 16, 2018, the Company entered into a subscription agreement with another third-party investor. The investor is expected to remit two equal installments of $1 million each, totaling $2 million, in exchange for such numbers of the Company’s common stock as determined pursuant to the terms and conditions of the subscription agreement. On August 17, 2018, the Company received a first installment of $1 million. The Company expects to receive a second installment in December 2018 or January 2019.

The Company also received financial support commitments from the Company’s related parties.

We believe that available cash and cash equivalents, together with loans from related parties and actions as mentioned above, should enable us to meet presently anticipated cash needs for at least the next 12 months after the date that the financial statements are issued. However, if we are unable to obtain the necessary additional capital on a timely basis and on acceptable terms, we will be unable to implement our current plans for expansion, meet our debt repayment obligations or respond to market competitions. Any of these factors would have a material adverse effect on our business, prospects, financial condition and results of operations and may raise substantial doubts about our ability to continue as a going concern.

Critical Accounting Policies and Estimates

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at dates of the financial statements and the reported amounts of revenue and expenses during the periods. Actual results could differ from these estimates. Our significant estimates and assumptions include depreciation, stock-based compensation and the valuation allowance relating to the Company’s deferred tax assets.

Recently Issued Accounting Pronouncements

Reference is made to the “Recent Accounting Pronouncements” in Note 2 to the Financial Statements included in this report for information related to new accounting pronouncement, none of which had a material impact on our consolidated financial statements, and the future adoption of recently issued accounting pronouncements, which we do not expect will have a material impact on our consolidated financial statements.

Off-Balance Sheet Arrangements

As of September 30, 2018, we do not have any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 4. CONTROLS AND PROCEDURES

Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO concluded that the material weaknesses disclosed in the Company’s Form 10-K for the year ended December 31, 2017 continue to exist and accordingly, the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO, as appropriate, to allow timely decisions regarding required disclosure.

There was no change 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.

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

On November 5, 2018, the Company was served a summon for a complaint filed by Ofsink on September 13, 2018, in the New York Supreme Court in New York County, New York against the Company. By filing the complaint, Ofsink alleged, among other claims, that the Company failed to pay for its legal services rendered in an aggregate amount of $252,822, and that it sustained damages as a result of the non-payment of the invoices rendered. The complaint seeks, among other relief, compensatory damages and plaintiff’s counsel’s fees. The Company intends to defend the lawsuit vigorously and has engaged legal counsel to attend to this matter. The outcome or effect of this lawsuit, however, cannot be predicted with certainty. The Company accrued $252,822 of legal fees based on the available information and Management's best estimates.

ITEM 1A. RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

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

For the nine months ended September 30, 2018, the Company issued 2,622,609 shares of common stock to 27 individuals for a net cash consideration of $2,609,331. The Company issued 1,433,460 shares of common stock with a total value of $1,130,448 to two placement agents pursuant to the Consulting Agreement. The Company issued 20,400 shares of common stock with a total value of $16,320 to one agent pursuant to the Service Agreement. The Company also issued 1,000,333 shares of common stock with a total value of $870,333 to seven individuals as payments for professional services related to public relations and marketing, director fees, and employment benefits. The value of shares of common stock issued for consideration other than cash was determined by referring to the value of shares of common stock issued for cash consideration.

All of the transactions listed above were made pursuant to the exemption from the Section 5 registration requirements of the Securities Act of 1933 for offerings made outside the United States by a United States issuer. The securities issued have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

 ITEM 6. EXHIBITS.

** Furnished, not filed

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.