The following discussion and analysis of our Company's financial condition and
results of operations should be read in conjunction with our unaudited condensed
consolidated financial statements and the related notes included elsewhere in
the report. This discussion contains forward-looking statements that involve
risks and uncertainties. Actual results and the timing of selected events could
differ materially from those anticipated in these forward-looking statements as
a result of various factors. See "Cautionary Note Concerning Forward-Looking
Statements" on page 2.
Unless otherwise noted, all currency figures quoted as "U.S. dollars", "dollars"
or "$" refer to the legal currency of the United States. Throughout this report,
assets and liabilities of the Company's subsidiaries are translated into U.S.
dollars using the exchange rate on the balance sheet date. Revenue and expenses
are translated at average rates prevailing during the period. The gains and
losses resulting from translation of financial statements of foreign
subsidiaries are recorded as a separate component of accumulated other
comprehensive income within the statement of stockholders' equity.
Overview
The Company, through its subsidiaries, is engaged in two business segments: (i)
the physical arts and collectibles business, and (ii) the financing/money
lending business. We conduct our physical arts and collectibles business through
Coinllectibles Pte Ltd, a Singapore corporation ("Coinllectibles"), pursuant to
which we provide authentication, valuation and certification (AVC) service, sale
and purchase, hire purchase, financing, custody, security and exhibition (CSE)
services to art buyers through traditional methods as well as through leveraging
blockchain technology through the creation of non-fungible tokens (NFTs). We
initially intend to focus on customers located in Hong Kong and expand
throughout Asia. We conduct our financing/money lending business through the 9
subsidiaries of Coinllectibles DeFi Limited, our Hong Kong subsidiaries which
are licensed under Hong Kong's Money Lenders Ordinance. We primarily provide
unsecured personal loan financings to private individuals. We also have a small
portfolio of mortgage loans. Revenue is generated from interest received from
the provision of loans to private individual customers.
We are not a Hong Kong operating company but a Nevada holding company with
operations conducted through our wholly owned subsidiaries based in Singapore
and Hong Kong.
We conduct our NFT operations from Singapore. In Singapore, cryptocurrencies and
the custodianship of such cryptocurrencies are not specifically regulated.
Cryptocurrency exchanges and trading of cryptocurrencies are legal, but not
considered legal tender. To the extent that cryptocurrencies or tokens are
considered "capital market products" such as securities, spot foreign exchange
contracts, derivatives and the like, they will be subject to the jurisdiction of
the Monetary Authority of Singapore (MAS), Securities and Futures Act,
anti-money laundering and combating the financing of terrorism laws and
requirements. To the extent that tokens are deemed "digital payment tokens,"
they will be subject to the Payment Services Act of 2019 which, among other
things, require compliance with anti-money laundering and combating the
financing of terrorism laws and requirements. According to the Payment Services
Act of 2019, "digital payment token" means any digital representation of value
(other than an excluded digital representation of value) that (a) is expressed
as a unit; (b) is not denominated in any currency, and is not pegged by its
issuer to any currency; (c) is, or is intended to be, a medium of exchange
accepted by the public, or a section of the public, as payment for goods or
services or for the discharge of a debt; (d) can be transferred, stored or
traded electronically; and (e) satisfies such other characteristics as the
Authority may prescribe; Our NFTs, therefore, are not securities or digital
payment tokens subject to these acts.
We receive fiat and cryptocurrency from sale of collectibles and collection of
royalty fees. In order to minimize the risk of price fluctuation in
cryptocurrency, after we receive the fiat and crypto currencies we will
immediately exchange them into US dollar or stable currencies that are pegged
with US dollar.
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There may be prominent risks associated with our operations being in Hong Kong.
