UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-55793
| COSMOS GROUP HOLDINGS INC. |
| (Exact Name of Registrant as Specified in Its Charter) |
| Nevada | 90-1177460 | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer |
37th Floor, Singapore Land Tower
50 Raffles Place, Singapore 048623
+65 6829 7017
(Address of Principal Executive Offices and Issuer’s
Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each Class | Trading Symbol | Name of each exchange on which registered | ||
| None. | N/A | N/A |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 31, 2022, the Company had outstanding 386,923,398 shares of common stock.
INTRODUCTORY COMMENTS
References in this report to the “Company,” “COSG,” “we,” “us” and “our” refer to Cosmos Group Holdings Inc., a Nevada company (also known as Coinllectibles, Inc.), and all of its subsidiaries on a consolidated basis. Where reference to a specific entity is required, the name of such specific entity will be referenced.
We are a Nevada holding company with operations conducted through our wholly owned subsidiaries based in Hong Kong and Singapore. Our investors hold shares of common stock in Cosmos Group Holdings Inc., the Nevada holding company. This structure presents unique risks as our investors may never directly hold equity interests in our Hong Kong subsidiary and will be dependent upon contributions from our subsidiaries to finance our cash flow needs. Our ability to obtain contributions from our subsidiaries are significantly affected by regulations promulgated by Hong Kong and Singaporean authorities. Any change in the interpretation of existing rules and regulations or the promulgation of new rules and regulations may materially affect our operations and or the value of our securities, including causing the value of our securities to significantly decline or become worthless. For a detailed description of the risks facing the Company associated with our structure, please refer to “Risk Factors – Risks Relating to Doing Business in Hong Kong.” set forth in the Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 15, 2022 (the “Form 10-K”).
Cosmos Group Holdings Inc. and our Hong Kong subsidiaries are not required to obtain permission or approval from the Chinese authorities including the China Securities Regulatory Commission, or CSRC, the Cybersecurity Administration Committee, or CAC, to operate our business or to issue securities to foreign investors. However, in light of the recent statements and regulatory actions by the People’s Republic of China (“the PRC”) government, such as those related to Hong Kong’s national security, the promulgation of regulations prohibiting foreign ownership of Chinese companies operating in certain industries, which are constantly evolving, and anti-monopoly concerns, we may be subject to the risks of uncertainty of any future actions of the PRC government in this regard including the risk that we inadvertently conclude that such approvals are not required, that applicable laws, regulations or interpretations change such that we are required to obtain approvals in the future, or that the PRC government could disallow our holding company structure, which would likely 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 cause 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 CSRC, if we fail to comply with such rules and regulations, which would likely adversely affect the ability of the Company’s securities to continue to trade on the Over-the-Counter Bulletin Board, which would likely cause the value of our securities to significantly decline or become worthless.
There are prominent legal and operational risks associated with our operations being in Hong Kong. For example, as a U.S.-listed Hong Kong public company, 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. We are subject to risks arising from the legal system in China where there are risks and uncertainties regarding the enforcement of laws including where the Chinese government can change the rules and regulations in China and Hong Kong, including the enforcement and interpretation thereof, at any time with little to no advance notice and can intervene at any time with little to no advance notice. Changes in Chinese internal regulatory mandates, such as the M&A rules, Anti-Monopoly Law, and 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. By way of example, the PRC government initiated a series of regulatory actions and statements to regulate business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. In April 2020, the Cyberspace Administration of China and certain other PRC regulatory authorities promulgated the Cybersecurity Review Measures, which became effective in June 2020. Pursuant to the Cybersecurity Review Measures, operators of critical information infrastructure must pass a cybersecurity review when purchasing network products and services which do or may affect national security. On July 10, 2021, the Cyberspace Administration of China issued a revised draft of the Measures for Cybersecurity Review for public comments (“Draft Measures”), which required that, in addition to “operator of critical information infrastructure,” any “data processor” carrying out data processing activities that affect or may affect national security should also be subject to cybersecurity review, and further elaborated the factors to be considered when assessing the national security risks of the relevant activities, including, among others, (i) the risk of core data, important data or a large amount of personal information being stolen, leaked, destroyed, and illegally used or exited the country; and (ii) the risk of critical information infrastructure, core data, important data or a large amount of personal information being affected, controlled, or maliciously used by foreign governments after listing abroad. The Cyberspace Administration of China has said that under the proposed rules companies holding data on more than 1,000,000 users must now apply for cybersecurity approval when seeking listings in other nations because of the risk that such data and personal information could be “affected, controlled, and maliciously exploited by foreign governments,” The cybersecurity review will also investigate the potential national security risks from overseas IPOs. On January 4, 2022, the CAC, in conjunction with 12 other government departments, issued the New Measures for Cybersecurity Review (the “New Measures”) on January 4, 2022. The New Measures amends the Draft Measures released on July 10, 2021 and became effective on February 15, 2022.
1
The business of our subsidiaries are not subject to cybersecurity review with the Cyberspace Administration of China, given that: (i) we do not have one million individual online users of our products and services in Hong Kong; (ii) we do not possess a large amount of personal information in our business operations. In addition, we are not subject to merger control review by China’s anti-monopoly enforcement agency due to the level of our revenues which provided from us and audited by our auditor and the fact that we currently do not expect to propose or implement any acquisition of control of, or decisive influence over, any company with revenues within China of more than Renminbi (“RMB”) 400 million. Currently, these statements and regulatory actions have had no impact on our daily business operations, the ability to accept foreign investments and list our securities on an U.S. or other foreign exchange. However, since these statements and regulatory actions are new, it is highly uncertain how soon legislative or administrative regulation making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, and the potential impact such modified or new laws and regulations will have on our daily business operation, the ability to accept foreign investments and list our securities on an U.S. or other foreign exchange. For a detailed description of the risks the Company is facing and the offering associated with our operations in Hong Kong, please refer to “Risk Factors – Risks Relating to Doing Business in Hong Kong.” set forth in the Form 10-K.
The recent joint statement by the SEC and Public Company Accounting Oversight Board (“PCAOB”), and the Holding Foreign Companies Accountable Act (“HFCAA”) all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. Trading in our securities may be prohibited under the HFCAA if the PCAOB determines that it cannot inspect or investigate completely our auditor, and that as a result, an exchange may determine to delist our securities. On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act which would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA from three years to two thus reducing the time before our securities may be prohibited from trading or being delisted. On December 2, 2021, the SEC adopted rules to implement the HFCAA. Pursuant to the HFCAA, the PCAOB issued its report notifying the Commission that it is unable to inspect or investigate completely accounting firms headquartered in mainland China or Hong Kong due to positions taken by authorities in mainland China and Hong Kong. Our auditor is based in Kuala Lumpur, Malaysia and is subject to PCAOB’s inspection. It is not subject to the determinations announced by the PCAOB on December 16, 2021. However, in the event the Malaysian authorities subsequently take a position disallowing the PCAOB to inspect our auditor, then we would need to change our auditor to avoid having our securities delisted. Furthermore, due to the recent developments in connection with the implementation of the HFCAA, we cannot assure you whether the SEC or other regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statements. The requirement in the HFCAA that the PCAOB be permitted to inspect the issuer’s public accounting firm within two or three years, may result in the delisting of our securities from applicable trading markets in the U.S, in the future if the PCAOB is unable to inspect our accounting firm at such future time. Please see “Risk Factors- The Holding Foreign Companies Accountable Act requires the Public Company Accounting Oversight Board (PCAOB) to be permitted to inspect the issuer’s public accounting firm within three years. This three-year period will be shortened to two years if the Accelerating Holding Foreign Companies Accountable Act is enacted. There are uncertainties under the PRC Securities Law relating to the procedures and requisite timing for the U.S. securities regulatory agencies to conduct investigations and collect evidence within the territory of the PRC. If the U.S. securities regulatory agencies are unable to conduct such investigations, they may suspend or de-register our registration with the SEC and delist our securities from applicable trading market within the U.S.” set forth in the Form 10-K.
2
In addition to the foregoing risks, we face various legal and operational risks and uncertainties arising from doing business in Hong Kong as summarized below and in “Risk Factors — Risks Relating to Doing Business in Hong Kong.” set forth in the Form 10-K.
Adverse changes in economic and political policies of the PRC government could have a material and adverse effect on overall economic growth in China and Hong Kong, which could materially and adversely affect our business. Please see “Risk Factors-We face the risk that changes in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in Hong Kong and the profitability of such business.” and “Substantial uncertainties and restrictions with respect to the political and economic policies of the PRC government and PRC laws and regulations could have a significant impact upon the business that we may be able to conduct in the PRC and accordingly on the results of our operations and financial condition.” set forth in the Form 10-K.
We are a holding company with operations conducted through our wholly owned subsidiaries based in Hong Kong and Singapore. This structure presents unique risks as our investors may never directly hold equity interests in our Hong Kong and Singapore subsidiaries and will be dependent upon contributions from our subsidiaries to finance our cash flow needs. Any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to conduct business. We do not anticipate paying dividends in the foreseeable future; you should not buy our stock if you expect dividends. Please see “Risk Factors- Because our holding company structure creates restrictions on the payment of dividends, our ability to pay dividends is limited.” set forth in the Form 10-K.
There is a possibility that the PRC could prevent our cash maintained in Hong Kong from leaving or the PRC could restrict the deployment of the cash into our business or for the payment of dividends. We rely on dividends from our Hong Kong subsidiaries for our cash and financing requirements, such as the funds necessary to service any debt we may incur. Any such controls or restrictions may adversely affect our ability to finance our cash requirements, service debt or make dividend or other distributions to our shareholders. Please see “Risk Factors - PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds we receive from offshore financing activities to make loans to or make additional capital contributions to our Hong Kong subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand business.”; “Risk Factors - Because our holding company structure creates restrictions on the payment of dividends or other cash payments, our ability to pay dividends or make other payments is limited.” and “Transfers of Cash to and from our Subsidiaries.” set forth in the Form 10-K.
PRC regulation of loans to and direct investments in PRC entities by offshore holding companies may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our operating subsidiaries in Hong Kong. Substantial uncertainties exist with respect to the interpretation of the PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations. Please see “Risk Factors- PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds we receive from offshore financing activities to make loans to or make additional capital contributions to our Hong Kong subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand business.” set forth in the Form 10-K.
In light of China’s extension of its authority into Hong Kong, the Chinese government can change Hong Kong’s rules and regulations at any time with little or no advance notice, and can intervene and influence our operations and business activities in Hong Kong. We are currently not required to obtain approval from Chinese authorities to list on U.S. exchanges. However, if our subsidiaries or the holding company were required to obtain approval in the future, or we erroneously conclude that approvals were not required, or we were denied permission from Chinese authorities to operate or to list on U.S. exchanges, we will not be able to continue listing on a U.S. exchange and the value of our common stock would likely significantly decline or become worthless, which would materially affect the interest of the investors. There is a risk that the Chinese government may intervene or influence our operations at any time, or may exert more control over offerings conducted overseas and/or foreign investment in Hong Kong-based issuers, which could result in a material change in our operations and/or the value of our securities. Further, any actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers would likely 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. Please see “Risk Factors-We face the risk that changes in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the Hong Kong and the profitability of such business.” and “Substantial uncertainties and restrictions with respect to the political and economic policies of the PRC government and PRC laws and regulations could have a significant impact upon the business that we may be able to conduct in the PRC and accordingly on the results of our operations and financial condition.” and “The Chinese government exerts substantial influence over the manner in which we must conduct our business activities. We are currently not required to obtain approval from Chinese authorities to list on U.S. exchanges. However, to the extent that the Chinese government exerts more control over offerings conducted overseas and/or foreign investment in China-based issuers over time and if our PRC subsidiaries or the holding company were required to obtain approval in the future and were denied permission from Chinese authorities to list on U.S. exchanges, we will not be able to continue listing on U.S. exchange and the value of our common stock may significantly decline or become worthless, which would materially affect the interest of the investors.” set forth in the Form 10-K.
3
Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.
We may become subject to a variety of laws and regulations in the PRC regarding privacy, data security, cybersecurity, and data protection. We may be liable for improper use or appropriation of personal information provided by our customers. Please see “Risk Factors- The Chinese government exerts substantial influence over the manner in which we must conduct our business activities. We are currently not required to obtain approval from Chinese authorities to list on U.S exchanges. However, to the extent that the Chinese government exerts more control over offerings conducted overseas and/or foreign investment in China-based issuers over time and if our PRC subsidiaries or the holding company were required to obtain approval in the future and were denied permission from Chinese authorities to list on U.S. exchanges, we will not be able to continue listing on U.S. exchange and the value of our common stock may significantly decline or become worthless, which would materially affect the interest of the investors.” set forth in the Form 10-K.
Under the Enterprise Income Tax Law of the PRC (“EIT Law”), we may be classified as a “Resident Enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders. Please see “Risk Factors- Our global income may be subject to PRC taxes under the PRC Enterprise Income Tax Law, which could have a material adverse effect on our results of operations.” set forth in the Form 10-K.
Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident Shareholders to personal liability, may limit our ability to acquire Hong Kong and PRC companies or to inject capital into our Hong Kong subsidiary, may limit the ability of our Hong Kong subsidiaries to distribute profits to us or may otherwise materially and adversely affect us.
You may be subject to PRC income tax on dividends from us or on any gain realized on the transfer of shares of our common stock. Please see “Risk Factors- Dividends payable to our foreign investors and gains on the sale of our shares of common stock by our foreign investors may become subject to tax by the PRC.” set forth in the Form 10-K.
We face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies. Please see “Risk Factors- We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.” set forth in the Form 10-K.
We are organized under the laws of the State of Nevada as a holding company that conducts its business through a number of subsidiaries organized under the laws of foreign jurisdictions such as Hong Kong, Singapore and the British Virgin Islands. This may have an adverse impact on the ability of U.S. investors to enforce a judgment obtained in U.S. Courts against these entities, bring actions in Hong Kong against us or our management or to effect service of process on the officers and directors managing the foreign subsidiaries. Please see “Risk Factors- It may be difficult for stockholders to enforce any judgment obtained in the United States against us, which may limit the remedies otherwise available to our stockholders.” set forth in the Form 10-K.
4
U.S. regulatory bodies may be limited in their ability to conduct investigations or inspections of our operations in China.
There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of our PRC subsidiary, and dividends payable by our PRC subsidiary to our offshore subsidiaries may not qualify to enjoy certain treaty benefits. Please see “Risk Factors- Our global income may be subject to PRC taxes under the PRC Enterprise Income Tax Law, which could have a material adverse effect on our results of operations.” set forth in the Form 10-K.
Transfers of Cash to and from Our Subsidiaries
Cosmos Group Holdings Inc. (also known as Coinllectibles Inc.) is a Nevada holding company with no operations of its own. COSG conduct our operations in Hong Kong primarily through our subsidiaries in Hong Kong and Singapore conduct all operations. COSG may rely on dividends or other transfers of cash or assets to be made by our Hong Kong and Singapore subsidiaries to fund our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. If our Hong Kong and Singapore subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. To date, our subsidiaries have not made any transfers, dividends or distributions to Cosmos Group Holdings Inc. and Cosmos Group Holdings Inc. has not made any transfers, dividends or distributions of cash flows or other assets to our subsidiaries.
We do not intend to make dividends or distributions to investors of Cosmos Group Holdings Inc. in the foreseeable future.
We currently intend to retain all available funds and future earnings, if any, for the operation and expansion of our business and do not anticipate declaring or paying any dividends in the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors after considering our financial condition, results of operations, capital requirements, contractual requirements, business prospects and other factors the board of directors deems relevant, and subject to the restrictions contained in any future financing instruments.
Cosmos Group Holdings Inc. (Nevada corporation that is also known as Coinllectibles Inc.)
Subject to the Nevada Revised Statutes and our bylaws, our board of directors may authorize and declare a dividend to shareholders at such time and of such an amount as they think fit if they are satisfied, on reasonable grounds, that immediately following the dividend the value of our assets will exceed our liabilities and we will be able to pay our debts as they become due. There is no further Nevada statutory restriction on the amount of funds which may be distributed by us by dividend. Accordingly, Cosmos Group Holdings Inc. is permitted under the Nevada laws to provide funding to our subsidiaries in Singapore and Hong Kong through loans or capital contributions without restrictions on the amount of the funds, subject to satisfaction of applicable government registration, approval and filing requirements.
Singapore and Hong Kong Subsidiaries
Our Hong Kong subsidiaries and our Singapore subsidiary are also permitted under the laws of Hong Kong and Singapore to provide funding to Cosmos Group Holdings Inc. through dividend distribution without restrictions on the amount of the funds. If our Hong Kong and Singapore subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. To date, our subsidiaries have not made any transfers, dividends or distributions to Cosmos Group Holdings Inc. and Cosmos Group Holdings Inc. has not made any transfers, dividends or distributions to our subsidiaries.
5
Under the current practice of the Inland Revenue Department of Hong Kong, no tax is payable in Hong Kong in respect of dividends paid by us. The laws and regulations of the PRC do not currently have any material impact on transfer of cash from Cosmos Group Holdings Inc. to our Hong Kong subsidiaries or from our Hong Kong subsidiaries to Cosmos Group Holdings Inc. There are no restrictions or limitation under the laws of Hong Kong imposed on the conversion of Hong Kong dollar (“HKD”) into foreign currencies and the remittance of currencies out of Hong Kong or across borders and to U.S. investors.
There is a possibility that the PRC could prevent our cash maintained in Hong Kong from leaving or the PRC could restrict the deployment of the cash into our business or for the payment of dividends. Any such controls or restrictions may adversely affect our ability to finance our cash requirements, service debt or make dividend or other distributions to our shareholders. Please see “Risk Factors - “Risk Factors - PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds we receive from offshore financing activities to make loans to or make additional capital contributions to our Hong Kong subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand business.”; “Risk Factors - Because our holding company structure creates restrictions on the payment of dividends or other cash payments, our ability to pay dividends or make other payments is limited.” set forth in the Form 10-K.
Current PRC regulations permit PRC subsidiaries to pay dividends to Hong Kong subsidiaries only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity in China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation. As of the date of this report, we do not have any PRC subsidiaries.
The PRC government imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency to finance our cash requirements, service debt or make dividend or other distributions to our shareholders. Furthermore, if our subsidiaries in the PRC incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the revenues from our operations, we may be unable to pay dividends on our common stock.
Cash dividends, if any, on our common stock will be paid in U.S. dollars. If we are considered a PRC tax resident enterprise for tax purposes, any dividends we pay to our overseas shareholders may be regarded as China-sourced income and as a result may be subject to PRC withholding tax at a rate of up to 10%.
If in the future we have PRC subsidiaries, certain payments from such PRC subsidiaries to Hong Kong subsidiaries will be subject to PRC taxes, including business taxes and VAT. As of the date of this report, we do not have any PRC subsidiaries and our Hong Kong subsidiaries have not made any transfers, dividends or distributions nor do we expect to make such transfers, dividends or distributions in the foreseeable future.
Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, the 10% withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC entity. However, the 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including, without limitation, that (a) the Hong Kong entity must be the beneficial owner of the relevant dividends; and (b) the Hong Kong entity must directly hold no less than 25% share ownership in the PRC entity during the 12 consecutive months preceding its receipt of the dividends. In current practice, a Hong Kong entity must obtain a tax resident certificate from the Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by a PRC subsidiary to its immediate holding company. As of the date of this report, we do not have a PRC subsidiary. In the event that we acquire or form a PRC subsidiary in the future and such PRC subsidiary desires to declare and pay dividends to our Hong Kong subsidiary, our Hong Kong subsidiary will be required to apply for the tax resident certificate from the relevant Hong Kong tax authority. In such event, we plan to inform the investors through SEC filings, such as a current report on Form 8-K, prior to such actions. See “Risk Factors – Risks Relating to Doing Business in Hong Kong.” set forth in the Form 10-K.
6
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical facts, included in this Form 10-Q including, without limitation, statements in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, events or developments which the Company expects or anticipates will or may occur in the future, including such things as future capital expenditures (including the amount and nature thereof); expansion and growth of the Company’s business and operations; and other such matters are forward-looking statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate under the circumstances. However, whether actual results or developments will conform with the Company’s expectations and predictions is subject to a number of risks and uncertainties, including general economic, market and business conditions; the business opportunities (or lack thereof) that may be presented to and pursued by the Company; changes in laws or regulation and other factors, most of which are beyond the control of the Company.
These forward-looking statements can be identified by the use of predictive, future-tense or forward-looking terminology, such as “believes,” “anticipates,” “expects,” “estimates,” “plans,” “may,” “will,” or similar terms. These statements appear in a number of places in this filing and include statements regarding the intent, belief or current expectations of the Company, and its directors or its officers with respect to, among other things: (i) trends affecting the Company’s financial condition or results of operations for its limited history; (ii) the Company’s business and growth strategies; and, (iii) the Company’s financing plans. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. Such factors that could adversely affect actual results and performance include, but are not limited to, the Company’s limited operating history, potential fluctuations in quarterly operating results and expenses, government regulation, technological change and competition. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to our filings with the SEC under the Exchange Act and the Securities Act of 1933, as amended, including our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2022.
Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequence to or effects on the Company or its business or operations. The Company assumes no obligations to update any such forward-looking statements.
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TABLE OF CONTENTS.
8
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
COSMOS GROUP HOLDINGS INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | (Audited) | |||||||
| Current asset: | ||||||||
| Cash and cash equivalents | $ | 1,975,047 | $ | 1,131,128 | ||||
| Digital assets, net | 19,166 | 35,451 | ||||||
| Loan receivables, net | 18,449,707 | 16,186,351 | ||||||
| Loan interest and fee receivables, net | 299,044 | 483,371 | ||||||
| Inventories | 3,078,550 | 2,103,038 | ||||||
| Prepayment and other receivables | 837,906 | 877,802 | ||||||
| Right-of-use assets, net | 222,287 | 298,317 | ||||||
| Produced content cost | 608,257 | - | ||||||
| Total current assets | 25,489,964 | 21,115,458 | ||||||
| Non-current assets: | ||||||||
| Property and equipment, net | 57,922 | 59,270 | ||||||
| Intangible assets, net | 15,576,252 | 18,554,389 | ||||||
| Goodwill | 816,277 | |||||||
| Loan receivables, net | 2,032,637 | 2,866,243 | ||||||
| TOTAL ASSETS | $ | 43,973,052 | $ | 42,595,360 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 2,217,476 | $ | 240,156 | ||||
| Accrued liabilities and other payables | 966,659 | 399,968 | ||||||
| Accrued consulting and service fee | 2,642,821 | |||||||
| Loan payables | 816,946 | 489,836 | ||||||
| Amounts due to related parties | 21,059,146 | 20,954,836 | ||||||
| Income tax payable | 962,391 | 431,463 | ||||||
| Operating lease liabilities | 173,340 | 231,816 | ||||||
| Convertible note payables | 256,558 | - | ||||||
| Total current liabilities | 29,095,337 | 22,748,075 | ||||||
| Non-current liabilities | ||||||||
| Operating lease liabilities | 56,394 | 78,216 | ||||||
| TOTAL LIABILITIES | 29,151,731 | 22,826,291 | ||||||
| Commitments and contingencies | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $0.001 par value; 500,000,000 shares authorized; 386,923,398 and 358,067,481 issued and outstanding as of September 30, 2022 and December 31, 2021 | 386,923 | 358,067 | ||||||
| Common stock to be issued | 800,000 | 806,321 | ||||||
| Additional paid-in capital | 130,336,783 | 44,930,337 | ||||||
| Accumulated other comprehensive loss | (23,511 | ) | (7,588 | ) | ||||
| Accumulated deficit | (116,680,664 | ) | (26,436,477 | ) | ||||
| 14,819,531 | 19,650,660 | |||||||
| Noncontrolling interest | 1,790 | 118,409 | ||||||
| Stockholders’ equity | 14,821,321 | 19,769,069 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 43,973,052 | $ | 42,595,360 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
9
COSMOS GROUP HOLDINGS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (restated) | (restated) | |||||||||||||||
| Revenue, net | ||||||||||||||||
| Lending segment | $ | 1,517,764 | $ | 1,757,531 | $ | 4,833,433 | $ | 4,985,476 | ||||||||
| Arts and collectibles technology segment | 2,493,100 | 524,868 | 8,051,436 | 524,868 | ||||||||||||
| 4,010,864 | 2,282,399 | 12,884,869 | 5,510,344 | |||||||||||||
| Cost of revenue | ||||||||||||||||
| Lending segment | (27,046 | ) | (7,249 | ) | (367,337 | ) | (784,195 | ) | ||||||||
| Arts and collectibles technology segment | (311,620 | ) | (213,484 | ) | (1,118,755 | ) | (213,484 | ) | ||||||||
| (338,666 | ) | (220,733 | ) | (1,486,092 | ) | (997,679 | ) | |||||||||
| Gross profit | 3,672,198 | 2,061,666 | 11,398,777 | 4,512,665 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing expenses | (499,464 | ) | (94,508 | ) | (26,756,319 | ) | (136,862 | ) | ||||||||
| Corporate development expense | (510,786 | ) | (26,242,917 | ) | ||||||||||||
| Technology and development expense | (273,839 | ) | (32,832,406 | ) | ||||||||||||
| Metaverse and AI development expense | (5,000,000 | ) | (5,000,000 | ) | ||||||||||||
| General and administrative expenses | (4,344,801 | ) | (4,391,148 | ) | (9,743,097 | ) | (6,040,872 | ) | ||||||||
| Total operating expenses | (10,628,890 | ) | (4,485,656 | ) | (100,574,739 | ) | (6,177,734 | ) | ||||||||
| LOSS FROM OPERATION | (6,956,692 | ) | (2,423,990 | ) | (89,175,962 | ) | (1,665,069 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 188 | 73 | 301 | 89 | ||||||||||||
| Gain (loss) on disposal of digital assets | 206 | (14 | ) | 206 | (14 | ) | ||||||||||
| Impairment loss on digital assets | (2,477 | ) | (37,451 | ) | (12,633 | ) | (37,451 | ) | ||||||||
| Convertible notes interest expense | (979 | ) | (979 | ) | ||||||||||||
| Loan interest expense | (1,360 | ) | (1,360 | ) | ||||||||||||
| Imputed interest expense | (235,205 | ) | (714,696 | ) | ||||||||||||
| Sundry income | 36,564 | 803 | 93,614 | 3,085 | ||||||||||||
| Gain from forgiveness of related party debt | 2,298 | 140,712 | ||||||||||||||
| Total other (expense) income | (203,063 | ) | (34,291 | ) | (635,547 | ) | 106,421 | |||||||||
| LOSS BEFORE INCOME TAXES | (7,159,755 | ) | (2,458,281 | ) | (89,811,509 | ) | (1,558,648 | ) | ||||||||
| Income tax expense | (188,878 | ) | (163,524 | ) | (546,146 | ) | (377,453 | ) | ||||||||
| NET LOSS | (7,348,633 | ) | (2,621,805 | ) | (90,357,655 | ) | (1,936,101 | ) | ||||||||
| Net (loss) income attributable to noncontrolling interest | (156,049 | ) | 103,026 | (113,468 | ) | 432,802 | ||||||||||
| Net loss attributable to common shareholders | (7,192,584 | ) | (2,724,831 | ) | (90,244,187 | ) | (2,368,903 | ) | ||||||||
| Other comprehensive loss: | ||||||||||||||||
| Foreign currency adjustment loss | (11,403 | ) | (4,948 | ) | (15,923 | ) | (5,283 | ) | ||||||||
| COMPREHENSIVE LOSS | $ | (7,203,987 | ) | $ | (2,729,779 | ) | $ | (90,260,110 | ) | $ | (2,374,186 | ) | ||||
| Net loss per share | ||||||||||||||||
| – Basic | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.24 | ) | $ | (0.01 | ) | ||||
| – Diluted | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.24 | ) | $ | (0.01 | ) | ||||
| Weighted average common shares outstanding | ||||||||||||||||
| – Basic | 385,604,067 | 336,284,874 | 374,086,727 | 334,710,645 | ||||||||||||
| – Diluted | 385,604,067 | 336,284,874 | 374,086,727 | 334,710,645 | ||||||||||||
| Share-based compensation expense included in operating expenses: | ||||||||||||||||
| Sales and marketing expenses | $ | 150,225 | $ | $ | 25,913,695 | $ | ||||||||||
| Corporate development expense | 333,225 | 25,646,926 | ||||||||||||||
| Technology and development expense | 45,000 | 32,105,000 | ||||||||||||||
| General and administrative expenses | 2,172,839 | 2,811,839 | ||||||||||||||
| $ | 2,701,289 | $ | $ | 86,477,460 | $ | |||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
10
COSMOS GROUP HOLDINGS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Currency expressed in United States Dollars (“US$”))
Nine months ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (90,357,655 | ) | $ | (1,936,101 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation of property and equipment | 6,341 | 11,350 | ||||||
| Amortization of intangible assets | 2,979,763 | |||||||
| Gain from forgiveness of related party debts | (140,712 | ) | ||||||
| Imputed interest expense | 714,696 | |||||||
| Digital assets received as revenue | (8,025,885 | ) | (257,977 | ) | ||||
| Digital assets paid for expense | 8,029,743 | |||||||
| Loss on disposal of digital assets | (206 | ) | 14 | |||||
| Impairment loss on digital assets | 12,633 | 37,451 | ||||||
| Loss on written-off property and equipment | 163,058 | |||||||
| Share issued for services rendered | 83,856,800 | 1,334,710 | ||||||
| Change in operating assets and liabilities: | ||||||||
| Loan receivables | (1,429,750 | ) | (6,991,052 | ) | ||||
| Loan interest and fee receivables | 184,327 | (752,839 | ) | |||||
| Inventories | (975,512 | ) | (1,148,903 | ) | ||||
| Prepayment and other receivables | 51,114 | (97,437 | ) | |||||
| Accrued liabilities and other payables | 54,977 | 3,856,451 | ||||||
| Accrued consulting and service fee | 2,642,821 | |||||||
| Accounts payables | 1,977,320 | |||||||
| Right-of-use assets and operating lease liabilities | (60,662 | ) | 12,500 | |||||
| Produced content cost | (67,272 | ) | ||||||
| Income tax payable | 546,146 | 376,222 | ||||||
| Net cash provided by (used in) operating activities | 139,739 | (5,533,265 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (2,858 | ) | ||||||
| Payment to acquire intangible assets | (1,874 | ) | (39,325 | ) | ||||
| Cash from acquisition of a subsidiary | 33,322 | |||||||
| Net cash provided by (used in) investing activities | 28,590 | (39,325 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from (repayment of) loan payables | 327,110 | (3,629,682 | ) | |||||
| Advances from related parties | 59,684 | 11,146,695 | ||||||
| Proceeds from convertible note payables | 312,952 | |||||||
| Net cash provided by financing activities | 699,746 | 7,517,013 | ||||||
| Foreign currency translation adjustment | (24,156 | ) | (14,265 | ) | ||||
| Net change in cash and cash equivalents | 843,919 | 1,930,158 | ||||||
| BEGINNING OF PERIOD | 1,131,128 | 773,381 | ||||||
| END OF PERIOD | $ | 1,975,047 | $ | 2,703,539 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | 367,337 | $ | 784,194 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
11
COSMOS GROUP HOLDINGS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)
| Common stock | Common stock to be | Additional paid-in | Accumulated other comprehensive | (Accumulated losses) retained | Non- controlling | Total stockholders’ (deficit) | ||||||||||||||||||||||||||
| No. of shares | Amount | issued | capital | loss | earnings | interest | equity | |||||||||||||||||||||||||
| Balance as of January 1, 2021 (restated) | 333,910,484 | $ | 333,911 | $ | 800,000 | $ | $ | (5,374 | ) | $ | (1,379,358 | ) | $ | 237,590 | $ | (13,231 | ) | |||||||||||||||
| Foreign currency translation adjustment | - | (292 | ) | (292 | ) | |||||||||||||||||||||||||||
| Net income for the period | - | 348,860 | (139,945 | ) | 208,915 | |||||||||||||||||||||||||||
| Balance as of March 31, 2021 | 333,910,484 | 333,911 | 800,000 | (5,666 | ) | (1,030,498 | ) | 97,645 | 195,392 | |||||||||||||||||||||||
| Foreign currency translation adjustment | - | (43 | ) | (43 | ) | |||||||||||||||||||||||||||
| Net income for the period | - | 7,068 | 469,721 | 476,789 | ||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | 333,910,484 | 333,911 | 800,000 | (5,709 | ) | (1,023,430 | ) | 567,366 | 672,138 | |||||||||||||||||||||||
| Shares issued for acquisition of legal acquirer | 21,536,933 | 21,536 | 395,516 | (1,436 | ) | (421,613 | ) | - | (5,997 | ) | ||||||||||||||||||||||
| Recapitalization of legal acquirer | - | (395,516 | ) | 1,436 | 394,080 | - | ||||||||||||||||||||||||||
| Shares issued for goods and services rendered | 180,855 | 181 | 1,334,529 | 1,334,710 | ||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | (4,948 | ) | 632 | (4,316 | ) | ||||||||||||||||||||||||||
| Net income for the period | - | (2,724,831 | ) | 103,026 | (2,621,805 | ) | ||||||||||||||||||||||||||
| Balance as of September 30, 2021 | 355,628,272 | $ | 355,628 | $ | 800,000 | $ | 1,334,529 | $ | (10,657 | ) | $ | (3,775,794 | ) | $ | 671,024 | $ | (625,270 | ) | ||||||||||||||
| Balance as of January 1, 2022 | 358,067,481 | $ | 358,067 | $ | 806,321 | $ | 44,930,337 | $ | (7,588 | ) | $ | (26,436,477 | ) | $ | 118,409 | $ | 19,769,069 | |||||||||||||||
| Imputed interest on related party loans | - | 236,336 | 236,336 | |||||||||||||||||||||||||||||
| Commitment Share issued for private placement | 100,000 | 100 | (100 | ) | ||||||||||||||||||||||||||||
| Share issued for acquired subsidiary | 153,060 | 154 | 612,086 | 12,966 | 625,206 | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | (10,442 | ) | (10,442 | ) | |||||||||||||||||||||||||||
| Net loss for the period | - | (62,391,753 | ) | (3,391 | ) | (62,395,144 | ) | |||||||||||||||||||||||||
| Balance as of March 31, 2022 | 358,320,541 | 358,321 | 806,321 | 45,778,659 | (18,030 | ) | (88,828,230 | ) | 127,984 | (41,774,975 | ) | |||||||||||||||||||||
| Imputed interest on related party loans | - | 241,872 | 241,872 | |||||||||||||||||||||||||||||
| Share issued for service rendered | 26,985,556 | 26,985 | (6,321 | ) | 82,636,136 | 82,656,800 | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | 5,922 | 5,922 | |||||||||||||||||||||||||||||
| Net loss for the period | - | (20,659,850 | ) | 45,972 | (20,613,878 | ) | ||||||||||||||||||||||||||
| Balance as of June 30, 2022 | 385,306,097 | 385,306 | 800,000 | 128,656,667 | (12,108 | ) | (109,488,080 | ) | 173,956 | 20,515,741 | ||||||||||||||||||||||
| Imputed interest on related party loans | - | 234,959 | 234,959 | |||||||||||||||||||||||||||||
| Share issued for service rendered | 1,452,785 | 1,452 | 1,198,548 | 1,200,000 | ||||||||||||||||||||||||||||
| Share issued for the acquisition of a subsidiary | 164,516 | 165 | 246,609 | (16,117 | ) | 230,657 | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | (11,403 | ) | (11,403 | ) | |||||||||||||||||||||||||||
| Net loss for the period | - | (7,192,584 | ) | (156,049 | ) | (7,348,633 | ) | |||||||||||||||||||||||||
| Balance as of September 30, 2022 | 386,923,398 | $ | 386,923 | $ | 800,000 | $ | 130,336,783 | $ | (23,511 | ) | $ | (116,680,664 | ) | $ | 1,790 | $ | 14,821,321 | |||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
12
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with both accounting principles generally accepted in the United States (“GAAP”), and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.