We may be subject to the risks of uncertainty of any future actions of the PRC
government including the risk that the PRC government could disallow our holding
company structure, which may result in a material change in our operations,
including our ability to continue our existing holding company structure, carry
on our current business, accept foreign investments, and offer or continue to
offer securities to our investors. These adverse actions could value the value
of our common stock to significantly decline or become worthless. We may also be
subject to penalties and sanctions imposed by the PRC regulatory agencies,
including the Chinese Securities Regulatory Commission, if we fail to comply
with such rules and regulations, which could adversely affect the ability of the
Company's securities to continue to trade on the Over-the-Counter Bulletin
Board, which may cause the value of our securities to significantly decline or
become worthless.
As a U.S.-listed company with operations in Hong Kong, we may face heightened
scrutiny, criticism and negative publicity, which could result in a material
change in our operations and the value of our common stock. It could also
significantly limit or completely hinder our ability to offer or continue to
offer securities to investors and cause the value of such securities to
significantly decline or be worthless. Additionally, changes in Chinese internal
regulatory mandates, such as the M&A rules, Anti-Monopoly Law, and the soon to
be effective Data Security Law, may target the Company's corporate structure and
impact our ability to conduct business in Hong Kong, accept foreign investments,
or list on an U.S. or other foreign exchange. For a detailed description of the
risks facing the Company and the offering associated with our operations in Hong
Kong, please refer to "Risk Factors - Risk Factors Relating to Our Operations in
Hong Kong" as disclosed in our Current Report on Form 8-k filed with the
Securities and Exchange Commission on September 17, 2021.
Our corporate chart is below:
[[Image Removed: cosg_10qimg2.jpg]]
On June 17, 2021, the Company entered into a Share Acquisition Agreement (the
"Share Acquisition Agreement"), by and among the Company, Massive Treasure
Limited, a British Virgin Islands corporation ("Massive Treasure"), and the
holders of ordinary shares of Massive Treasure. Under the terms and conditions
of the Share Acquisition Agreement, the Company offered to issue 1,078,269,470
shares of common stock of the Company, in consideration for all the issued and
outstanding shares in Massive Treasure. Dr. Herbert Lee, our director, is the
beneficial holder of 47,500 common shares, or 95%, of the issued and outstanding
shares of Massive Treasure. The Company will also issue 55,641,014 shares to
complete the acquisitions of 12 business entities with Massive Treasure has
signed.
As of the date of this report, these acquisitions consummated on September 17,
2021 with 800,000,000 shares of common stock pending to be issued to Dr. Herbert
Lee.
Recent Purchases of Collectibles and Acquisition of subsidiaries
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On July 23, 2021, the Company and Lee Ying Chiu Herbert, our director, entered
into a Sale and Purchase Agreement pursuant to which the Company agreed to
purchase Fifty-Five (55) sets of art collectibles for HK$10,344,000, payable
through the issuance of 180,855 shares of common stock of the Company (the
"Shares"). The sale consummated on August 13, 2021. It is our understanding that
Dr. Herbert Lee is not a U.S. Person within the meaning of Regulations S.
Accordingly, the Shares were sold pursuant to the exemption provided by Section
4(a)(2) of the Securities Act of 1933, as amended, and Regulation S promulgated
thereunder.
On October 15, 2021, Massive Treasure, a subsidiary of Cosmos Group Holdings
Inc., the Company, NFT Limited, a British Virgin Island limited liability
company ("NFT"), and the shareholders of NFT (collectively, the "NFT
Shareholders") agreed to entered into a Share Exchange Agreement Version 2021001
(the "Agreement") which is available on the web site of
http://www.coinllectibles.art, pursuant to which Massive Treasure agreed to
acquire 51% of NFT Limited through the issuance of 2,350,229 shares of common
stock of the Company (the "Shares"). The specifics of such share exchange are
further set forth in that certain Confirmation dated October 15, 2021, by and
among the Shareholders, NFT, the Company and Massive Treasure (the
"Confirmation"). The consummation of the Agreement occurs upon the issuance of
the Shares to the NFT Shareholders on October 22, 2021.