In the opinion of management, the consolidated balance sheet as of December 31, 2021 which has been derived from audited financial statements and these unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary to state fairly the results for the periods presented. The results for the period ended September 30, 2022 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2022 or for any future period.
NOTE 2 - ORGANIZATION AND BUSINESS BACKGROUND
Cosmos Group Holdings Inc. (the “Company” or “COSG”) was incorporated in the state of Nevada on August 14, 1987.
The Company currently offers financial and money lending services in Hong Kong and operates an online platform for the sale and distribution of arts and collectibles around the world, through the use of blockchain technologies and minting token.
13
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
Description of subsidiaries
| Company name | Place of incorporation and kind of legal entity | Principal activities and place of operation | Particulars of registered/ paid up share capital | Effective interest held |
|||||
| Massive Treasure Limited | BVI, limited liability company | Investment holding | 50,000 ordinary shares with a par value of US$1 each | 100 | % | ||||
| Coinllectibles (HK) Limited | Hong Kong, limited liability company | Corporate management in Hong Kong | 1,000 ordinary shares for HK$1,000 | 100 | % | ||||
| Coinllectibles Wealth Limited | Hong Kong, limited liability company | Corporate management in Hong Kong | 1 ordinary share for HK$1 | 100 | % | ||||
| Coinllectibles DeFi Limited | Hong Kong, limited liability company | Financing service management in Hong Kong | 10,000 ordinary shares for HK$10,000 | 100 | % | ||||
| Coinllectibles Private Limited | Singapore, limited liability company | Corporate management and IT development in Singapore | 1,000 ordinary shares for S$1,000 | 100 | % | ||||
| Coinllectibles Limited | BVI, limited liability company | Procurement of art and collectibles in Singapore | 1,000 ordinary shares with a par value of US$1 each | 100 | % | ||||
| Healthy Finance Limited | Hong Kong, limited liability company | Money lending service in Hong Kong | 10,000 ordinary shares for HK$10,000 | 51 | % | ||||
| 8M Limited | Hong Kong, limited liability company | Money lending service in Hong Kong | 10 ordinary shares for HK$10 | 100 | % | ||||
| Dragon Group Mortgage Limited | Hong Kong, limited liability company | Money lending service in Hong Kong | 10,000 ordinary shares for HK$10,000 | 51 | % | ||||
| E-on Finance Limited | Hong Kong, limited liability company | Money lending service in Hong Kong | 2 ordinary shares for HK$2 | 100 | % | ||||
| Lee Kee Finance Limited | Hong Kong, limited liability company | Money lending service in Hong Kong | 920,000 ordinary shares for HK$920,000 | 51 | % | ||||
| Rich Finance (Hong Kong) Limited | Hong Kong, limited liability company | Money lending service in Hong Kong | 10,000 ordinary shares for HK$10,000 | 51 | % | ||||
| Long Journey Finance Limited | Hong Kong, limited liability company | Money lending service in Hong Kong | 100 ordinary shares for HK$100 | 51 | % | ||||
| Vaav Limited | Hong Kong, limited liability company | Money lending service in Hong Kong | 10,000 ordinary shares for HK$10,000 | 51 | % | ||||
| Star Credit Limited | Hong Kong, limited liability company | Money lending service in Hong Kong | 1,000,000 ordinary shares for HK$1,000,000 | 51 | % | ||||
| NFT Limited | BVI, limited liability company | Procurement of intangible assets in Hong Kong | 10,000 ordinary shares with a par value of US$1 each | 51 | % | ||||
| Grandway Worldwide Holding Limited | BVI, limited liability company | Development of mobile application | 50,000 ordinary shares for USD$50,000 | 51 | % | ||||
| Grand Town Development Limited | Hong Kong, limited liability company | Provision of treasury management | 2 ordinary shares for HK$2 | 100 | % | ||||
| Grand Gallery Limited | Hong Kong, limited liability company | Procurement of art and collectibles in Hong Kong | 400,000 ordinary shares for HK$400,000 | 80 | % | ||||
| Phoenix Waters Group Limited | BVI, limited liability company | Investment holding | 50,000 ordinary shares with a par value of US$1 each | 100 | % | ||||
| Phoenix Waters Productions (HK) Limited | Hong Kong, limited liability company | Film Production | 100,000 ordinary shares for HK$100,000 | 51 | % |
The Company and its subsidiaries are hereinafter referred to as (the “Company”).
14
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed consolidated financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying condensed consolidated financial statements and notes.
| ● | Basis of presentation |
These accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).
| ● | 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. If actual results significantly differ from the Company’s estimates, the Company’s financial condition and results of operations could be materially impacted. Significant estimates in the period include the goodwill, impairment loss on digital assets, valuation and useful lives of intangible assets and property and equipment and deferred tax valuation allowance.
| ● | Basis of consolidation |
The condensed consolidated financial statements include the accounts of COSG and its subsidiaries. All significant inter-company balances and transactions within the Company have been eliminated upon consolidation.
| ● | Noncontrolling interest |
The Company accounts for noncontrolling interest in accordance with ASC Topic 810-10-45, which requires the Company to present noncontrolling interests as a separate component of total shareholders’ equity on the consolidated balance sheets and the consolidated net loss attributable to its noncontrolling interest be clearly identified and presented on the face of the consolidated statements of operations and comprehensive loss.
| ● | Segment reporting |
Accounting Standard Codification (“ASC”) Topic 280, Segment Reporting establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in condensed consolidated financial statements. Currently, the Company operates in two reportable operating segments in Hong Kong and Singapore.
| ● | Cash and cash equivalents |
Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.
| ● | Inventories |
Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. The cost includes the purchase cost of arts and collectibles from related party and independent artists and the costs associated with token minting for collectible pieces. The Company will reduce inventory on hand to its net realizable value on an item-by-item basis when it is apparent that the expected realizable value of an inventory item falls below its original cost. A charge to cost of sales results when the estimated net realizable value of specific inventory items declines below cost. Management regularly reviews the Company’s inventories for such declines in value. Although inventories are classified as current assets in the accompanying balance sheets, the Company anticipates that certain inventories will be sold beyond twelve months from September 30, 2022.
| ● | Digital assets |
The Company’s digital assets mainly represent the cryptocurrencies held in its e-wallet. The Company accounts for its digital assets in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 350, “General Intangibles Other Than Goodwill” (“ASC 350”). ASC 350 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. Accordingly, the Company performs an analysis each quarter to identify whether events or changes in circumstances and determines the fair value of its cryptocurrencies based on quoted closing prices on the active exchange on the balance sheet date, if the fair market value is lower than the carrying value an impairment loss equal to the difference will be recognized as “Impairment loss of digital assets” in the unaudited condensed consolidated statement of operations. If the fair market value is higher than the carrying value the basis of the digital assets will not be adjusted to account for this increase. Gains on digital assets, if any, will be recognized upon sale, exchange or disposal of the assets.
The Company’s cryptocurrencies are deemed to have an indefinite useful life, therefore amounts are not amortized, but rather are assessed for impairment.
15
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
| ● | 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, commercial 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”) |
The adequacy of the Company’s ALL is determined, in accordance with ASC Topic 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.
| ● | Property and equipment |
Property and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:
| Expected useful life | ||
| Computer and office equipment | 5 years |
Expenditure for repairs and maintenance is expensed as incurred. When assets have retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the results of operations.
Depreciation expense for the three months ended September 30, 2022 and 2021 totaled $2,016 and $856, respectively.
Depreciation expense for the nine months ended September 30, 2022 and 2021 totaled $6,341 and $10,916, respectively.
16
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
| ● | Business combination |
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill to reporting units based on the expected benefit from the business combination. Allocation of purchase consideration to identifiable assets and liabilities affects the amortization expense, as acquired finite-lived intangible assets are amortized over the useful life, whereas any indefinite-lived intangible assets, including goodwill, are not amortized. During the measurement period, which is not to exceed one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Acquisition-related expenses are recognized separately from business combinations and are expensed as incurred.
| ● | Goodwill |
In accordance with ASC 350, the goodwill we determined for reporting units is based on the expected benefit from business combinations. We evaluate our reporting units annually, as well as when changes in our operating segments occur. For changes in reporting units, we reassign goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level annually or more frequently if events or changes in circumstances would more likely than not reduce the fair value of a reporting unit below its carrying value. We have two reporting units subject to goodwill impairment testing. As of September 30, 2022 and December 31, 2021, no impairment of goodwill has been identified.
| ● | Intangible assets |
The Company accounts for its intangible assets in accordance with ASC 350. Intangible assets represented the acquired technology software, licensed technology know-how, trademark and trade names for its internal use to facilitate and support its platform operation. They are stated at the purchase cost and are amortized based on their economic benefit expected to be realized.
| ● | Development costs |
The Company enters into a technical knowhow license and servicing agreement with a company controlled by its major shareholder and are required to make payments for technical knowhow development. Technical knowhow consists of Visual Intelligence Engine, Speech Recognition Engine, Text Analytics Engine, Emotion Recognition Engine, Motion Recognition Engine, AI Agent Creation Engine and NFT Generation and Loading Engine for development of metaverse. In accordance with ASC 350-14-25-1, all development costs are charged to expenses as incurred and to be recognized as “Metaverse and AI development expense” in the unaudited condensed consolidated statement of operations during the preliminary project stage. After establishing technological feasibility, the Company capitalizes all development payments to service provider as development costs. Significant management judgements are made in the assessment of when technological feasibility is established. Amortization of capitalized development costs commences when a product is available for general release. For capitalized development costs, annual amortization is calculated using the straight-line method over the remaining estimated life of the title. The Company evaluates the future recoverability of capitalized development costs on a quarterly basis. For the nine months ended September 30, 2022 and 2021, the Company incurred the related development costs of $5,000,000 and $0, respectively. The Company did not capitalize any related development costs during the nine months ended September 30, 2022 and 2021.
| ● | Impairment of long-lived assets |
In accordance with the provisions of ASC Topic 360, Impairment or Disposal of Long-Lived Assets, all long-lived assets such as property and equipment and intangible assets owned and held by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of an asset to its estimated future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets.
| ● | Revenue recognition |
ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers.
The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements:
| ● | identify the contract with a customer; |
| ● | identify the performance obligations in the contract; |
| ● | determine the transaction price; |
| ● | allocate the transaction price to performance obligations in the contract; and |
| ● | recognize revenue as the performance obligation is satisfied. |
17
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
Revenue is recognized when the Company satisfies its performance obligation under the contract by transferring the promised product to its customer that obtains control of the product and collection is reasonably assured. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. Most of the Company’s contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.
Lending Business
The Company is licensed to originate personal loan, company loan and mortgage loan in Hong Kong. During the nine months ended September 30, 2022 and 2021, the Company originated loans generally ranging from $644 to $579,000, with terms ranging from 1 week to 120 months. The Company mainly derives a portion of its revenue from loan which is specifically excluded from the scope of this standard, that is, interest on loan receivable is accrued monthly and credited to income as earned.
Arts and Collectibles Technology Business
The Company currently operates its online platform in the sale and distribution of arts and collectibles, with the use of blockchain technologies and minting tokens. The item of arts and collectibles is individually monetized as non-interchangeable unit of data stored on a blockchain, which is a form of digital ledger that can be sold, in the form of a minting token on the online platform. The Company is involved with the following activities to earn its revenue in this segment:
Sale of arts and collectibles products: The Company recognizes revenue derived from the sales of the arts and collectibles when the Company has transferred the risks and rewards of the arts and collectibles to the customers.
The minted item of the individual art or collectible which is sold in crypto asset transaction is the only performance obligation under the fixed-fee arrangements. The corresponding fees received upon each sale transaction is recognized as revenue when the designated token, minted with the corresponding art and collectibles is delivered to the end user, together with the transfer of both digital and official title.
Transaction fee income:
The Company also generates revenue through transaction fees transacted on its platform or other marketplaces. The Company charges a fee to individual customers at the secondary transaction level, which is allocated to the single performance obligation. The transaction fee is collected from the customer in digital assets, with revenue measured based on a certain percentage of the value of digital assets at the time the transaction is executed.
The Company’s service comprises of a single performance obligation to provide a platform facilitating the transfer of its DOTs. The Company considers its performance obligation satisfied, and recognizes revenue, at the point when the transaction is processed.
18
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
In this segment, the transaction consideration that the Company receives is a non-cash consideration in the form of digital assets, which are cryptocurrencies. The Company measures the related cryptocurrencies at fair value on the date received, at the same time, the revenue is recognized. Fair value of the digital asset award received is determined using the average U.S. dollar spot rate of the related digital currency at the time of receipt.
Expenses associated with operating the Arts and Collectibles Technology Business, such as minting cost and purchase cost of collectibles and artworks are also recorded as cost of revenues.
| ● | Leases |
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and long-term lease liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one year or less. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. However, certain adjustments to the right-of-use assets may be required for items such as prepaid or accrued lease payments. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
In accordance with the guidance in ASC Topic 842, components of a lease should be split into three categories: lease components (e.g. land, building, etc.), non-lease components (e.g. common area maintenance, consumables, etc.), and non-components (e.g. property taxes, insurance, etc.). Subsequently, the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on the respective relative fair values to the lease components and non-lease components.
The Company made the policy election to not separate lease and non-lease components. Each lease component and the related non-lease components are accounted for together as a single component.
| ● | Produced content cost |
In accordance with the guidance in ASC Topic 926, costs related directly to the production of content are capitalized as film costs as they are incurred. Capitalized content costs are recognized as “Produced content cost” in the unaudited condensed consolidated balance sheet. The concept of “predominant monetization strategy” to classify capitalized content costs for purposes of amortization and impairment as follows:
Individual
Lifetime value is predominantly derived from third-party revenues that are directly attributable to the specific film or television title (e.g. theatrical revenues or sales to third-party television programmers).
Group
Lifetime value is predominantly derived from third-party revenues that are attributable only to a bundle of titles (e.g. subscription revenue).
Production costs for content that is predominantly monetized individually is amortized based upon the ratio of the current period’s revenues to the estimated remaining total revenues.
Production costs that are predominantly monetized as a group are amortized based on projected usage (which may be, for example, derived from historical viewership patterns), typically resulting in an accelerated or straight-line amortization pattern. Participations and residuals are generally expensed in line with the pattern of usage.
The costs of produced content are subject to regular recoverability assessments. For content that is predominantly monetized individually, the unamortized costs are compared to the estimated fair value. The fair value will be determined based on a discounted cash flow analysis of the cash flows directly attributable to the title in accordance with ASC Topic 926-20 Entertainment-Films. To the extent the unamortized costs exceed the fair value, an impairment charge is recorded for the excess. For content that is predominantly monetized as a group, the aggregate unamortized costs of the group are compared to the present value of the discounted cash flows using the lowest level for which identifiable cash flows are independent of other produced content. If the unamortized costs exceed the present value of discounted cash flows, an impairment charge is recorded for the excess and allocated to individual titles based on the relative carrying value of each title in the group. If there are no plans to continue to use an individual film or television program that is part of a group, the unamortized cost of the individual title is written-off immediately.
| ● | Income taxes |
The Company adopted the ASC Topic 740 Income tax provisions of paragraph 740-10-25-13, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the unaudited condensed consolidated financial statements. Under paragraph 740-10-25-13, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Paragraph 740-10-25-13 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of paragraph 740-10-25-13.
19
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its balance sheets and provides valuation allowances as management deems necessary.
| ● | Uncertain tax positions |
The Company did not take any uncertain tax positions and had no adjustments to its income tax liabilities or benefits pursuant to the ASC Topic 740 provisions of Section 740-10-25 for the six months ended September 30, 2022 and 2021.
| ● | Foreign currencies translation |
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the consolidated statement of operations.
The reporting currency of the Company is United States Dollar (“US$”) and the accompanying consolidated financial statements have been expressed in US$. In addition, the Company has operations in Hong Kong and Singapore and maintains the books and record in the local currency, Hong Kong Dollars (“HKD”) and Singapore Dollars (“SGD”), which is a functional currency as being the primary currency of the economic environment in which their operations are conducted. In general, for consolidation purposes, assets and liabilities of its subsidiary whose functional currency is not US$ are translated into US$, in accordance with ASC Topic 830-30, Translation of Financial Statement, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiary are recorded as a separate component of accumulated other comprehensive income within the statements of changes in stockholder’s equity.
Translation of amounts from HKD and SGD into US$ has been made at the following exchange rates for the following periods:
| September 30, 2022 |
September 30, 2021 |
|||||||
| Period-end HKD:US$ exchange rate | 0.1274 | 0.1284 | ||||||
| Period average HKD:US$ exchange rate | 0.1277 | 0.1288 | ||||||
| September 30, 2022 | September 30, 2021 | |||||||
| Period-end SGD:US$ exchange rate | 0.6973 | 0.7355 | ||||||
| Period average SGD:US$ exchange rate | 0.7271 | 0.7469 | ||||||
| ● | Comprehensive income |
ASC Topic 220, Comprehensive Income, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated other comprehensive income, as presented in the accompanying consolidated statements of changes in stockholders’ equity, consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.
| ● | Net loss per share |
The Company calculates net loss per share in accordance with ASC Topic 260, Earnings per Share. Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.
20
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
| ● | Stock based compensation |
Pursuant to ASU 2018-07, the Company follows ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all share-based payment awards (employee or non-employee), are measured at grant-date fair value of the equity instruments that an entity is obligated to issue. Restricted stock units are valued using the market price of the Company’s common shares on the date of grant. The Company uses a Black-Scholes option model to estimate the fair value of employee stock options at the date of grant. As of September 30, 2022, those shares issued and stock options granted for service compensations were immediately vested, and therefore these amounts are thus recognized as expense in the operation.
| ● | Related parties |
The Company follows the ASC 850-10, Related Party for the identification of related parties and disclosure of related party transactions.
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 unaudited 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.
| ● | Commitments and contingencies |
The Company follows the ASC 450-20, Commitments to report accounting for contingencies. Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based upon information available at this time that these matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows.
21
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
| ● | 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.
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.
22
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The carrying amounts of the Company’s financial assets and liabilities, such as cash and cash equivalents, loan and fee receivable, prepayments and other receivables, amounts due from related parties, accrued liabilities and other payables, loans payable, amounts due to related parties approximate their fair values because of the short maturity of these instruments.
| ● | Recent accounting pronouncements |
From time to time, new accounting pronouncements are issued by the Financial Accounting Standard Board (“FASB”) or other standard setting bodies and adopted by the Company as of the specified effective date. 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.
NOTE 4 - GOING CONCERN UNCERTAINTIES
The accompanying condensed consolidated financial statements have been prepared using the going concern basis of accounting, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The Company has suffered from an accumulated deficit of $116,680,664 and working capital deficit of $3,605,373 at September 30, 2022. The continuation of the Company as a going concern in the next twelve months is dependent upon the continued financial support from its stockholders. Management believes the Company is currently pursuing additional financing for its operations. However, there is no assurance that the Company will be successful in securing sufficient funds to sustain the operations.
These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. These condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result in the Company not being able to continue as a going concern.
23
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
NOTE 5 - BUSINESS COMBINATION
On February 10, 2022, the Company issued 153,060 shares of its common stock, at a price of $4.00 per share at its current market price, in exchange for 80% of equity interest of Grand Gallery Limited, a Hong Kong limited liability company. The Company accounted for the transaction as an acquisition of a business pursuant to ASC 805, “Business Combinations” (“ASC 805”).
The transaction was accounted for using the acquisition method. Accordingly, goodwill has been measured as the excess of the total consideration over the amounts assigned to the identifiable assets acquired and liabilities assumed based on their preliminary estimated fair values.
The purchase price allocation resulted in $552,729 of goodwill, as below:
| Acquired assets: | ||||
| Property and equipment | $ | 2,593 | ||
| Cash and cash equivalents | 33,322 | |||
| Deposit, prepayment and other receivables | 11,218 | |||
| Amounts due from related parties | 21,778 | |||
| 68,911 | ||||
| Less: Assumed liabilities | ||||
| Accrued liabilities and other payables | (4,242 | ) | ||
| (4,242 | ) | |||
| Fair value of net assets acquired | 64,669 | |||
| Noncontrolling interest | (12,966 | ) | ||
| Foreign translation adjustment | 7,808 | |||
| Goodwill recorded | 552,729 | |||
| Consideration allocated, payable by the Company’s common stock | $ | 612,240 | ||
On August 18, 2022, the Company issued 164,516 shares of its common stock, at a price of $1.50 per share at its current market price, in exchange for 51% of equity interest of Phoenix Waters Productions (HK) Limited, a Hong Kong limited liability company. The acquisition was completed on August 31, 2022. The Company accounted for the transaction as an acquisition of a business pursuant to ASC 805, “Business Combinations” (“ASC 805”).
The transaction was accounted for using the acquisition method. Accordingly, goodwill has been measured as the excess of the total consideration over the amounts assigned to the identifiable assets acquired and liabilities assumed based on their preliminary estimated fair values.
The purchase price allocation resulted in $263,548 of goodwill, as below:
| Acquired assets: | ||||
| Produced content cost | $ | 540,985 | ||
| Amount due from a director | 69,270 | |||
| 610,255 | ||||
| Less: Assumed liabilities | ||||
| Accrued liabilities and other payables | (507,472 | ) | ||
| Loan from related party | (135,674 | ) | ||
| (643,146 | ) | |||
| Fair value of net liabilities assumed | (32,891 | ) | ||
| Noncontrolling interest | 16,117 | |||
| Goodwill recorded | 263,548 | |||
| Consideration allocated, payable by the Company’s common stock | $ | 246,774 | ||
Under the acquisition method of accounting, the total acquisition consideration price was allocated to the assets acquired and liabilities assumed based on their preliminary estimated fair values. The fair value measurements utilize estimates based on key assumptions of the Acquisition, and historical and current market data. The preliminary allocation of the purchase price is based on the best information available and is pending, amongst other things: (i) the finalization of the valuation of the fair values and useful lives of tangible assets acquired; (ii) finalization of the valuation of accrued expenses; and (iii) finalization of the fair value of non-cash consideration.
The Acquisition was accounted for as a business combination in accordance with ASC 805 “Business Combinations”. The Company has allocated the purchase price consideration based upon the fair value of the identifiable assets acquired and liabilities assumed on the acquisition date. Management of the Company is responsible for determining the fair value of assets acquired, liabilities assumed and intangible assets identified as of the acquisition date and considered a number of factors including valuations from management estimation. Acquisition-related costs incurred for the acquisitions are not material and have been expensed as incurred in general and administrative expense.
24
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
NOTE 6 - REVENUE FROM CONTRACTS WITH CUSTOMERS
The following is a disaggregation of the Company’s revenue by major source for the respective periods:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Interest income | $ | 1,517,764 | $ | 1,757,531 | $ | 4,833,433 | $ | 4,985,476 | ||||||||
| ACT income | ||||||||||||||||
| - Sale of arts and collectibles products | 418,998 | 257,956 | 1,825,448 | 257,956 | ||||||||||||
| - Transaction fee income and others | 2,074,102 | 266,912 | 6,225,988 | 266,912 | ||||||||||||
| 2,493,100 | 524,868 | 8,051,436 | 524,868 | |||||||||||||
| $ | 4,010,864 | $ | 2,282,399 | $ | 12,884,869 | $ | 5,510,344 | |||||||||
NOTE 7 - BUSINESS SEGMENT INFORMATION
Currently, the Company has two reportable business segments:
| (i) | Lending Segment, mainly provides financing and lending services; and |
| (ii) | Arts and Collectibles Technology (“ACT”) Segment, mainly operates an online platform to sell and distribute the arts and collectibles to end-users, with the use of blockchain technologies and minting tokens. |
In the following table, revenue is disaggregated by primary major product line, and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue with the reportable segments.
| Three months ended September 30, 2022 | ||||||||||||
| Lending Segment |
ACT Segment |
Total | ||||||||||
| Revenue from external customers: | ||||||||||||
| Interest income | $ | 1,517,764 | $ | $ | 1,517,764 | |||||||
| Arts and collectibles technology income | 2,493,100 | 2,493,100 | ||||||||||
| Total revenue, net | 1,517,764 | 2,493,100 | 4,010,864 | |||||||||
| Cost of revenue: | ||||||||||||
| Interest expense | (27,046 | ) | (27,046 | ) | ||||||||
| Arts and collectibles technology expense | (311,620 | ) | (311,620 | ) | ||||||||
| Total cost of revenue | (27,046 | ) | (311,620 | ) | (338,666 | ) | ||||||
| Gross profit | 1,490,718 | 2,181,480 | 3,672,198 | |||||||||
| Operating expenses | ||||||||||||
| Sales and marketing | (7,681 | ) | (491,783 | ) | (499,464 | ) | ||||||
| Corporate development | (510,786 | ) | (510,786 | ) | ||||||||
| Technology and development | (273,839 | ) | (273,839 | ) | ||||||||
| Metaverse and AI development | - | (5,000,000 | ) | (5,000,000 | ) | |||||||
| General and administrative | (737,558 | ) | (3,607,243 | ) | (4,344,801 | ) | ||||||
| Total operating expenses | (745,239 | ) | (9,883,651 | ) | (10,628,890 | ) | ||||||
| Income (loss) from operations | 745,479 | (7,702,171 | ) | (6,956,692 | ) | |||||||
| Other income (expense): | ||||||||||||
| Interest income | 104 | 84 | 188 | |||||||||
| Gain (loss) on disposal of digital assets | 206 | 206 | ||||||||||
| Impairment loss on digital assets | (2,477 | ) | (2,477 | ) | ||||||||
| Convertible notes interest expense | (979 | ) | (979 | ) | ||||||||
| Loan interest expense | (1,360 | ) | (1,360 | ) | ||||||||
| Imputed interest expense | (235,205 | ) | (235,205 | ) | ||||||||
| Sundry income | 36,564 | 36,564 | ||||||||||
| Total other expense, net | (198,537 | ) | (4,526 | ) | (203,063 | ) | ||||||
| Segment income (loss) | $ | 546,942 | $ | (7,706,697 | ) | $ | (7,159,755 | ) | ||||
25
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
| Three months ended September 30, 2021 | ||||||||||||
| Lending Segment | ACT Segment | Total | ||||||||||
| Revenue from external customers: | ||||||||||||
| Interest income | $ | 1,757,531 | $ | $ | 1,757,531 | |||||||
| Arts and collectibles technology income | 524,868 | 524,868 | ||||||||||
| Total revenue, net | 1,757,531 | 524,868 | 2,282,399 | |||||||||
| Cost of revenue: | ||||||||||||
| Interest expense | (7,249 | ) | (7,249 | ) | ||||||||
| Arts and collectibles technology expense | (213,484 | ) | (213,484 | ) | ||||||||
| Total cost of revenue | (7,249 | ) | (213,484 | ) | (220,733 | ) | ||||||
| Gross profit | 1,750,282 | 311,384 | 2,061,666 | |||||||||
| Operating expenses | ||||||||||||
| Sales and marketing | (1,340 | ) | (93,168 | ) | (94,508 | ) | ||||||
| General and administrative | (433,911 | ) | (3,957,237 | ) | (4,391,148 | ) | ||||||
| Total operating expenses | (435,251 | ) | (4,050,405 | ) | (4,485,656 | ) | ||||||
| Loss from operations | 1,315,031 | (3,739,021 | ) | (2,423,990 | ) | |||||||
| Other income (expense): | ||||||||||||
| Interest income | 73 | 73 | ||||||||||
| Loss on disposal of digital assets | (14 | ) | (14 | ) | ||||||||
| Impairment loss on digital assets | (37,451 | ) | (37,451 | ) | ||||||||
| Sundry income | 803 | 803 | ||||||||||
| Gain from forgiveness of related party debt | 2,298 | 2,298 | ||||||||||
| Total other income (expense), net | 3,174 | (37,465 | ) | (34,291 | ) | |||||||
| Segment income (loss) | $ | 1,318,205 | $ | (3,776,486 | ) | $ | (2,458,281 | ) | ||||
26
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
| Nine months ended September 30, 2022 | ||||||||||||
| Lending Segment |
ACT Segment |
Total | ||||||||||
| Revenue from external customers: | ||||||||||||
| Interest income | $ | 4,833,433 | $ | $ | 4,833,433 | |||||||
| Arts and collectibles technology income | 8,051,436 | 8,051,436 | ||||||||||
| Total revenue, net | 4,833,433 | 8,051,436 | 12,884,869 | |||||||||
| Cost of revenue: | ||||||||||||
| Interest expense | (367,337 | ) | (367,337 | ) | ||||||||
| Arts and collectibles technology expense | (1,118,755 | ) | (1,118,755 | ) | ||||||||
| Total cost of revenue | (367,337 | ) | (1,118,755 | ) | (1,486,092 | ) | ||||||
| Gross profit | 4,466,096 | 6,932,681 | 11,398,777 | |||||||||
| Operating expenses | ||||||||||||
| Sales and marketing | (260,599 | ) | (26,495,720 | ) | (26,756,319 | ) | ||||||
| Corporate development | (26,242,917 | ) | (26,242,917 | ) | ||||||||
| Technology and development | (32,832,406 | ) | (32,832,406 | ) | ||||||||
| Metaverse and AI development | - | (5,000,000 | ) | (5,000,000 | ) | |||||||
| General and administrative | (2,550,218 | ) | (7,192,879 | ) | (9,743,097 | ) | ||||||
| Total operating expenses | (2,810,817 | ) | (97,763,922 | ) | (100,574,739 | ) | ||||||
| Income (loss) from operations | 1,655,279 | (90,831,241 | ) | (89,175,962 | ) | |||||||
| Other income (expense): | ||||||||||||
| Interest income | 211 | 90 | 301 | |||||||||
| Gain on disposal of digital assets | 206 | 206 | ||||||||||
| Impairment loss on digital assets | (12,633 | ) | (12,633 | ) | ||||||||
| Convertible notes interest expense | (979 | ) | (979 | ) | ||||||||
| Loan interest expense | (1,360 | ) | (1,360 | ) | ||||||||
| Imputed interest expense | (714,696 | ) | (714,696 | ) | ||||||||
| Sundry income | 93,108 | 506 | 93,614 | |||||||||
| Total other expense, net | (621,377 | ) | (14,170 | ) | (635,547 | ) | ||||||
| Segment income (loss) | $ | 1,033,902 | $ | (90,845,411 | ) | $ | (89,811,509 | ) | ||||
27
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
| Nine months ended September 30, 2021 | ||||||||||||
Lending Segment | ACT Segment | Total | ||||||||||
| Revenue from external customers: | ||||||||||||
| Interest income | $ | 4,985,476 | $ | $ | 4,985,476 | |||||||
| Arts and collectibles technology income | 524,868 | 524,868 | ||||||||||
| Total revenue, net | 4,985,476 | 524,868 | 5,510,344 | |||||||||
| Cost of revenue: | ||||||||||||
| Interest expense | (784,195 | ) | (784,195 | ) | ||||||||
| Arts and collectibles technology expense | (213,484 | ) | (213,484 | ) | ||||||||
| Total cost of revenue | (784,195 | ) | (213,484 | ) | (997,679 | ) | ||||||
| Gross profit | 4,201,281 | 311,384 | 4,512,665 | |||||||||
| Operating Expenses | ||||||||||||
| Sales and marketing | (43,694 | ) | (93,168 | ) | (136,862 | ) | ||||||
| General and administrative | (2,083,635 | ) | (3,957,237 | ) | (6,040,872 | ) | ||||||
| Total operating expenses | (2,127,329 | ) | (4,050,405 | ) | (6,177,734 | ) | ||||||
| Income (loss) from operations | 2,073,952 | (3,739,021 | ) | (1,665,069 | ) | |||||||
| Other income (expense): | ||||||||||||
| Interest income | 89 | 89 | ||||||||||
| Loss on disposal of digital assets | (14 | ) | (14 | ) | ||||||||
| Impairment loss on digital assets | (37,451 | ) | (37,451 | ) | ||||||||
| Sundry income | 3,085 | 3,085 | ||||||||||
| Gain from forgiveness of related party debt | 140,712 | 140,712 | ||||||||||
| Total other income (expense), net | 143,886 | (37,465 | ) | 106,421 | ||||||||
| Segment income (loss) | $ | 2,217,838 | $ | (3,776,486 | ) | $ | (1,558,648 | ) | ||||
The below revenues are based on the countries in which the customer is located. Summarized financial information concerning the geographic segments is shown in the following tables:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Hong Kong | $ | 1,517,764 | 1,757,531 | $ | 4,833,433 | 4,985,476 | ||||||||||
| Around the world | 2,493,100 | 524,868 | 8,051,436 | 524,868 | ||||||||||||
| 4,010,864 | 2,282,399 | 12,884,869 | 5,510,344 | |||||||||||||
28
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
NOTE 8 – LOAN RECEIVABLES, NET
The Company’s loan portfolio was as follows:
September
30, | December
31, | |||||||
| Personal loans | $ | 19,127,321 | $ | 17,352,856 | ||||
| Commercial loans | 997,431 | 1,186,339 | ||||||
| Mortgage loans | 2,443,795 | 1,294,601 | ||||||
| Total loans | 22,568,547 | 19,833,796 | ||||||
| Less: Allowance for loan losses | (2,086,203 | ) | (781,202 | ) | ||||
| Loans receivables, net | $ | 20,482,344 | $ | 19,052,594 | ||||
| Reclassifying as: | ||||||||
| Current portion | $ | 18,449,707 | $ | 16,186,351 | ||||
| Non-current portion | 2,032,637 | 2,866,243 | ||||||
| Total loans receivables | $ | 20,482,344 | $ | 19,052,594 | ||||
The interest rates on loans issued were ranged from 13% to 59% per annum for the nine months ended September 30, 2022 and for the year ended December 31, 2021.
All loans are made to either business or individual customers in Hong Kong for a period of 1 week to 120 months.
Allowance for loan losses is estimated on an annual basis based on an assessment of specific evidence indicating doubtful collection, historical experience, loan balance aging and prevailing economic conditions.