On October 25, 2021, Coinllectibles Private Limited ( "Coinllectibles"), a
subsidiary of Cosmos Group Holdings Inc., and the Company entered into two Sale
and Purchase Agreements (the "Agreements") with two artists, pursuant to which
Coinllectibles agreed to purchase collectible art items for £260,000 and
US$100,000, payable through the issuance of 43,633 and 12,500 shares of common
stock of the Company (the "Shares") respectively, at a per share price of $4.00,
and £130,000 and US$50,000 in cash payable after the respective collectible art
item has sold by Coinllectibles. The consummation of the Agreements occurs upon
the issuance of the Shares to the respective artists on October 29, 2021.
Results of Operations.
The recent outbreak of COVID-19, which has been declared by the World Health
Organization to be a pandemic, has spread across the globe and is impacting
worldwide economic activity. The COVID-19 pandemic has significantly impacted
health and economic conditions throughout Asian region. National, regional and
local governments took a variety of actions to contain the spread of COVID-19,
including office and store closures, quarantining suspected COVID-19 patients,
and capacity limitations. These developments have significantly impacted the
results of operations, financial condition and cash flows of the Company
included in this reporting. The impact included the difficulties of working
remotely from home including slow Internet connection, the inability of our
accounting and financial officers to collaborate as effectively as they would
otherwise have in an office environment and issues arising from mandatory state
quarantines.
While it is not possible at this time to estimate with sufficient certainty the
impact that COVID-19 could have on the Company's business, the continued spread
of COVID-19 and the measures taken by federal, state, local and foreign
governments could disrupt the operation of the Company's business. The COVID-19
outbreak and mitigation measures have also had and may continue to have an
adverse impact on global and domestic economic conditions, which could have an
adverse effect on the Company's business and financial condition, including on
its potential to conduct financings on terms acceptable to the Company, if at
all. In addition, the Company has taken temporary precautionary measures
intended to help minimize the risk of the virus to its employees, including
temporarily requiring employees to work remotely, and discouraging employee
attendance at in-person work-related meetings, which could negatively affect the
Company's business. These measures are continuing. The extent to which the
COVID-19 outbreak impacts the Company's results will depend on future
developments that are highly uncertain and cannot be predicted, including new
information that may emerge concerning the severity of the virus and the actions
to contain its impact.
Between October and November, 2021, we have made significant progress, including
the completion of the acquisition of NFT Limited which beneficially owned Talk+
and the on boarding of two paintings from two renowned artists. Talk+ is a
messaging and cryptocurrency-focused mobile application which aims at
simplifying the crypto usage experience by allowing users to send crypto through
instant messages to other individuals. This helps to flatten the learning curve
for any new individual that is exploring the possibility to participate in the
crypto community. Therefore, including Talk+ into our technological landscape
enables us to attract more non-crypto native users. This thereby helps to
broaden our community reach to not just the crypto community. Signing the Sale
and Purchase Agreements with Hughes and Yeo is another milestone for us. By
having the formal cooperation with these two famous artists, we can solidify our
proof of concept in connecting physical artworks to the digital NFT world. This
helps us to validate our business model and also establish a working partnership
model with other artists in the future.
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Comparison of the three months ended September 30, 2021 and September 30, 2020
As of September 30, 2021, we had a working capital deficit of $1,907,801 and
accumulated deficit of $3,775,794. As a result, our continuation as a going
concern is dependent upon improving our profitability and continued financial
support from our stockholders or other capital sources. Management believes that
continued financial support from existing shareholders and external financing
will provide the additional cash necessary to meet our obligations as they
become due. Our financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
and liabilities that may result in the Company not being able to continue as a
going concern.
The following table sets forth certain operational data for the three months
ended September 30, 2021, compared to the three months ended September 30, 2020:
Three months ended September 30,
2021 2020
Revenue $ 2,282,399 $ 1,554,251
Cost of revenue (220,733 ) (327,845 )
Gross profit 2,061,666 1,226,406
Operating expenses (4,485,656 ) (858,253 )
(Loss) income from operations (2,423,990 ) 368,153
Total other (expense) income (34,291 ) 28,667
Income tax (expense) credit (163,524 ) 3
NET (LOSS) INCOME $ (2,621,805 ) $ 396,823Revenue. Revenue for the three months ended September 30, 2021 and 2020 was
$2,282,399 and $1,554,251. The increase in revenues of approximately $728,148 or
46.85% is primarily due to the soar from the loan interest income received and
sales of collectibles. During the three months ended September 30, 2021 and
2020, revenues were mainly attributable to the finance business segment
representing 76.96% and 100%, respectively and collectible business segment
representing 23.04% and 0%.