Interest on loan receivable is accrued and credited to income as earned. The Company determines a loan’s past due status by the number of days that have elapsed since a borrower has failed to make a contractual loan payment. Accrual of interest is generally discontinued when either (i) reasonable doubt exists as to the full, timely collection of interest or principal or (ii) when a loan becomes past due by more than 180 days (The further extension of loan past due status is subject to management final approval and on case-by-case basis).
29
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The following table presents the activity in the allowance for loan losses as of and for the nine months ended September 30, 2022 and the year ended December 31, 2021:
| September 30, 2022 | December 31, 2021 | |||||||
| Balance at Beginning of Period/Year | $ | 781,202 | $ | 53,506 | ||||
| Provisions | 1,270,017 | 783,694 | ||||||
| Foreign translation adjustment | 34,984 | (55,998 | ) | |||||
| Balance at End of Period/Year | $ | 2,086,203 | $ | 781,202 | ||||
For the nine months ended September 30, 2022, the Company had $1,270,017 provision for the allowance of loan losses.
Allowance for loan losses is estimated on a annual basis based on an assessment of specific evidence indicating doubtful collection, historical experience, loan balance aging and prevailing economic conditions.
AGE ANALYSIS LOANS BY CLASS
All classes of loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Interest and fees continue to accrue on past due loans until the date the loan is placed in nonaccrual status, if applicable. The following table includes an aging analysis of loans as of the dates indicated. Also included in the table below are loans that are 90 days or more past due as to interest and principal and still accruing interest, because they are well-secured and in the process of collection.
| Age Analysis of Loans by Class | ||||||||||||||||||||||||||||||||
| Mortgage | Commercial loan | Personal loan | September 30, 2022 | Mortgage | Commercial loan | Personal loan | December 31, 2021 | |||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Within credit term | 1,609,689 | 458,361 | 11,241,479 | 13,309,529 | 1,051,202 | 647,677 | 13,003,233 | 14,702,112 | ||||||||||||||||||||||||
| Past due: | ||||||||||||||||||||||||||||||||
| 30-59 days | ||||||||||||||||||||||||||||||||
| 60-89 days | ||||||||||||||||||||||||||||||||
| 90 or more days due and still accruing | ||||||||||||||||||||||||||||||||
| Nonaccrual | 834,106 | 539,070 | 7,885,842 | 9,259,018 | 89,859 | 25,650 | 5,016,175 | 5,131,684 | ||||||||||||||||||||||||
| Total loans | 2,443,795 | 997,431 | 19,127,321 | 22,568,547 | 1,141,061 | 673,327 | 18,019,408 | 19,833,796 | ||||||||||||||||||||||||
30
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
LOAN MATURITY BY CLASS
The following table presents the maturities of loan balances for the years presented:
| Maturities | Mortgage | Commercial loan | Personal loan | September 30, 2022 | Mortgage | Commercial loan | Personal loan | December 31, 2021 | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Within 1 year | 1,943,735 | 742,644 | 16,867,446 | 19,553,825 | 1,019,780 | 673,327 | 13,553,132 | 15,246,239 | ||||||||||||||||||||||||
| 1-5 years | 500,060 | 254,787 | 2,259,875 | 3,014,722 | 121,281 | 4,466,276 | 4,587,557 | |||||||||||||||||||||||||
| 5-10 years | ||||||||||||||||||||||||||||||||
| More than 10 years | ||||||||||||||||||||||||||||||||
| Total loans | 2,443,795 | 997,431 | 19,127,321 | 22,568,547 | 1,141,061 | 673,327 | 18,019,408 | 19,833,796 | ||||||||||||||||||||||||
Interest on loans receivable is accrued and credited to income as earned. The Company determines a loan’s past due status by the number of days that have elapsed since a borrower has failed to make a contractual loan payment. Accrual of interest is generally discontinued when either (i) reasonable doubt exists as to the full, timely collection of interest or principal or (ii) when a loan becomes past due by more than 180 days (The further extension of loan past due status is subject to management final approval and on case-by-case basis).
CREDIT QUALITY INFORMATION
The Company uses internally-assigned risk grades to estimate the capability of borrowers to repay the contractual obligations of their loan agreements as scheduled or at all. The Company’s internal risk grade system is based on experiences with similarly graded loans and the assessment of borrower credit quality, such as, credit risk scores, collateral and collection history. Individual credit scores are assessed by credit bureau, such as TransUnion. Internal risk grade ratings reflect the credit quality of the borrower, as well as the value of collateral held as security. The Company requires collateral arrangements to all mortgage loans and has policies and procedures for validating the reasonableness of the collateral valuations on a regular basis. Management believes that these policies effectively manage the credit risk from advances.
31
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The Company’s internally assigned risk grades are as follows:
Pass: Loans are of acceptable risk.
Other Assets Especially Mentioned (OAEM): Loans have potential weaknesses that deserve management’s close attention.
Substandard: Loans reflect significant deficiencies due to several adverse trends of a financial, economic or managerial nature.
Doubtful: Loans have all the weaknesses inherent in a substandard loan with added characteristics that make collection or liquidation in full based on currently existing facts, conditions and values highly questionable or improbable.
Loss: Loans have been identified for charge-off because they are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.
The following table presents credit quality exposures by internally assigned risk ratings as of the dates indicated:
| Credit grades | Mortgage | Commercial loan |
Personal loan |
September 30, 2022 |
Mortgage | Commercial loan |
Personal loan |
December 31, 2021 |
||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Other assets especially mentioned | 1,542,680 | 490,210 | 13,806,233 | 15,839,123 | 1,051,202 | 673,327 | 13,997,540 | 15,722,069 | ||||||||||||||||||||||||
| Substandard | 187,417 | 952,890 | 1,140,307 | 330,278 | 330,278 | |||||||||||||||||||||||||||
| Doubtful | 713,698 | 507,221 | 4,368,198 | 5,589,117 | 89,859 | 3,691,590 | 3,781,449 | |||||||||||||||||||||||||
| Loss | ||||||||||||||||||||||||||||||||
| Total loans | 2,443,795 | 997,431 | 19,127,321 | 22,568,547 | 1,141,061 | 673,327 | 18,019,408 | 19,833,796 | ||||||||||||||||||||||||
32
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
NOTE 9 - DIGITAL ASSETS, NET
The following tables present changes in carrying value of digital assets as of and for the nine months ended September 30, 2022 and December 31, 2021:
| USDT | OKT | ETH | BNB | BUSD | MATIC | COTK | Total | |||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | 25,576 | $ | 34 | $ | 5,658 | $ | 1,612 | $ | $ | $ | 2,571 | $ | 35,451 | ||||||||||||||||||
| Received as revenue | 118,800 | 42,789 | 958 | 7,863,338 | 8,025,885 | |||||||||||||||||||||||||||
| Paid as expense | (143,786 | ) | (3 | ) | (22,621 | ) | (561 | ) | (7,862,585 | ) | (8,029,556 | ) | ||||||||||||||||||||
| Purchase | 19 | 19 | ||||||||||||||||||||||||||||||
| Impairment loss | (24 | ) | (9,395 | ) | (643 | ) | (2,571 | ) | (12,633 | ) | ||||||||||||||||||||||
| Balance at September 30, 2022 | $ | 590 | $ | 7 | $ | 16,431 | $ | 1,366 | $ | 753 | $ | 19 | $ | $ | 19,166 | |||||||||||||||||
| USDT | OKT | ETH | BNB | COTK | Total | |||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Received as revenue | 3,008,129 | 257,956 | 3,266,085 | |||||||||||||||||||||
| Paid as expense | (2,982,553 | ) | (22 | ) | (214,677 | ) | (6,050 | ) | (226 | ) | (3,203,528 | ) | ||||||||||||
| Purchase | 57 | 269 | 7,766 | 4,718 | 12,810 | |||||||||||||||||||
| Impairment loss | (1 | ) | (37,890 | ) | (104 | ) | (1,921 | ) | (39,916 | ) | ||||||||||||||
| Balance at December 31, 2021 | $ | 25,576 | $ | 34 | $ | 5,658 | $ | 1,612 | $ | 2,571 | $ | 35,451 | ||||||||||||
As of September 30, 2022 and December 31, 2021, the fair value of the digital assets held by the Company was $19,166 and $35,451, respectively.
33
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
NOTE 10 - INVENTORIES
A summary of inventories as of September 30, 2022 and December 31, 2021 is as follows:
| As of September 30, 2022 | ||||||||||||
| No. of token | No. of art and collectible items | Total amount | ||||||||||
| Balance at January 1, 2022 | 10 | 45 | $ | 2,103,038 | ||||||||
| Purchased | 102 | 2,021,913 | ||||||||||
| Token minted | 36 | |||||||||||
| Sold | (22 | ) | (27 | ) | (1,046,401 | ) | ||||||
| Balance at September 30, 2022 | 24 | 120 | $ | 3,078,550 | ||||||||
| As of December 31, 2021 | ||||||||||||
| No. of token | No. of art and collectible items | Total amount | ||||||||||
| Balance at January 1, 2021 | $ | |||||||||||
| Purchased | 57 | 3,111,542 | ||||||||||
| Token minted | 24 | |||||||||||
| Sold | (13 | ) | (13 | ) | (993,020 | ) | ||||||
| Marketing expense | (1 | ) | (1 | ) | (15,484 | ) | ||||||
| Balance at December 31, 2021 | 10 | 43 | $ | 2,103,038 | ||||||||
34
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
NOTE 11 - INTANGIBLE ASSETS, NET
A summary of intangible assets as of September 30, 2022 and December 31, 2021 is as follows:
Estimated useful life | September 30, 2022 | December 31, 2021 | ||||||||
| At cost: | ||||||||||
| Acquired technology software | 5 years | $ | 17,344,690 | $ | 17,344,690 | |||||
| Licensed technology knowhow | 4 years | 2,000,000 | 2,000,000 | |||||||
| Trademarks and trade name | 10 years | 41,144 | 39,270 | |||||||
| Less: accumulated amortization | (3,809,333 | ) | (829,575 | ) | ||||||
| Foreign translation adjustment | (249 | ) | 4 | |||||||
| $ | 15,576,252 | $ | 18,554,389 | |||||||
As of September 30, 2022, the estimated annual amortization expense for intangible assets for each of the succeeding five years and thereafter is as follows
| Period ending September 30: | ||||
| 2023 | $ | 3,973,026 | ||
| 2024 | 3,973,026 | |||
| 2025 | 3,848,026 | |||
| 2026 | 3,473,026 | |||
| 2027 | 293,166 | |||
| Thereafter | 15,982 | |||
| $ | 15,576,252 | |||
Amortization of intangible assets for the three months ended September 30, 2022 and 2021 totaled $993,257 and $0, respectively.
Amortization of intangible assets for the nine months ended September 30, 2022 and 2021 totaled $2,979,763 and $0, respectively.
NOTE 12 – PRODUCED CONTENT COST
Total capitalized produced content by predominant monetization strategy as of September 30, 2022 and December 31, 2021 is as follows:
September 30, 2022 | December 31, | |||||||
| Produced content: | ||||||||
| Released, net of amortization | $ | $ | ||||||
| Completed, not released | ||||||||
| In-process | 608,257 | |||||||
| $ | 608,257 | $ | ||||||
The produced content cost is not amortized as of September 30, 2022 as the production of the film is still in process.
35
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
NOTE 13 - ACCRUED CONSULTING AND SERVICE FEE
For the nine months ended September 30, 2022, the Company agreed to compensate certain business or professional service providers, in which rendered IT development service, sale and marketing service, corporate development service and administrative service. These accrued consulting and service fees totaled $2,642,821 and agreed to be settled in lieu of the common stock of the Company.
NOTE 14 - LOAN PAYABLES
The amounts represented temporary advances received from the third parties for the lending business, which carried annual interest at the rate of 18% to 21%. These amounts were unsecured and will become repayable within one year. The loan payable balance was $816,946 and $489,836 as of September 30, 2022 and December 31, 2021, respectively.
Interest related to the loan payables was $27,046 and $7,249 for the three months ended September 30, 2022 and 2021, respectively.
Interest related to the loan payables was $367,337 and $784,195 for the nine months ended September 30, 2022 and 2021, respectively.
NOTE 15 - CONVERTIBLES NOTE PAYABLES
Securities purchase agreement and related convertible note
Chan Hin Yip Note
On August 2, 2022, the Company entered into a Sale and Purchase Agreement (“SPA”) with CHAN Hin Yip, pursuant to which the Company agreed to purchase approximately 58 collectible items from Mr. Chan for a purchase price of HKD 1,305,000 (approximately USD $167,308) (the “Purchase Price”), through its subsidiaries holds approximately 80% of the issued and outstanding securities of Grand Gallery Limited (“GGL”), and Mr. Chan is a director and 5% equity owner of GGL.
On August 2, 2022, the Company and Mr. Chan entered into a Note Purchase Agreement (“Chan Hin Yip Note”) pursuant to which the Company agreed to pay the Purchase Price via a promissory note that will be converted into shares of the Company’s common stock at a conversion price equal to 90% of the volume weighted average closing price of the Company’s common stock for the ten days immediately prior to February 2, 2023. The Chan Hin Yip Note bears interest at 1% per annum and is due on February 2, 2023
1800 Diagonal Note
On August 26, 2022, the Company and 1800 Diagonal Lending LLC (“1800 Diagonal”) entered into a Securities Purchase Agreement, whereby the Company issued a promissory note to 1800 Diagonal (“1800 Diagonal Note”) in the original principal amount of $89,250. The 1800 Diagonal Note is convertible into shares of the common stock of the Company one hundred eighty (180) days following the date of funding at a price equal to 65% of the average of two (2) lowest trading price of the Company’s common stock for the twenty (20) trading days prior to conversion. The Company has the option to prepay the 1800 Diagonal Note by paying an amount equal to the then outstanding amount multiplied by premium percentage during the first one hundred eighty (180) days. The 1800 Diagonal Note bears interest at 8% per annum and is due on August 26, 2023.
As of September 30, 2022, the Company did not prepay any of the convertible note payables.
As of September 30, 2022, accrued convertible notes interest expense were amounted to $979.
36
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
NOTE 16 - AMOUNTS DUE TO RELATED PARTIES
The amounts represented temporary advances to the Company for the lending business, which were unsecured, interest-free and had no fixed terms of repayments. The related party balances were $21,059,146 and $20,954,836 as of September 30, 2022 and December 31, 2021, respectively.
During the three and nine months ended September 30, 2022, the Company recorded an imputed additional non-cash interest of $235,205 and $714,696 at the market rate of 5% per annum on these interest-free related party loans, under ASC 835-30 “Imputation of Interest”.
NOTE 17 - LEASES
The Company entered into operating leases primarily for office premises with lease terms generally 2 years. The Company adopted Topic 842, using the modified-retrospective approach as discussed in Note 3, and as a result, recognized a right-of-use asset and a lease liability. The Company uses a 5% rate to determine the present value of the lease payments. The remaining life of the lease was two years.
The Company excludes short-term leases (those with lease terms of less than one year at inception) from the measurement of lease liabilities or right-of-use assets.
As of September 30, 2022, right-of-use assets were $222,287 and lease liabilities were $229,734.
For the three months ended September 30, 2022 and 2021, the Company charged to operations lease as expenses of $66,470 and $0, respectively.
For the nine months ended September 30, 2022 and 2021, the Company charged to operations lease as expenses of $206,453 and $0, respectively.
The maturity of the Company’s lease obligations is presented below:
NOTE 18 – STOCK-BASED COMPANESATION
On May 19, 2022, the Company has filed a Registration Statement on Form S-8 and includes a Reoffer Prospectus that the Reoffer Prospectus may be used for reoffers and resales of shares of the Company. The Reoffer Prospectus covers the Shares issuable to the Selling Securityholders pursuant to awards granted to the Selling Securityholders under the Coinllectibles Inc. 2022 Stock Incentive Plan. The Company will not receive any proceeds from the sale of the shares offered by the Reoffer Prospectus.
As of September 30, 2022, there were 28,438,341 shares of the Company have been issued to consultants who have provided services to the Company.
The following table presents the stock-based compensation expenses for shares granted consultants during the three and nine months ended September 30, 2022 and 2021:
| Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Corporate development expenses | $ | 333,225 | $ | $ | 25,646,926 | $ | ||||||||||
| Technology and development expenses | 45,000 | 32,105,000 | ||||||||||||||
| Sales and marketing expenses | 150,225 | 25,913,695 | ||||||||||||||
| General and administrative expenses | 2,172,839 | 2,811,839 | ||||||||||||||
| $ | 2,701,289 | $ | $ | 86,477,460 | $ | |||||||||||
37
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The stock-based compensation expense was $2,701,289 during the three months ended September 30, 2022.
The stock-based compensation expense was $86,477,460 during the nine months ended September 30, 2022.
NOTE 19 - STOCKHOLDERS’ EQUITY
Authorized stock
The Company’s authorized share is 500,000,000 common shares with a par value of $0.001 per share.
Common stock outstanding
On January 19, 2022, the Company issued 100,000 shares of its common stock as Commitment Shares to Williamsburg Venture Holdings, LLC (the “Investor”), under an Equity Purchase Agreement dated December 31, 2021 (the “Agreement”), in consideration for the Investor’s execution and delivery of, and performance under the Agreement.
On February 10, 2022, the Company issued 153,060 shares of its common stock, at a price of $4.00 per share at its current market price, in exchange for 80% of equity interest of Grand Gallery Limited, a Hong Kong limited liability company, which is engaged in the business of selling traditional art and collectible pieces. The Company believes that this acquisition will strengthen the DOT business by expanding its access to buyers of arts and collectibles.