Cost of Revenue. Cost of revenue of approximately $220,733 for the three months
ended September 30, 2021 consisted primarily of interest expense and cost of
collectibles. Cost of revenue of approximately $327,845 for the three months
ended September 30, 2020. The decrease in cost of revenues of approximately
$107,112 or 32.67% from the comparable period in 2020 was mainly due to the
repayment of loan payable during the period in which lead to decrease in
interest expense.
Gross Profit. We achieved a gross profit of $2,061,666 and $1,226,406 for the
three months ended September 30, 2021, and 2020, respectively. The increase in
gross profit for the three months ended September 30, 2021 was $835,260 or
approximately 68.11%, the increase in gross profit is primarily attributable to
an increase in our collectible business volume.
Operating Expenses. We incurred operating expenses of $4,485,656 and $858,253
for the three months ended September 30, 2021, and 2020, respectively. Operating
expenses consist primarily of costs in salary and benefits for our general
administrative and management staff, facilities costs, depreciation expenses,
professional fees, audit fees, and other miscellaneous expenses incurred in
connection with general operations. Operating expenses increased by 422.65% or
approximately $3,627,403 in the three months ended September 30, 2021 from
$858,253 in the same period of 2020. The increase was primarily due to the
increase in consultancy fee, directors' remuneration, and management fee charged
by a related company owned by the director of the Company.
Other Income (Expenses), net. We incurred net other income (expenses) of
$(34,291) and $28,667 for the three months ended September 30, 2021 and 2020,
respectively. The increase in net other income (expenses) is primarily
attributable to the impairment loss on digital assets.
Income Tax (Expense) Credit. Our income tax (expense) credit for the three
months ended September 30, 2021 and 2020 was $(163,524) and $3, respectively.
Net Income (Loss). During the three months ended September 30, 2021 and 2020, we
incurred a net (loss) income of $(2,621,805) and $396,823, respectively. The
decrease in net income for the three months ended September 30, 2021 of
$3,018,628 was mainly attributed from the increase in operating expenses.
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Comparison of the nine months ended September 30, 2021 and September 30, 2020
The following table sets forth certain operational data for the nine months
ended September 30, 2021, compared to the nine months ended September 30, 2020:
Nine months ended September 30,
2021 2020
Revenue $ 5,510,344 $ 3,414,244
Cost of revenue (997,679 ) (795,041 )
Gross profit 4,512,665 2,619,203
Operating Expenses (6,177,734 ) (2,225,836 )
(Loss) income from operations (1,665,069 ) 393,367
Total other income 106,421 112,721
Income tax (expense) credit (377,453 ) 6,051
NET (LOSS) INCOME $ (1,936,101 ) $ 512,139Revenue. Revenue for the nine months ended September 30, 2021 and 2020 was
$5,510,344 and $3,414,244. The increase in revenues of approximately $2,096,100
or 61.39% is due primarily to the soar from the loan interest income received
and sales of collectibles. During the nine months ended September 30, 2021 and
2020, revenues were mainly attributable to the finance business segment
representing 90.47% and 100%, respectively and collectible business segment
representing 9.53% and 0%.
Cost of Revenue. Cost of revenue of approximately $997,679 for the nine months
ended September 30, 2021 consisted primarily of interest expense and cost of
collectibles. Cost of revenue of approximately $795,041 for the nine months
ended September 30, 2020 consisted primarily of interest expense. The increase
in cost of revenues of approximately $202,638 or 25.49% from the comparable
period in 2020 was due mainly to the increases of collectible revenue.