On May 19, 2022, the Company issued 26,921,356 shares of its common stock to settle the common stock to be issued and accrued consulting and service fee to consultants who have provided services to the Company.
On May 24, 2022, the Company issued 64,200 shares of its common stock, at a price of $4.00 per shares at its current market price, to a consultant who has provided service to the Company under Rule 144.
On August 18, 2022, the Company issued 164,516 shares of its common stock, at a price of $1.50 per shares at its current market price, in exchange for 51% of equity interest of Phoenix Waters Productions (HK) Limited, a Hong Kong Limited liability company, which is engaged in filmmaking in Hong Kong. The acquisition was completed on September 1, 2022.
On September 16, 2022, the Company issued 1,452,785 shares of its common stock, at a price of $0.826 per shares at its current market price, to a consultant who has provided service to the Company under Rule 144.
As of September 30, 2022 and December 31, 2021, the Company had a total of 386,923,398 shares and 358,067,481 shares of its common stock issued and outstanding, respectively.
Common stock to be issued
As of September 30, 2022, the Company had 800,000,000 shares of its common stock to be issued to Dr. Lee, a director of the Company, in connection with the acquisition of Massive Treasure.
As of December 31, 2021, the Company had 806,321,356 shares of its common stock to be issued, comprising of 800,000,000 shares outstanding to Dr. Lee, a major shareholder and former director of the Company, in connection with the acquisition of Massive Treasure, 235,294 shares outstanding to Mr. Tan, a director of the Company, in connection with his service to the Company for the year ended December 31, 2021, and 6,086,062 shares outstanding to consultants for their services rendered to the Company for the year ended December 31, 2021.
NOTE 20 - INCOME TAX
The provision for income taxes consisted of the following:
| Nine months ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Current tax: | ||||||||
| - Local | $ | $ | ||||||
| - Foreign | 546,146 | 377,453 | ||||||
| Deferred tax | ||||||||
| - Local | ||||||||
| - Foreign | ||||||||
| Income tax expense | $ | 546,146 | $ | 377,453 | ||||
38
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The effective tax rate in the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rate. The Company mainly operates in Singapore and Hong Kong that is subject to taxes in the jurisdictions in which they operate, as follows:
United States of America
COSG is registered in the State of Nevada and is subject to the tax laws of United States of America. The U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law. The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits in its income tax provision. The Company has not accrued or paid interest or penalties which were not material to its results of operations for the periods presented. Deferred tax asset is not provided for as the tax losses may not be able to carry forward after a change in substantial ownership of the Company.
For the nine months ended September 30, 2022 and 2021, there were no operating income in US tax regime.
BVI
Under the current BVI law, the Company is not subject to tax on income.
Republic of Singapore
The Company’s subsidiaries are registered in Republic of Singapore and are subject to the Singapore corporate income tax at a standard income tax rate of 17% on the assessable income arising in Singapore during its tax year. The operation in Singapore incurred an operating loss due to certain charges within the group and there is no provision for income tax for the nine months ended September 30, 2022 and 2021.
| Nine months ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Loss before income taxes | $ | (87,384,457 | ) | $ | (52,736 | ) | ||
| Statutory income tax rate | 17 | % | 17 | % | ||||
| Income tax expense at statutory rate | (14,855,358 | ) | (8,965 | ) | ||||
| Net operating loss | 14,855,358 | 8,965 | ||||||
| Income tax expense | $ | $ | ||||||
Hong Kong
The Company and subsidiaries operating in Hong Kong is subject to the Hong Kong Profits Tax at the two-tiered profits tax rates from 8.25% to 16.5% on the estimated assessable profits arising in Hong Kong during the current year, after deducting a tax concession for the tax year. The reconciliation of income tax rate to the effective income tax rate for the nine months ended September 30, 2022 and 2021 is as follows:
| Nine months ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Income before income taxes | $ | 1,191,436 | $ | 2,217,838 | ||||
| Statutory income tax rate | 16.5 | % | 16.5 | % | ||||
| Income tax expense at statutory rate | 196,587 | 365,943 | ||||||
| Tax effect of non-deductible items | 342,096 | 11,510 | ||||||
| Tax effect of non-taxable items | (8,499 | ) | ||||||
| Net operating loss | 15,962 | |||||||
| Income tax expense | $ | 546,146 | $ | 377,453 | ||||
39
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The following table sets forth the significant components of the deferred tax assets and liabilities of the Company as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforward, from | ||||||||
| US tax regime | $ | 128,579 | $ | 68,955 | ||||
| Singapore tax regime | 18,009,235 | 3,153,877 | ||||||
| Hong Kong tax regime | 36,148 | 20,186 | ||||||
| Less: valuation allowance | (18,173,962 | ) | (3,243,018 | ) | ||||
| Deferred tax assets, net | $ | $ | ||||||
As of September 30, 2022, the operations in the United States of America incurred $612,279 of cumulative net operating losses which can be carried forward indefinitely to offset future taxable income. The Company has provided for a full valuation allowance against the deferred tax assets of $128,579 on the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.
As of September 30, 2022, the operations in Singapore incurred $105,936,672 of cumulative net operating losses which can be carried forward to offset future taxable income. There is no expiry in net operating loss carryforwards under Singapore tax regime. the Company has provided for a full valuation allowance against the deferred tax assets of $18,009,235 on the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.
As of September 30, 2022, the operations in Hong Kong incurred $219,079 of cumulative net operating losses which can be carried forward indefinitely to offset future taxable income. The Company has provided for a full valuation allowance against the deferred tax assets of $36,148 on the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.
The Company filed income tax returns in the United States federal tax jurisdiction and several state tax jurisdictions. Since the Company is in a loss carryforward position, it is generally subject to examination by federal and state tax authorities for all tax years in which a loss carryforward is available.
NOTE 21 - RELATED PARTY TRANSACTIONS
From time to time, the directors of the Company advanced funds to the Company for working capital purpose. Those advances were unsecured, non-interest bearing and had no fixed terms of repayment.
During the three months ended September 30, 2022, the Company paid the management service fee of $931,059, to a company controlled by its major shareholder and former director, Dr. Lee.
During the three months ended September 30, 2022, the Company paid the director fee of $30,000 to Mr. Tan, a director of the Company, for his service to the Company’s subsidiary.
During the nine months ended September 30, 2022, the Company paid the management service fee of $2,746,911, to a company controlled by its major shareholder and former director, Dr. Lee.
During the nine months ended September 30, 2022, the Company paid the director fee of $90,000 to Mr. Tan, a director of the Company, for his service to the Company’s subsidiary.
On July 1, 2022, the Company’s wholly-owned subsidiary entered into a technical knowhow license and servicing agreement (the “Servicing Agreement”) with Total Chase Limited (“Total Chase”), a company controlled by its major shareholder and former director, Dr. Lee. Pursuant to which the Company engaged Total Chase to develop the technical knowhow for a term of three-year. Marvel Digital AI Limited (“MDAI”), the subsidiary of Total Chase, owns several intellectual properties and provides technical development services to Total Chase. The technical knowhow consists of Visual Intelligence Engine, Speech Recognition Engine, Text Analytics Engine, Emotion Recognition Engine, Motion Recognition Engine, AI Agent Creation Engine and NFT Generation and Loading Engine for development of metaverse on Roblox. Under the terms of the Servicing Agreement, the Company is required to pay to Total Chase an aggregate of $50,000,000 for the development of technical knowhow. The consideration is payable in cash or cryptocurrencies. All MDAI’s proprietary items remain the sole and exclusive property of MDAI, Total Chase will grant the Company a perpetual, non-exclusive, paid-up license to use certain MDAI’s proprietary items. The Company reserves the right to terminate services in whole or in part, upon 7 days written notice to Total Chase. The foregoing description of the Servicing Agreement is qualified in its entirety by reference to such agreement which is filed as Exhibit 10.8 to this quarterly report on Form 10-Q and incorporated herein by reference.
40
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The Company charged all related development costs to expenses as incurred and recognized as “Metaverse and AI development expenses” in the unaudited condensed consolidated statement of operations. During the nine months ended September 30, 2022, the Company incurred developmental costs of $5,000,000 and paid $2,689,000.
On August 2, 2022, the Company entered into a Sale and Purchase Agreement (“SPA”) with CHAN Hin Yip, pursuant to which the Company agreed to purchase approximately 58 collectible items from Mr. Chan for a purchase price of HKD1,305,000 (approximately USD167,308) (the “Purchase Price”), through its subsidiaries holds approximately 80% of the issued and outstanding securities of Grand Gallery Limited (“GGL”), and Mr. Chan is a director and 5% equity owner of GGL.
On August 2, 2022, the Company and Mr. Chan entered into a Note Purchase Agreement (“Chan Hin Yip Note”) pursuant to which the Company agreed to pay the Purchase Price via a promissory note that will be converted into shares of the Company’s common stock at a conversion price equal to 90% of the volume weighted average closing price of the Company’s common stock for the ten days immediately prior to February 2, 2023. The Chan Hin Yip Note bears interest at 1% per annum and is due on February 2, 2023
On September 1, 2022, the Company purchased 42 collectibles items from companies controlled by its major shareholder and former director, Dr. Lee, for a purchase price of $1,851,520
On September 16, 2022, the Company issued 1,452,785 shares of its common stock, at a price of $0.826 per shares at market price under Rule 144, to a partnership fund beneficially owned by its major shareholder and former director, Dr. Lee, which has rendered service to the Company.
As of September 30, 2022, Phoenix Waters Production (HK) Limited (“PWHK”), a subsidiary of the Company, has promissory notes payables to a company controlled by the Company’s major shareholder and former director, Dr. Lee, amounted to HKD512,000 (approximately USD65,225). The promissory notes payables are subject to interest at 12% per annum and repayable within 1 year upon delivery of the note.
As of September 30, 2022, PWHK has loan payables to a company controlled by the Company’s major shareholder and former director, Dr. Lee, amounted to HKD1,939,554 (approximately USD240,086). The loan is unsecured, interest-free with 1% penalty on late repayment and repayable in January 2023.
Apart from the transactions and balances detailed elsewhere in these accompanying condensed consolidated financial statements, the Company has no other significant or material related party transactions during the periods presented.
NOTE 22 - COMMITMENTS AND CONTINGENCIES
As of September 30, 2022, the Company is committed to the below contractual arrangements.
In May 2021, The Company, through its subsidiary, Massive Treasure entered into a Share Swap Letter Agreement (the “100% Share Swap Letter”) with the shareholders of each of E-on Finance Limited (“E-on”) and 8M Limited ("8M") to acquire 100% of each of E-on and 8M for 20,110,604 and 10,055,302 shares of common stock of COSG respectively based upon the closing price of the common stock of COSG as of the date of signing of the 100% Share Swap Letter and determined in accordance with the terms of the 100% Share Swap Letter on the date. The acquisition of E-on and 8M consummated in May 2021. Thereon, the Company issued 10,256,409 shares and 5,128,204 shares to the shareholders of E-on and 8M respectively, during 2021.
41
COSMOS GROUP HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The Company is obligated to issue 9,854,195 and 4,927,098 shares on the first anniversary of the closing of the acquisition to the former shareholders of E-on and 8M respectively, subject to certain clawback provisions. E-on and 8M are obligated to meet certain financial milestones in each of the two-year anniversaries following the closing. Failure to meet such milestones will result in a clawback of the shares issued to the former shareholders. On the second anniversary of the closing, if E-on or 8M exceeds the aggregate financial milestone set for the two years, the former shareholders thereof shall be entitled to additional shares of COSG as determined in accordance with the 100% Share Swap Letter.
In May and June 2021, the Company, through its subsidiary, Massive Treasure entered into a Share Swap Letter Agreement (the “51% Share Swap Letter”) with the shareholders of Healthy Finance Limited, Dragon Group Mortgage Limited, Lee Kee Finance Limited, Rich Finance (Hong Kong) Limited, Long Journey Finance Limited, Vaav Limited and Star Credit Limited (collectively “the entities”), to acquire each of the entities 51% of the issued and outstanding securities of the entities for an aggregate amount of 23,589,736 shares of COSG’s common stock as set forth below (the “First Tranche Shares”), based upon the closing price of the common stock of COSG as of the date of signing the 51% Share Swap Letter and determined in accordance with the terms of the 51% Share Swap Letter. The acquisition of the entities consummated in May and June 2021. Thereon, COSG issued the First Tranche Shares.
On the first anniversary of the closing, the Company is obligated to issue a second tranche of shares of its common stock, based upon the closing price of its shares as of the fifth business day prior to such first anniversary as determined in accordance with the terms of the 51% Share Swap Letter (the “Second Tranche Shares”). Upon the issuance of the Second Tranche Shares, each of the entities will deliver the remaining 49% of the issued and outstanding securities to COSG to become wholly owned subsidiaries of COSG. Each of the entities are obligated to meet certain financial milestones in each of the two-year anniversaries following the closing. Failure to meet such milestones will result in a clawback of the shares issued to the former shareholders. On the second anniversary of the closing, if any entity exceeds the aggregate financial milestone set for the two years, the former shareholders thereof shall be entitled to additional shares of COSG as determined in accordance with the 51% Share Swap Letter.
On December 31, 2021, the Company entered into an Equity Purchase Agreement with Williamsburg Venture Holdings, LLC, a Nevada limited liability company (“Investor”), pursuant to which the Investor agreed to invest up to Thirty Million Dollars ($30,000,000) over a 36-month period in accordance with the terms and conditions of that certain Equity Purchase Agreement, dated as of December 31, 2021, by and between the Company and the Investor (the “Equity Purchase Agreement”). During the term, the Company shall be entitled to put to the Investor, and the Investor shall be obligated to purchase, such number of shares of the Company’s common stock and at such price as are determined in accordance with the Equity Purchase Agreement. The per share purchase price for the Williamsburg Put Shares will be equal to 88% the lowest traded price of the Common Stock on the principal market during the five (5) consecutive trading days immediately preceding the date which Williamsburg received the Williamsburg Put Shares as DWAC Shares in its brokerage account (as reported by Bloomberg Finance L.P., Quotestream, or other reputable source). In connection with the Equity Purchase Agreement, both parties also entered into a Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which the Company agreed to register with the SEC the common stock issuable under the Equity Purchase Agreement, among other securities. As of September 30,2022, the remaining balance for Equity Purchase from the Investor was $30,000,000.
NOTE 23 - SUBSEQUENT EVENTS
In accordance with ASC Topic 855, “Subsequent Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before consolidated financial statements are issued, the Company has evaluated all events or transactions that occurred after September 30, 2022, up through the date the Company issued the unaudited condensed consolidated financial statements.
42
ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our Company’s financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in the report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors. See “Cautionary Note Concerning Forward-Looking Statements” on page 7.
Unless otherwise noted, all currency figures quoted as “U.S. dollars”, “dollars” or “$” 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
We are a Nevada holding company with no operations of its own as all operations are conducted through our subsidiaries based in Singapore and Hong Kong. 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. Our products and services are not offered in the United States but are available to U.S. persons.
Through the physical arts and collectibles business of our subsidiaries, we provide authentication, valuation and certification (“AVC”) service, sale and purchase, hire purchase, financing, custody, security and exhibition (“CSE”) services to art and collectibles buyers through traditional methods as well as through leveraging blockchain technology through the creation of Digital Ownership Tokens (“DOTs”).
DOT is an integrated, best in class, smart contract for art and collectible pieces. We use blockchain technology to help resolve the issues of provenance, authenticity and ownership in the arts and collectibles market. For each art or collectible piece, we create an individual DOT that includes an independent appraisal, a 3D rendering of the piece, high-definition photo of the piece, AI recognition file of the piece and a set of legal documents to provide proof of ownership and provenance of the piece to the blockchain. Our DOTs are intended to provide assurance on the authenticity of art or collectible pieces as well as act as a record of ownership transfers using blockchain technology to establish provenance of the piece. As the owner of a DOT, the buyer will be able to take the necessary legal action against those who breach the digital ownership rights. We initially intend to focus on customers located in Hong Kong and expand throughout Asia and the rest of the world.
Our DOT operations are conducted 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 DOTs, therefore, are not securities or digital payment tokens subject to these acts.
We receive fiat and cryptocurrency from the sale of art and collectibles. We also generate revenue from transactions fees derived from the secondary and subsequent sales of the collectibles made from our platform. We do not retain any interest in the DOTs after they are sold. In order to minimize the risk of price fluctuation in cryptocurrency, after we receive the cryptocurrencies, we will recognize the value by immediately exchange them into US dollar or stable digital currencies that are pegged with US dollar.
Our financing/money lending business is conducted through our Hong Kong subsidiaries which are licensed under Hong Kong’s Money Lenders Ordinance. Our Hong Kong subsidiaries primarily provide unsecured personal loan financings to private individuals. Our Hong Kong subsidiaries also have a small portfolio of mortgage loans. Revenue is generated from interest received from the provision of loans to private individual customers.
43
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 change 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 set forth in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 15, 2022 (the “Form 10-K”).
Our corporate chart is below:
Note 1: In May 2021, Massive Treasure entered into a Share Swap Letter Agreement (the “100% Share Swap Letter”) with the shareholders of each of E-on Finance Limited (“E-on”) and 8M Limited ("8M") to acquire 100% of each of E-on and 8M for 20,110,604 and 10,055,302 shares of common stock of COSG respectively based upon the closing price of the common stock of COSG as of the date of signing of the 100% Share Swap Letter and determined in accordance with the terms of the 100% Share Swap Letter on the date. The acquisition of E-on and 8M consummated in May 2021. Thereon, COSG issued 10,256,409 shares and 5,128,204 shares to the shareholders of E-on and 8M respectively.