Gross Profit. We achieved a gross profit of $4,512,665 and $2,619,203 for the
nine months ended September 30, 2021, and 2020, respectively. The increase in
gross profit is primarily attributable to an increase in our collectible
business volume.
Operating Expenses. We incurred operating expenses of $6,177,734 and $2,225,836
for the nine months ended September 30, 2021, and 2020, respectively. Operating
expenses consist primarily of costs in salary and benefits for our general
administrative and management staff, consulting, management fees, facilities
costs, depreciation expenses, professional fees, audit fees, and other
miscellaneous expenses incurred in connection with general operations. Operating
expenses increased by 177.55% or approximately $3,951,898 in the nine months
ended September 30, 2021 from $2,225,836 in the same period of 2020. The
increase was due to the increase in management fee charged by a related company
which owned by a director of the Company, consulting fees, and salaries, wages
and benefits.
Other Income, net. We incurred net other income of $106,421 and $112,721 for the
nine months ended September 30, 2021 and 2020, respectively.
Income Tax (Expense) Credit. Our income tax (expense) credit for the nine months
ended September 30, 2021 and 2020 was $(377,453) and $6,051, respectively.
Net Income (Loss). During the nine months ended September 30, 2021 and 2020, we
incurred a net (loss) income of $(1,936,101) and $512,139, respectively. The
decrease in net income for the nine months ended September 30, 2021 of
$2,448,240 or approximately 478.04% due to the increase in operating expenses.
Liquidity and Capital Resources
As of September 30, 2021 and December 31, 2020, we had cash and cash equivalents
of $2,703,539 and $773,381.
We expect to incur significantly greater expenses in the near future as we
develop our artificial intelligence education business or enter into strategic
partnerships. We also expect our general and administrative expenses to increase
as we expand our finance and administrative staff, add infrastructure, and incur
additional costs related to being reporting act company, including directors'
and officers' insurance and increased professional fees.
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We have never paid dividends on our Common Stock. Our present policy is to apply
cash to investments in product development, acquisitions or expansion;
consequently, we do not expect to pay dividends on Common Stock in the
foreseeable future.
Going Concern Uncertainties
Our continuation as a going concern is dependent upon improving our
profitability and the continuing financial support from our stockholders. Our
sources of capital in the past have included the sale of equity securities,
which include common stock sold in private transactions and public offerings,
lease liability and short-term and long-term debts. In addition, with respect to
the ongoing and evolving coronavirus (COVID-19) outbreak, which was designated
as a pandemic by the World Health Organization on March 11, 2020, the outbreak
has caused substantial disruption in international economies and global trades
and if repercussions of the outbreak are prolonged, could have a significant
adverse impact on our business. Given the addition political and public health
challenges, our ability to obtain external financing or financing from existing
shareholders to fund our working capital needs has been materially and adversely
impacted, and there can be no assurance that we will be able to raise such
additional capital resources on satisfactory terms. We believe that our current
cash and other sources of liquidity discussed below are adequate to support
general operations for at least the next 12 months.
Nine Months Ended September 30,
2021 2020
Net cash used in operating activities $ (5,533,265 ) $ (1,132,832 )
Net cash used in investing activities
(39,325 ) (17,034 )
Net cash provided by financing activities $ 7,517,013 $ 1,264,379
Net Cash Used In Operating Activities.
For the nine months ended September 30, 2021, net cash used in operating
activities was $5,533,265 which consisted primarily of a net loss of $1,936,101,
gain from forgiveness of related party debts of $140,712, digital assets
received of $257,977, loss on written-off of property and equipment of $163,058,
an increase in loan receivables of $6,991,052, an increase in loan interest and
fee receivables of $752,839, an increase in inventory of $1,148,903, offset by
issuance of common stock for goods and services rendered of $1,334,710, an
increase in other payable and accruals of $3,856,451, and an increase in income
tax payable of $376,222.