COSG is obligated to issue 9,854,195 and 4,927,098 shares on the first anniversary of the closing of the acquisition to the former shareholders of E-on and 8M respectively, subject to certain clawback provisions. E-on and 8M are obligated to meet certain financial milestones in each of the two-year anniversaries following the closing. Failure to meet such milestones will result in a clawback of the shares issued to the former shareholders. On the second anniversary of the closing, if E-on or 8M exceeds the aggregate financial milestone set for the two years, the former shareholders thereof shall be entitled to additional shares of COSG as determined in accordance with the 100% Share Swap Letter.
Note 2: In May and June 2021, Massive Treasure entered into a Share Swap Letter Agreement (the “51% Share Swap Letter”) with the shareholders of each of the entities to acquire 51% of the issued and outstanding securities of the entities for an aggregate amount of 23,589,736 shares of COSG’s common stock as set forth below (the “First Tranche Shares”), based upon the closing price of the common stock of COSG as of the date of signing the 51% Share Swap Letter and determined in accordance with the terms of the 51% Share Swap Letter. The acquisition of the entities consummated in May and June 2021. Thereon, COSG issued the First Tranche Shares.
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On the first anniversary of the closing, COSG is obligated to issue a second tranche of shares of its common stock, based upon the closing price of its shares as of the fifth business day prior to such first anniversary as determined in accordance with the terms of the 51% Share Swap Letter (the “Second Tranche Shares”). Upon the issuance of the Second Tranche Shares, each of the entities will deliver the remaining 49% of the issued and outstanding securities to COSG to become wholly owned subsidiaries of COSG. Each of the entities are obligated to meet certain financial milestones in each of the two-year anniversaries following the closing. Failure to meet such milestones will result in a clawback of the shares issued to the former shareholders. On the second anniversary of the closing, if any entity exceeds the aggregate financial milestone set for the two years, the former shareholders thereof shall be entitled to additional shares of COSG as determined in accordance with the 51% Share Swap Letter.
Note 3: On February 10, 2022, the Company consummated the acquisition of 80% of the issued and outstanding securities of Grand Gallery Limited, a Hong Kong limited liability company engaged in the business of selling traditional art and collectible pieces, through the issuance of 153,060 shares of our common stock, at a valuation of $4.00 per share. The Company believes that this acquisition will strengthen our DOT business by expanding our access to buyers of arts and collectibles.
Note 4: On September 1, 2022, the Company consummated the acquisition of 51% of the issued and outstanding securities of Phoenix Waters Productions (HK) Limited, a Hong Kong limited liability company engaged in film production, through the issuance of 164,516 shares of our common stock, at a valuation of $1.50 per share.
Coinllectibles business overview
Despite a generally challenging economic environment and specifically in areas of negative sentiment around the NFT and crypto currency markets, the Company continued to see strong market interest in developing DOT applications tied to a range of physical items.
During the quarter, the Company partnered directly with galleries, auction houses, artists and manufacturers to apply DOTs to physical items with a focus on the premium art and collectible segment. While overall market sentiment to NFTs in sport was weaker over the period, we believe the Company made progress building interest in sports related DOTs in Asia in particular and in the use of DOTs with 3D technology to enhance enjoyment value. Each of these market segments are substantial in size, and we believe these markets provide substantial growth opportunities for the use of DOTs to enhance user experience and reach.
During the quarter, the Company launched several DOTs on ceramic art and expanded its application of DOTs across new art related segments including photographs, sculptures, and new artists. The price points of the DOTs tied to physical items varied across launches. We collaborated on the launch of Fusion DOTs on signed photographs from the William John Kennedy collection of iconic Andy Warhol themes. As part of the launch there were several sessions to increase awareness of the photographer William John Kennedy and his works. We also partnered for a third time with UK headquartered Spink auction house to mint DOTs on a collection of photographic DOTs of musicians titled "Live from Abbey Road”. Coinllectibles acquired 58 art pieces from Grand Gallery in Hong Kong over the quarter. We launched DOTs on several distinct sculpture pieces by world renowned British sculptor Jonathan Wylder. All pieces launched as Fusion DOTs include documentation noting rights of ownership, photographs and other supporting information.
In addition to applying DOT applications in the premium art market and collectibles segments, the Company is seeking to expand DOT applications to include luxury goods, sports and film. The Company announced plans to collaborate with the Swiss watch manufacture Quinting on DOTs tied to several unique watches. We believe the application of DOTs to the luxury goods area offers strong potential for DOTs.
The Company is seeking to conduct its activities in an environmentally sound manner and is seeking ways and projects to accomplish this. Over the quarter the Company began to mint DOTs on the Polygon blockchain.
Coinllectibles sees the metaverse as a strong opportunity and intends to focus on metaverse related technologies and strategies to define and bridge art and other areas of application across the metaverse and the real world. In October 2022, the Company announced its first physical conference to be held in Singapore in November 2022 with an objective to address the interoperability of decentralized and centralized metaverse Web platforms to promote dialogue and engagement with industry leaders. In addition, attendees will be able to attend fringe events and see a range of technologies and DOT pieces with which Coinllectibles is working.
Lending business overview
The lending segment continued to provide a stable revenue to the Company, and we generated approximately US$1.52 million and US$1.76 million for the three months ended September 30, 2022 and 2021 respectively. Our finance companies are licensed to originate personal loans, company loans and mortgage loans in Hong Kong, and generate interest income from these loans. In contrast to the significant growth in DOT revenue, our finance companies have long been established in Hong Kong and thus, the growth of the business is relatively steady. Despite the global economic situation and consequences caused by the pandemic, we believe that there is always a need for borrowing, and anticipate our lending segment to continue to provide stable revenue in the near future.
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Development of Metaverse on Roblox
The Company is currently developing a metaverse in the Roblox environment. On July 1, 2022, the Company’s wholly-owned subsidiary, Coinllectibles Limited, entered into a technical knowhow license and servicing agreement (the “Servicing Agreement”) with Total Chase Limited (“Total Chase”), a company controlled by its major shareholder and former director, Dr. Lee. Pursuant to which the Company engaged Total Chase to develop the technical knowhow for a term of three-year. Marvel Digital AI Limited (“MDAI”), the subsidiary of Total Chase, owns several intellectual properties and provides technical development services to Total Chase. The technology we are implementing to our metaverse includes:
| ☐ | Visual Intelligence Engine which consists of modules of face detection, image restoration and enhancement, 3D model reconstruction, feature extraction training on fingerprint model generation; | |
| ☐ | Speech Recognition Engine which allows the transformation from speech to text, text to speech and natural language processing; | |
| ☐ | Text Analytics Engine which consists of modules of tokenization, stemming, summarization, part-of-speech tagging, feature selection and feature extraction; | |
| ☐ | Emotion Recognition Engine which consists of modules of facial expression and voice tone and tempo of AI characters; | |
| ☐ | Motion Recognition Engine which consists of modules of motion detection, tracking and recognition; | |
| ☐ | AI Agent Creation Engine which consists of modules of dialog, event sequences, moving path, AI agents behavior and emotion; | |
| ☐ | NFT Generation and Loading Engine which allow users to facilitate creating smart contracts for NFT products, uploading metadata of objects to a file system for storage and loading objects from outside and port them into the Roblox metaverse |
Under the terms of the Servicing Agreement, the Company is required to pay to Total Chase an aggregate of $50,000,000 for the development of technical knowhow. The consideration is payable in cash or cryptocurrencies. All MDAI’s proprietary items remain the sole and exclusive property of MDAI, Total Chase will grant the Company a perpetual, non-exclusive, paid-up license to use certain MDAI’s proprietary items. The Company reserves the right to terminate services in whole or in part, upon 7 days written notice to Total Chase. The foregoing description of the Servicing Agreement is qualified in its entirety by reference to such agreement which is filed as Exhibit 10.8 to this quarterly report on Form 10-Q and incorporated herein by reference.
We intend to make the capabilities that could allow us to promote our arts and collectibles and the concept of digital ownership through the metaverse we are building.
Other Activities
On December 31, 2021, the Company entered into an Equity Purchase Agreement with Williamsburg Venture Holdings, LLC, a Nevada limited liability company (“Investor”), pursuant to which the Investor agreed to invest up to Thirty Million Dollars ($30,000,000) over a 36-months period in accordance with the terms and conditions of that certain Equity Purchase Agreement, dated as of December 31, 2021, by and between the Company and the Investor (the “Equity Purchase Agreement”). During the term, the Company shall be entitled to put to the Investor, and the Investor shall be obligated to purchase, such number of shares of the Company’s common stock and at such price as are determined in accordance with the Equity Purchase Agreement. The per share purchase price for the Williamsburg Put Shares will be equal to 88% the lowest traded price of the Common Stock on the principal market during the five (5) consecutive trading days immediately preceding the date which Williamsburg received the Williamsburg Put Shares as DWAC Shares in its brokerage account (as reported by Bloomberg Finance L.P., Quotestream, or other reputable source). In connection with the Equity Purchase Agreement, both parties also entered into a Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which the Company agreed to register with the SEC the common stock issuable under the Equity Purchase Agreement, among other securities. As of September 30, 2022, the remaining balance for Equity Purchase from the Investor was $30,000,000.
In connection with the Equity Purchase Agreement, the parties also entered into a Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which the Company agreed to register with the SEC the common stock issuable under the Equity Purchase Agreement, among other securities.
The foregoing descriptions of the Equity Purchase Agreement and the Registration Rights Agreement are qualified in their entirety by reference to the Equity Purchase Agreement and the Registration Rights Agreement, which are filed as Exhibits 10.3 and 10.4 to this Quarterly Report and incorporated herein by reference.
In March 2022, we launched a new sports division in our MetaMall and partnering with a former NBA basketball player as president of Coinllectible Sports. We hope to exploit our DOT technology and the metaverse to bring innovation to the sports space, bridge the intersection of our DOT technology and Sports memorabilia to improve experiences for fans, athletes, teams, events and partners.
On August 2, 2022, the Company entered into a Sale and Purchase Agreement with CHAN Hin Yip, pursuant to which the Company agreed to purchase approximately 58 collectible items from Mr. Chan for a purchase price of HKD 1,305,000 (approximately USD $167,308) (the “Purchase Price”), through its subsidiaries holds approximately 80% of the issued and outstanding securities of Grand Gallery Limited (“GGL”), and Mr. Chan is a director and 5% equity owner of GGL.
On August 2, 2022, the Company and Mr. Chan entered into a Note Purchase Agreement pursuant to which the Company agreed to pay the Purchase Price via a promissory note that will be converted into shares of the Company’s common stock at a conversion price equal to 90% of the volume weighted average closing price of the Company’s common stock for the ten days immediately prior to February 2, 2023.
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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.
As of September 30, 2022, we had a working capital deficit of $3,605,373 and accumulated deficit of $116,680,664. 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.
Stock Based Compensation
The Company recognized a one-time USD 80 million non-cash item payment to the following three unaffiliated vendors for services provided from January 1 to April 30, 2022, with USD 60 million expensed in the first quarter of 2022 and USD 20 million expensed in the second quarter of 2022.
| Name | No. of Common Shares | |||
| LUNG Yuen | 6,000,000 | |||
| CHAN Chi Keung | 6,000,000 | |||
| FU Wah | 8,000,000 | |||
| TOTAL | 20,000,000 | |||
The consultancy fee expenses of USD 80 million resulted from the relevant accounting treatment of the 20,000,000 shares of Common Stock of the Company, issuable at $4 per share, being committed in the service agreements. On May 18, all shares of common stock of the Company have been issued. There was no cash compensation for services. The services composed of the following:
| 1) | Technology services which include IT infrastructure setup, item storage management and metaverse consultation. | |
| 2) | Business development which includes introduction of new artist and sourcing of new inventory to be made available onto the platform. |
The services were procured and the fees agreed upon in mid of 2021 for the fundamental set up of the arts and collectibles business for both the technology platform architectural design and development management to support the new arts and collectibles DOT business, and also the sourcing and management of the initial arts and collectibles items to be contributed for starting up the business, including the coverage of setting up the authentication and verification standards and process for the business. These services build up the core IT and business development operations of the arts and collectibles business for the Company, allowing the Company to continue to move forward towards its DOT business initiative.
The foregoing description of the Consultancy Agreements with each of LUNG Yuen, CHAN Chi Keung and FU Wah are qualified in their entirety by reference to such Consultancy Agreements, which are filed as Exhibits 10.5, 10.6 and 10.7 to this Quarterly Report and incorporated herein by reference.
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Comparison of the three months ended September 30, 2022 and September 30, 2021
The following table sets forth certain operational data for the three months ended September 30, 2022, compared to the three months ended September 30, 2021:
| Three months ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenue: | ||||||||
| Lending segment | $ | 1,517,764 | $ | 1,757,531 | ||||
| Arts and collectibles technology (“ACT”) segment | 2,493,100 | 524,868 | ||||||
| Total revenue | 4,010,864 | 2,282,399 | ||||||
| Cost of revenue: | ||||||||
| Lending segment | (27,046 | ) | (7,249 | ) | ||||
| ACT segment | (311,620 | ) | (213,484 | ) | ||||
| Gross profit | 3,672,198 | 2,061,666 | ||||||
| Operating expenses: | ||||||||
| Sales and marketing | (499,464 | ) | (94,508 | ) | ||||
| Corporate development | (510,786 | ) | - | |||||
| Technology and development | (273,839 | ) | - | |||||
| Metaverse and AI development | (5,000,000 | ) | - | |||||
| General and administrative | (4,344,801 | ) | (4,391,148 | ) | ||||
| Loss from operations | (6,956,692 | ) | (2,423,990 | ) | ||||
| Total other expense, net | (203,063 | ) | (34,291 | ) | ||||
| Loss before income tax | (7,159,755 | ) | (2,458,281 | ) | ||||
| Income tax expense | (188,878 | ) | (163,524 | ) | ||||
| NET LOSS | $ | (7,348,633 | ) | $ | (2,621,805 | ) | ||
| NON-GAAP ADJUSTMENT | ||||||||
| Non-cash consultancy expenses | ||||||||
| Settled by shares, valued at $4 per share | 85,600 | - | ||||||
| Settled by shares, valued at $0.826 per share | 1,200,000 | - | ||||||
| Unsettled | 1,415,689 | - | ||||||
| ADJUSTED LOSS | $ | (4,647,344 | ) | $ | (2,621,805 | ) | ||
Revenue. Revenue for the three months ended September 30, 2022 and 2021 was $4,010,864 and $2,282,399. The increase in revenue of approximately $1,728,465 is primarily due to the increase from the loan interest income received and sales of collectibles. During the three months ended September 30, 2022 and 2021, revenues were mainly attributable to the lending segment representing 37.8% and 77.0%, and ACT segment representing 62.2% and 23.0%, respectively.
Cost of Revenue. Cost of revenue of approximately $338,666 for the three months ended September 30, 2022 consisted primarily of interest expense and cost of collectibles. The increase in cost of revenues of approximately $117,933 from the comparable period in 2021 was mainly due to the increase in sales in ACT segment which led to the increase in cost of collectibles.
Gross Profit. We achieved a gross profit of $3,672,198 and $2,061,666 for the three months ended September 30, 2022, and 2021, respectively. The increase in gross profit for the three months ended September 30, 2022 was approximately $1,610,532, which was mainly due to the increase in gross profit is primarily attributable to an increase in our ACT segment volume.
Sales and marketing. We incurred sales and marketing expenses of $499,464 and $94,508 for the three months ended September 30, 2022, and 2021, respectively. Sales and marketing expenses consist primarily of costs related to public relations, consultancy fee, advertising and marketing programs, and personnel-related expenses. Sales and marketing expense increased by approximately $404,956 in the three months ended September 30, 2022 from $94,508 in the same period of 2021. The increase was primarily due to the increase in non-cash consultancy expenses charged by consultants for marketing events for ACT segment amounted to $150,225.
Corporate development. We incurred corporate development expenses of $510,786 and $0 for the three months ended September 30, 2022, and 2021, respectively. Corporate development expenses consist primarily of personnel-related expenses incurred to support our corporate development. Corporate development expenses increased by approximately $510,786 in the three months ended September 30, 2022 from $0 in the same period of 2021. The increase was primarily due to the increase in non-cash consultancy expense charged by consultants for corporate and community development for ACT segment amounted to $333,225.
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Technology and development. We incurred technology and development expenses of $273,839 and $0 for the three months ended September 30, 2022, and 2021, respectively. Technology and support expenses consist primarily of (i) development of the DOT (digital ownership token), an effective application of NFT technologies to real world assets, both tangible and intangible, (ii) research and development of blockchain smart contracts and other coding to apply the most suitable blockchains for DOTs and maintaining a distributed ledger to record all transactions and (iii) Development of a client management system to facilitate the sale and purchase of DOTs by both crypto and non-crypto natives. Technology and development expenses increased by approximately $273,839 in the three months ended September 30, 2022 from $0 in the same period of 2021. The increase was primarily due to the increase in non-cash consultancy fee charged by 3D technology consultants for ACT segment amounted to $45,000.
Metaverse and AI development. We incurred Metaverse and AI development expenses of $5,000,000 and $0 for the three months ended September 30, 2022, and 2021, respectively. The increase was due to the development of metaverse amounted to $5,000,000.
General and administrative. We incurred general and administrative expenses of $4,344,801 and $4,391,148 for the three months ended September 30, 2022, and 2021, respectively. General and administrative expenses consist primarily of professional fees, audit fees, other miscellaneous expenses incurred in connection with general operations and personnel-related expenses incurred to support our business, including legal, finance, executive, and other support operations. General and administrative expenses decreased by approximately $46,347 in the three months ended September 30, 2022 from $4,391,148 in the same period of 2021. The decrease was primarily due to the decrease in one-off expense including accounting expenses and legal and profession fee for the reverse takeover of the Company; partly offset by the consultancy expenses incurred amounted to $2,172,839.
Other expense, net. We incurred net other expense of $203,063 and $34,291 for the three months ended September 30, 2022 and 2021, respectively.
Income Tax Expense. Our income tax expense for the three months ended September 30, 2022 and 2021 was $188,878 and $163,524, respectively.
Net Loss. During the three months ended September 30, 2022 and 2021, we incurred a net loss of $7,348,633 and $2,621,805, respectively. The increase in net loss for the three months ended September 30, 2022 of $4,726,828 was mainly attributed from the increase in operating expenses such as non-cash consultancy expenses amounted to $2,701,289.
Comparison of the nine months ended September 30, 2022 and September 30, 2021
The following table sets forth certain operational data for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
| Nine months ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenue: | ||||||||
| Lending segment | $ | 4,833,433 | $ | 4,985,476 | ||||
| Arts and collectibles technology (“ACT”) segment | 8,051,436 | 524,868 | ||||||
| Total revenue | 12,884,869 | 5,510,344 | ||||||
| Cost of revenue: | ||||||||
| Lending segment | (367,337 | ) | (784,195 | ) | ||||
| ACT segment | (1,118,755 | ) | (213,484 | ) | ||||
| Gross profit | 11,398,777 | 4,512,665 | ||||||
| Operating expenses: | ||||||||
| Sales and marketing | (26,756,319 | ) | (136,862 | ) | ||||
| Corporate development | (26,242,917 | ) | - | |||||
| Technology and development | (32,832,406 | ) | - | |||||
| Metaverse and AI development | (5,000,000 | ) | - | |||||
| General and administrative | (9,743,097 | ) | (6,040,872 | ) | ||||
| Loss from operations | (89,175,962 | ) | (1,665,069 | ) | ||||
| Total other income (expense), net | (635,547 | ) | 106,421 | |||||
| Loss before income tax | (89,811,509 | ) | (1,558,648 | ) | ||||
| Income tax expense | (546,146 | ) | (377,453 | ) | ||||
| NET LOSS | $ | (90,357,655 | ) | $ | (1,936,101 | ) | ||
| NON-GAAP ADJUSTMENT | ||||||||
| Non-cash consultancy expenses | ||||||||
| Settled by shares, valued at $4 per share | 82,571,200 | - | ||||||
| Settled by shares, valued at $0.826 per share | 1,200,000 | - | ||||||
| Unsettled | 2,706,260 | - | ||||||
| ADJUSTED LOSS | $ | (3,880,195 | ) | $ | (1,936,101 | ) | ||
Revenue. Revenue for the nine months ended September 30, 2022 and 2021 was $12,884,869 and $5,510,344. The increase in revenue of approximately $7,374,525 is primarily due to the increase from the loan interest income received and sales of collectibles. During the nine months ended September 30, 2022 and 2021, revenues were mainly attributable to the lending segment representing 37.5% and 90.5%, and ACT segment representing 62.5% and 9.5%, respectively.
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Cost of Revenue. Cost of revenue of approximately $1,486,092 for the nine months ended September 30, 2022 consisted primarily of interest expense and cost of collectibles. The increase in cost of revenues of approximately $488,413 from the comparable period in 2021 was mainly due to the increase in sales in ACT segment which led to the increase in cost of collectibles.
Gross Profit. We achieved a gross profit of $11,398,777 and $4,512,665 for the nine months ended September 30, 2022, and 2021, respectively. The increase in gross profit for the nine months ended September 30, 2022 was approximately $6,886,112, which was mainly due to the increase in gross profit is primarily attributable to an increase in our ACT segment volume.
Sales and marketing. We incurred sales and marketing expenses of $26,756,319 and $136,862 for the nine months ended September 30, 2022, and 2021, respectively. Sales and marketing expenses consist primarily of costs related to public relations, consultancy fee, advertising and marketing programs, and personnel-related expenses. Sales and marketing expense increased by approximately $26,619,457 in the nine months ended September 30, 2022 from $136,862 in the same period of 2021. The increase was primarily due to the increase in non-cash consultancy expense charged by consultants for marketing events for ACT segment amounted to $25,913,695.
Corporate development. We incurred corporate development expenses of $26,242,917 and $0 for the nine months ended September 30, 2022, and 2021, respectively. Corporate development expenses consist primarily of personnel-related expenses incurred to support our corporate development. Corporate development expenses increased by approximately $26,242,917 in the nine months ended September 30, 2022 from $0 in the same period of 2021. The increase was primarily due to the increase in non-cash consultancy expense charged by consultants for corporate and community development for ACT segment amounted to $25,646,926.
Technology and development. We incurred technology and development expenses of $32,832,406 and $0 for the nine months ended September 30, 2022, and 2021, respectively. Technology and support expenses consist primarily of (i) development of the DOT (digital ownership token), an effective application of NFT technologies to real world assets, both tangible and intangible, (ii) research and development of blockchain smart contracts and other coding to apply the most suitable blockchains for DOTs and maintaining a distributed ledger to record all transactions and (iii) Development of a client management system to facilitate the sale and purchase of DOTs by both crypto and non-crypto natives. Technology and development expenses increased by approximately $32,832,406 in the nine months ended September 30, 2022 from $0 in the same period of 2021. The increase was primarily due to the increase in non-cash consultancy expense charged by 3D technology consultants for ACT segment amounted to $32,105,000.
Metaverse and AI development. We incurred Metaverse and AI development expenses of $5,000,000 and $0 for the nine months ended September 30, 2022, and 2021, respectively. The increase was due to the development of metaverse amounted to $5,000,000.
General and administrative. We incurred general and administrative expenses of $9,743,097 and $6,040,872 for the nine months ended September 30, 2022, and 2021, respectively. General and administrative expenses consist primarily of professional fees, audit fees, other miscellaneous expenses incurred in connection with general operations and personnel-related expenses incurred to support our business, including legal, finance, executive, and other support operations. General and administrative expenses increased by approximately $3,702,225 in the nine months ended September 30, 2022 from $6,040,872 in the same period of 2021. The increase was primarily due to the increase in non-cash consultancy expense amounted to $2,811,839, directors’ remuneration, and management fee charged by a related company owned by the director of the Company.
Other Income (expense), net. We incurred net other income of ($635,547) and $106,421 for the nine months ended September 30, 2022 and 2021, respectively.
Income Tax expense. Our income tax expense for the nine months ended September 30, 2022 and 2021 was $546,146 and $377,453, respectively.
Net Loss. During the nine months ended September 30, 2022 and 2021, we incurred a net loss of $90,357,655 and $1,936,101, respectively. The increase in net loss for the nine months ended September 30, 2022 of $88,421,554 was mainly attributed from the increase in operating expenses.
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Liquidity and Capital Resources
As of September 30, 2022 and December 31, 2021, we had cash and cash equivalents of $1,975,047 and $1,131,128.
We expect to incur significantly greater expenses in the near future as we develop our arts and collectibles technology 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.
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 | ||||||||
| 2022 | 2021 | |||||||
| Net cash provided by (used in) operating activities | $ | 139,739 | $ | (5,533,265 | ) | |||
| Net cash provided by (used in) investing activities | 28,590 | (39,325 | ) | |||||
| Net cash provided by financing activities | $ | 699,746 | $ | 7,517,013 | ||||
Net Cash Provided by (Used In) Operating Activities.
For the nine months ended September 30, 2022, net cash provided by operating activities was $139,739 which consisted primarily of a net loss of $90,357,655, imputed interest expense of $714,696, amortization of $2,979,763, digital assets paid for expense of $8,029,743, shares issued for services rendered of $83,856,800, a decrease in loan interest and fee receivables of $184,327, an increase in accrued consulting and service fee of $2,642,821, an increase in accounts payables of $1,977,320 and an increase in income tax payable of $546,146; offset by digital assets received of $8,025,885, an increase in loan receivables of $1,429,750 and an increase in inventory of $975,512.
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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.
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 Provided by (Used in) Investing Activities.
For the nine months ended September 30, 2022 and 2021, net cash provided by (used in) investment activities was $28,590 and ($39,325), respectively. The net cash provided by investing activities for the nine months ended September 30, 2022 mainly consisted of cash from acquisition of a subsidiary of $ 33,322; offset by acquisition of property and equipment of $2,858 and purchase of intangible assets of $1,874. 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.
Net Cash Provided By Financing Activities.
For the nine months ended September 30, 2022, net cash provided by financing activities was $699,746 consisting of advance from related parties of $ 59,684, proceeds from loan payables of $327,110 and proceeds of convertible note payables of $312,952.
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.
Material Cash Requirements
We have not achieved profitability since our inception, and we expect to continue to incur net losses for the foreseeable future. We expect net cash expended in 2022 to be significantly higher than 2021. As of September 30, 2022, we had an accumulated deficit of $116,680,664. Our material cash requirements are highly dependent upon the additional financial support from our major shareholders in the next 12 - 18 months.
We had the following contractual obligations and commercial commitments as of September 30, 2022:
| Contractual Obligations | Total | Less than 1 year | 1-3 Years | 3-5 Years | More than 5 Years | |||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
| Amounts due to related parties | 21,059,146 | 21,059,146 | – | – | – | |||||||||||||||
| Tax obligation | 962,391 | 962,391 | – | – | – | |||||||||||||||
| Accounts payable | 2,217,476 | 2,217,476 | – | – | – | |||||||||||||||
| Loan payable | 816,946 | 816,946 | – | – | – | |||||||||||||||
| Convertible Note Payables | 256,558 | 256,558 | – | – | – | |||||||||||||||
| Operating lease liabilities | 229,734 | 173,340 | 56,394 | |||||||||||||||||
| Other contractual liabilities (1) | 3,609,480 | 3,609,480 | – | – | – | |||||||||||||||
| Commercial commitments | – | – | – | – | – | |||||||||||||||
| Bank loan repayment | – | – | – | – | – | |||||||||||||||
| Total obligations | 29,151,731 | 29,095,337 | 56,394 | – | – | |||||||||||||||
| (1) | Includes all obligations included in “Accrued liabilities and other payables” and “Accrued consulting and service fee/” in current liabilities in the “Unaudited Condensed Consolidated Balance Sheets” that are contractually fixed as to timing and amount. |
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, 2022.
As of September 30, 2022, the Company had 800,000,000 shares of its common stock to be issued.
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Critical Accounting Policies and Estimates
For a detailed description of the Critical Accounting Policies and Estimates of the Company, please refer to Part II, ITEM 7 “MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” in our Annual Report Form 10-K for the year ended December 31, 2021 filed with the SEC on April 15, 2022.
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.
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
ITEM 4 Controls and Procedure
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), under the supervision of and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures, subject to limitations as noted below, as of September 30, 2022, and during the period prior to and including the date of this report, were effective to ensure that all information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rule and forms; and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Inherent Limitations
Because of its inherent limitations, our disclosure controls and procedures may not prevent or detect misstatements. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Changes in Internal Control over Financial Reporting
Subject to the foregoing disclosure, there were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2022, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
ITEM 1 Legal Proceedings
We are not a party to any legal or administrative proceedings that we believe, individually or in the aggregate, would be likely to have a material adverse effect on our financial condition or results of operations.
ITEM 1A Risk Factors
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
In addition to the risk factors set forth in the Form 10-K, we include the following risk factors.
The assessment of whether the DOTS we mint are securities is based upon our internal policies and procedures that are risk-based judgments made by us and are not a legal standard nor are they binding on any regulatory body or court. Our current policy is to perform a legal analysis under the U.S. federal securities laws for each DOT that we mint to determine whether such DOT is a security. This assessment is based on fact gathering and a legal analysis that is informed by the statutory definition of a security under the U.S. federal securities laws, Supreme Court decisions applying the definition of security (e.g., SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (“Howey”), Reves v. Ernst & Young (1990)), other judicial decisions applying the definition of a security, including recent court rulings pertaining to crypto assets, the FinHub Framework, and factors articulated in public communications by representatives of the SEC, no-action letters, and enforcement actions.
To help facilitate our assessment of whether a crypto asset is more or less likely to be a security, we have also developed an analytical framework using a points-based rating system centered around factual questions designed to address each of the test factors articulated in Howey: (i) whether crypto purchasers invested money; (ii) in a common enterprise; (iii) with a reasonable expectation of profit; and (iv) based on the efforts of others. As advised by FinHub in the letter to the New York State Department of Financial Services on January 27, 2020 (the “FinHub Letter”), our assessment seeks to take into account federal securities laws, factors enumerated within the FinHub Framework, case law, and other guidance, as well as our deep understanding of digital asset technologies. Our framework recognizes that, in general, the more factors that are implicated, the greater the likelihood that a crypto asset may be classified as an investment contact. We also weigh factors which we believe are more important than others in that assessment, in order to generate a scaled score. We believe this approach allows us to more methodically apply and analyze facts consistently across different assets and across the same asset over time. As indicated in the FinHub Letter, we recognize that the use of our framework or other model industry or state based frameworks or whitelists has not been endorsed by the SEC or other regulatory authorities, and recognize that the application of securities laws to the specific facts and circumstances of digital assets may be complex and subject to change, and that a listing determination by us does not guarantee any conclusion under the U.S. federal securities laws. Further, our risk-based assessment is not binding on any regulator or court.
However, if the interpretation or enforcement of the laws and regulations regarding digital assets change or if we erroneously conclude that our DOTs are not securities, our operations would likely be materially and adversely affected such that we may be unable to continue to mint DOTs or the SEC, a foreign regulatory authority, or a court determines that our DOTs constitutes a security, we could become subject to judicial or administrative sanctions for failing to offer or sell the digital asset in compliance with the registration requirements of Section 5 of the Securities Act, or for acting as a broker, dealer, or national securities exchange without appropriate registration in the future. Such an action could result in injunctions, cease and desist orders, as well as civil monetary penalties, fines, and disgorgement, criminal liability, and reputational harm. Users of our DOTs could also seek to rescind our sales transactions on the basis that it was conducted in violation of applicable law, which could subject us to significant liability. We may also be required to cease minting and selling our DOTs, which could negatively impact our business, operating results, and financial condition. If we are unable to mint our own DOTs, our results of operations and financial condition may be harmed and the value of your investment in us materially and adversely affected.
It may be difficult for stockholders to enforce any judgment obtained in the United States against us, which may limit the remedies otherwise available to our stockholders.
Substantially all of our assets are located in Hong Kong. Moreover, our current directors and officers are Hong Kong/Chinese nationals. All or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for our stockholders to effect service of process within the United States upon our subsidiaries or any individuals. In addition, there is uncertainty as to whether the courts of Hong Kong or the PRC would recognize or enforce judgments of U.S. courts obtained against us or our officers and/or directors predicated upon the civil liability provisions of Hong Kong against us or such persons predicated upon the securities laws of the United States or any state thereof. It is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement against us or our officers and directors of criminal penalties under the United States Federal securities laws or otherwise.
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ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3 Defaults upon Senior Securities
None.
ITEM 4 Mine Safety Disclosures
Not applicable.
ITEM 5 Other Information
On July 1, 2022, the Company’s wholly-owned subsidiary entered into a technical knowhow license and servicing agreement (the “Servicing Agreement”) with Total Chase Limited (“Total Chase”), a company controlled by its major shareholder and former director, Dr. Lee. Pursuant to which the Company engaged Total Chase to develop the technical knowhow for a term of three-year. Marvel Digital AI Limited (“MDAI”), the subsidiary of Total Chase, owns several intellectual properties and provides technical development services to Total Chase. The technical knowhow consists of Visual Intelligence Engine, Speech Recognition Engine, Text Analytics Engine, Emotion Recognition Engine, Motion Recognition Engine, AI Agent Creation Engine and NFT Generation and Loading Engine for development of metaverse on Roblox. Under the terms of Servicing Agreement, the Company is required to pay to Total Chase an aggregate of $50,000,000 for the development of technical knowhow. The consideration is payable in cash or cryptocurrencies. All MDAI’s proprietary items remain the sole and exclusive property of MDAI, Total Chase will grant the Company a perpetual, non-exclusive, paid-up license to use certain MDAI’s proprietary items. The Company reserves the right to terminate services in whole or in part, upon 7 days written notice to Total Chase. The foregoing description of the Servicing Agreement is qualified in its entirety by reference to such agreement which is filed as Exhibit 10.8 to this quarterly report on Form 10-Q and incorporated herein by reference.
The Company charged all related development costs to expenses as incurred and recognized as “Metaverse and AI development expense” in the unaudited condensed consolidated statement of operations. During the nine months ended September 30, 2022, the Company incurred developmental costs of $5,000,000 and paid $2,689,000.
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ITEM 6 Exhibits
| * | Filed herewith |
| (1) | Incorporated by reference from our Form 10 filed with the Securities and Exchange Commission on May 23, 2017. |
| (2) | Incorporated by reference from our Form 10-SB filed with the Securities and Exchange Commission on January 19, 2000, under the name Interactive Marketing Technology, Inc. |
| (3) | Incorporated by reference to Exhibit 4.2 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 25, 2021. |
| (4) | Incorporated by reference to the Exhibits to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2022. |
| (5) | Incorporated by reference to the Exhibits to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 6, 2022. |
| (6) | Incorporated by reference to the Exhibits to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 16, 2022. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| COSMOS GROUP HOLDINGS INC. | ||
| By: | /s/ Man Chung Chan | |
| Man Chung Chan | ||
|
Chief Executive Officer, | ||
| Date: October 31, 2022 | ||
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