For the nine months ended September 30, 2020, net cash used in operating
activities was $1,132,832, which consisted primarily of a net income of
$512,139, an increase in accrued liabilities and other payables of $100,603,
offset by gain from forgiveness of related party debts of $52,143, an increase
in loan receivables of $1,494,917, an increase in loan interest receivable of
$134,646, and increase in prepayment and other receivables of $67,691.
We expect to continue to rely on cash generated through financing from our
existing shareholders and private placements of our securities, however, to
finance our operations and future acquisitions.
Net Cash Used In Investing Activities.
For the nine months ended September 30, 2021 and 2020, net cash used in
investment activities was $39,325 and $17,034, respectively. The net cash used
in investing activities for the nine months ended September 30, 2021 mainly
consisted of purchase of intangible assets of $39,325. The net cash used in
investing activities for the nine months ended September 30, 2020 mainly
consisted of purchase of property and equipment of $17,034.
Net Cash Provided By Financing Activities.
For the nine months ended September 30, 2021, net cash provided by financing
activities was $7,517,013 consisting of advance from related parties of
$11,146,695 and repayment of loan payable of $3,629,682.
For the nine months ended September 30, 2020, net cash provided by financing
activities was $1,264,379 consisting primarily of advances from related parties
of $168,304 and proceeds from loan payable of $1,096,075.
Off-Balance Sheet Arrangements
We have no outstanding off-balance sheet guarantees, interest rate swap
transactions or foreign currency contracts. We do not engage in trading
activities involving non-exchange traded contracts.
Contractual Obligations and Commercial Commitments
We have contractual obligations and commercial commitments as of September 30,
2021.
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On June 17, 2021, the Company entered into a Share Acquisition Agreement (the
"Share Acquisition Agreement"), by and among the Company, Massive Treasure and
the holders of common shares of Massive Treasure. Under the terms and conditions
of the Share Acquisition Agreement, the Company offered to issue 1,078,269,470
shares of common stock of the Company, in consideration for all the issued and
outstanding shares in Massive Treasure. Dr. Herbert Lee, our director, is the
beneficial holder of 47,500 common shares, or 95%, of the issued and outstanding
shares of Massive Treasure. As of September 30, 2021, there are 800,000,000
shares of common stock pending to be issued to Dr. Herbert Lee.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported, including
the notes thereto, and related disclosures of commitments and contingencies, if
any. We have identified certain accounting policies that are significant to the
preparation of our financial statements. These accounting policies are important
for an understanding of our financial condition and results of operations.
Critical accounting policies are those that are most important to the
presentation of our financial condition and results of operations and require
management's subjective or complex judgment, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. Certain accounting estimates are particularly
sensitive because of their significance to financial statements and because of
the possibility that future events affecting the estimate may differ
significantly from management's current judgments. We believe the following
accounting policies are critical in the preparation of our financial statements.
? Use of estimates and assumptions
In preparing these condensed consolidated financial statements, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities in the balance sheet and revenues and expenses during the periods
reported. Actual results may differ from these estimates.
? Basis of consolidation
The condensed consolidated financial statements include the financial statements
of COSG and its subsidiaries. All significant inter-company balances and
transactions within the Company have been eliminated upon consolidation.
? Digital assets
The Company's digital assets represent the cryptocurrency of Ethereum and OEC
Token. The Company accounts for its digital assets in accordance with Financial
Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC")
Subtopic 350-30, General Intangibles Other Than Goodwill. ASC Subtopic 350-30
requires assets to be measured based on the fair value of the consideration
given or the fair value of the assets (or net assets) acquired, whichever is
more clearly evident and, thus, more reliably measurable. The Company's
cryptocurrencies are deemed to have an indefinite useful life, therefore amounts
are not amortized, but rather are assessed for impairment.
? Loan receivables, net
Loans receivables are carried at unpaid principal balances, less the allowance
for loan losses and charge-offs. The loans receivables portfolio consists of
real estate mortgage loans and personal loans.
Loans are placed on nonaccrual status when they are past due 180 days or more as
to contractual obligations or when other circumstances indicate that collection
is not probable. When a loan is placed on nonaccrual status, any interest
accrued but not received is reversed against interest income. Payments received
on a nonaccrual loan are either applied to protective advances, the outstanding
principal balance or recorded as interest income, depending on an assessment of
the ability to collect the loan. A nonaccrual loan may be restored to accrual
status when principal and interest payments have been brought current and the
loan has performed in accordance with its contractual terms for a reasonable
period (generally six months).
If the Company determines that a loan is impaired, the Company next determines
the amount of the impairment. The amount of impairment on collateral dependent
loans is charged off within the given fiscal quarter. Generally, the amount of
the loan and negative escrow in excess of the appraised value less estimated
selling costs, for the fair value of collateral valuation method, is charged
off. For all other loans, impairment is measured as described below in Allowance
for Loan Losses.
? Allowance for loan losses ("ALL")
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The adequacy of the Company's ALL is determined, in accordance with ASC
Subtopics 450-20 Loss Contingencies includes management's review of the
Company's loan portfolio, including the identification and review of individual
problem situations that may affect a borrower's ability to repay. In addition,
management reviews the overall portfolio quality through an analysis of
delinquency and non-performing loan data, estimates of the value of underlying
collateral, current charge-offs and other factors that may affect the portfolio,
including a review of regulatory examinations, an assessment of current and
expected economic conditions and changes in the size and composition of the loan
portfolio.
The ALL reflects management's evaluation of the loans presenting identified loss
potential, as well as the risk inherent in various components of the portfolio.
There is significant judgment applied in estimating the ALL. These assumptions
and estimates are susceptible to significant changes based on the current
environment. Further, any change in the size of the loan portfolio or any of its
components could necessitate an increase in the ALL even though there may not be
a decline in credit quality or an increase in potential problem loans.
? Revenue recognition
Accounting Standards Codification ("ASC") 606, Revenue from Contracts with
Customers ("ASC 606"), establishes principles for reporting information about
the nature, amount, timing and uncertainty of revenue and cash flows arising
from the entity's contracts to provide goods or services to customers. The core
principle requires an entity to recognize revenue to depict the transfer of
goods or services to customers in an amount that reflects the consideration that
it expects to be entitled to receive in exchange for those goods or services
recognized as performance obligations are satisfied. The Company applies the
following five steps in order to determine the appropriate amount of revenue to
be recognized as it fulfills its obligations under each of its agreements:
• identify the contract with a customer;
• identify the performance obligations in the contract;
• determine the transaction price;
• allocate the transaction price to performance obligations in the contract; and
• recognize revenue as the performance obligation is satisfied.
? Related parties
The Company follows the ASC 850-10, Related Party for the identification of
related parties and disclosure of related party transactions.
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Pursuant to section 850-10-20 the related parties include a) affiliates of the
Company; b) entities for which investments in their equity securities would be
required, absent the election of the fair value option under the Fair Value
Option Subsection of section 825-10-15, to be accounted for by the equity method
by the investing entity; c) trusts for the benefit of employees, such as pension
and Income-sharing trusts that are managed by or under the trusteeship of
management; d) principal owners of the Company; e) management of the Company; f)
other parties with which the Company may deal if one party controls or can
significantly influence the management or operating policies of the other to an
extent that one of the transacting parties might be prevented from fully
pursuing its own separate interests; and g) other parties that can significantly
influence the management or operating policies of the transacting parties or
that have an ownership interest in one of the transacting parties and can
significantly influence the other to an extent that one or more of the
transacting parties might be prevented from fully pursuing its own separate
interests.
The condensed consolidated financial statements shall include disclosures of
material related party transactions, other than compensation arrangements,
expense allowances, and other similar items in the ordinary course of business.
However, disclosure of transactions that are eliminated in the preparation of
consolidated or combined financial statements is not required in those
statements. The disclosures shall include: a) the nature of the relationship(s)
involved; b) a description of the transactions, including transactions to which
no amounts or nominal amounts were ascribed, for each of the periods for which
income statements are presented, and such other information deemed necessary to
an understanding of the effects of the transactions on the financial statements;
c) the dollar amounts of transactions for each of the periods for which income
statements are presented and the effects of any change in the method of
establishing the terms from that used in the preceding period; and d) amount due
from or to related parties as of the date of each balance sheet presented and,
if not otherwise apparent, the terms and manner of settlement.
? Fair value of financial instruments
The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards
Codification for disclosures about fair value of its financial instruments and
has adopted paragraph 820-10-35-37 of the FASB Accounting Standards Codification
("Paragraph 820-10-35-37") to measure the fair value of its financial
instruments. Paragraph 820-10-35-37 of the FASB Accounting Standards
Codification establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands disclosures about fair value
measurements. To increase consistency and comparability in fair value
measurements and related disclosures, paragraph 820-10-35-37 of the FASB
Accounting Standards Codification establishes a fair value hierarchy which
prioritizes the inputs to valuation techniques used to measure fair value into
three (3) broad levels. The fair value hierarchy gives the highest priority to
quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. The three (3) levels of fair
value hierarchy defined by paragraph 820-10-35-37 of the FASB Accounting
Standards Codification are described below:
Level 1 Quoted market prices available in active markets for identical assets or
liabilities as of the reporting date.
Level 2 Pricing inputs other than quoted prices in active markets included in
Level 1, which are either directly or indirectly observable as of the
reporting date.
Level 3 Pricing inputs that are generally observable inputs and not corroborated
by market data.
Financial assets are considered Level 3 when their fair values are determined
using pricing models, discounted cash flow methodologies or similar techniques
and at least one significant model assumption or input is unobservable.
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The fair value hierarchy gives the highest priority to quoted prices
(unadjusted) in active markets for identical assets or liabilities and the
lowest priority to unobservable inputs. If the inputs used to measure the
financial assets and liabilities fall within more than one level described
above, the categorization is based on the lowest level input that is significant
to the fair value measurement of the instrument.
? Recent accounting pronouncements
In January 2017, the Financial Accounting Standard Board ("FASB") issued ASU
2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the
Accounting for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 removes Step 2
of the goodwill impairment test, which requires a hypothetical purchase price
allocation. A goodwill impairment will now be the amount by which a reporting
unit's carrying value exceeds its fair value, not to exceed the carrying amount
of goodwill. This standard, which will be effective for the Company beginning in
the first quarter of fiscal year 2020, is required to be applied prospectively.
Early adoption is permitted for interim or annual goodwill impairment tests
performed on testing dates after January 1, 2017. The Company is currently
evaluating the impact this standard will have on its consolidated financial
statements.
In June 2020, the FASB issued ASU 2020-07, Improvements to Nonemployee
Share-Based Payment Accounting ("ASU 2020-07"), which supersedes ASC 505-50 and
expands the scope of ASC 718 to include all share-based payments arrangements
related to the acquisition of goods and services from both employees and
nonemployees. For public companies, the amendments are effective for annual
reporting periods beginning after December 15, 2020, including interim periods
within those annual periods. Early adoption is permitted, but no earlier than a
company's adoption date of ASC 606. The Company does not believe that the
adoption of ASU 2020-07 will have a material impact on the Company's
consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-15, Intangibles-Goodwill and
Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service
Contract, which amended its guidance for costs of implementing a cloud computing
service arrangement to align the requirements for capitalizing implementation
costs incurred in a hosting arrangement that is a service contract with the
requirements for capitalizing implementation costs incurred to develop or obtain
internal-use software. This new standard also requires customers to expense the
capitalized implementation costs of a hosting arrangement that is a service
contract over the term of the hosting arrangement. This new standard becomes
effective for the Company in the first quarter of fiscal year 2020, with early
adoption permitted. This new standard can be applied either retrospectively or
prospectively to all implementation costs incurred after the date of adoption.
The Company is evaluating the impact of adopting this amendment to its
consolidated financial statements.
The Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and do not believe the future adoption of any such pronouncements
may be expected to cause a material impact on its financial condition or the
results of its operations.
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