CHINA FOODS HOLDINGS LTD. Special Note Regarding Forward-Looking Statements
This Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in this Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as "may", "will", "expect", "believe", "anticipate", "estimate" or "continue" or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include by are not limited to economic conditions generally and in the industries in which we may participate; competition within our chosen industry, including competition from much larger competitors; technological advances and failure to successfully develop business relationships. Plan of Operation We are a health and wellness company that develops, markets, promotes and distributes a variety of customized health and wellness care products and services, including supplements, healthy snacks, meal replacements, skincare products, and nutritional consultation services to consumers inChina . We work with certain licensed healthcare food factories to develop and manufacture products and services that are distributed conventionally through sales agents and also through a network of e-commerce and social media platforms. In addition to products, we are committed to providing customized science based wellness consultation and service programs to customers. Our diverse products and services target health conscious customers and differentiate based upon age and gender and seek to manage different conditions. We reach out to customers fitting certain health and lifestyle profiles through our offline and online consultation services, and track eating habits and health indicators to provide customized products such as supplements. We believe this will facilitate the ability of customers to monitor, understand and adjust their health practices and lifestyle anytime and anywhere for increased customer engagement and retention. We conduct our business through our wholly owned subsidiaryGuangzhou Xiao Xiang Health Industry Company Limited , a limited liability company organized under the laws ofChina onMarch 8, 2017 .Alpha Wellness (HK) Limited , a limited liability company organized under the laws ofHong Kong onApril 24, 2019 , andElite Creation Group , a limited liability company formed under the laws of theBritish Virgin Islands formed onSeptember 5, 2018 , are holding companies without operations. 6 Our Products and Services Our health products are designed to help enhance immunity and improve general wellbeing. We provide the following categories of healthcare products and customized healthcare consultation services inChina : (i)Nutrition Catering (ii) Special Health Food (iii) Health Supplement and (iv) Skincare. The products target all age groups with different needs. Product category Representative Products Description Nutrition Catering Jasmine Beauty Meal replacement and healthy snacks Series Special Health Food Power Centinent Products that support a healthy Series active lifestyle and enhance Immunity Health Supplement Fuli Fruit Juice Functional fruit beverages and Series dietary and nutritional supplements containing resveratrol, anthocyanin, superoxide enzyme Skincare Series Tightness Facial skin care and recovery
Our products are taken as healthcare supplements in accordance with the principles of traditional Chinese medicine including the principle complementary medicine and ideal ratios and combinations of ingredients.
Markets and Regions The Great Health Industry refers to production, operation, service and information dissemination, maintenance, restoration, and promotions linked to health. It covers medical products, health supplements, nutritional foods, medical devices, health appliances, fitness, health management, health consulting and many other production and service areas closely related to human health. The Great Health Industry is an emerging industry with huge market potential, especially inChina . According to the "China Great Health Industry Strategic Planning and Enterprise Strategy Consulting Report" published byQianzhan Industry Institute (???????), the scale of the Great Health Industry in 2017 wasUSD 947.42 billion , which increased to overUSD 1,069.66 billion in 2018. The report predictedUSD 1,341.66 billion volume for 2019 and forecast overUSD 1,528.09 billion for 2020. In the years till 2023, the average annual compound growth rate will be approximately 12.55%, and with the Great Health Industry reaching approximatelyUSD 2,153.08 billion in 2023. Our Strategies We are focused on achieving long-term growth in revenues, cash flow and profit. We believe that we can achieve this by developing multiple distribution channels and strengthening our marketing and promotions, leading to better product turnover and revenue. We also expect to broaden our product range as well as product differentiation in the future. Based on the business experience accumulated over the years, we believe we can improve the efficiency of our supply chain with time-saving and cost-saving supply chain management and marketing planning for the target customer base with our one-stop service.
Our primary aims are (i) to strengthen our product saleability; (ii) to cut
logistics cost and time spent and (iii) to further expand the market share in
? Collaborate with third-party e-commerce platforms to boost product exposure,
e.g. Tmall, Jingdong mall
? Deliver healthcare knowledge and consultation service via social media and
We-media
? Build brand image and reputation through customer experience and word of mouth
? Increase the number of downstream distributors and wholesalers
? Strengthen the relationship with manufacturers, suppliers, drug agents and
distributors
? Pursue strategic acquisitions and partnerships
We intend to develop both online and offline distribution channels to increase
sales volume and revenue. We expect to partner with third party e-commerce
platforms, social media and We-media such as Wechat, TikTok and Xiaohongshu to
build our online presence. We believe that online channels will allow us to
provide real-time nutrition and healthcare consultation services as well as
increase customer engagement and retention. Starting from the second half of
2020, we have launched our "nutrition consulting" support services using a major
social media software to allow customer groups to receive pre-purchase
consultation and after-sales service for products anytime and anywhere.
Our current offline sales channel relies on distributors and sales agents. To
enhance the visibility and marketability of our products and services and to
improve brand recognition and awareness, we hope to develop store-in-shop and
counter experiences. We also intend to partner with high-end gyms to form
nutrition clubs and hold weight-loss training camps, health assessment and
fitness training camps and other activities.
We intend to create a 'one-stop' solution for our customers by creating a
multi-channel health product supply and retail system. We not only provide
personalized consultation service to our customers, but also summarize and
analyze our customer feedback and experiences through our consultation service
and after-sales service. We intend to share this data with our manufacturers and
supply chain partners to develop products and services that better meet the
demands of our customers. By pooling and addressing the needs of downstream
businesses and combining it with the Consumer to Manufacturer model for upstream
transformation, we anticipate establishing a close relationship between
manufacturers and suppliers. We believe this model can also reduce circulation
costs and improve the efficiency of our supply chain.
7
Competition
We operate in a highly competitive and fragmented industry that is sensitive to
price and service. We compete with leading e-commerce companies such as Alibaba
(China ) which may offer substantially the same or similar product offerings as
us. We also compete with businesses that focus on particular merchant categories
or markets such as UNI HEALTH (HK stock code: 02211) and ALI HEALTH (HK stock
code:0241). We also compete with traditional cash payments and other popular
online shopping websites and apps, and other traditional media companies that
provide discounts on products and services. We believe the principal competitive
factors in our market include the following:
? Breadth of member base and the products and services featured.
? Close and fast pre-sales and after-sales service response.
? Ability to reduce the product turnover time and inventory cost.
? Relationship and bargaining power with supplier and manufacturer.
? Healthcare product effectiveness and acceptance from customer.
? Local presence and understanding of local business trends.? Ability to deliver a high volume of relevant services and information to
consumers.
? Ability to produce high purchase rates for products and services among
members.
? Strength and recognition of our brand.
Although we believe we compete favorably on the factors described above, many of
our current and potential competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources,
larger product and services offerings, larger customer base and greater brand
recognition. These factors may allow our competitors to benefit from their
existing customer base with lower development costs or to respond more quickly
than we can to new or emerging technologies and changes in customer
requirements. These competitors may engage in more extensive research and
development efforts, undertake more far-reaching marketing campaigns and adopt
more aggressive pricing policies, which may allow them to build a larger
customer base more effectively than us. Our competitors may develop products or
services that are similar to our products and services or that achieve greater
market acceptance than our products and services. In addition, although we do
not believe that customer payment terms are a principal competitive factor in
our market, they may become such a factor, and we may be unable to competeon such terms.
Government and Industry Regulations
We are subject to the general laws in
Product Liability and Consumers Protection
Product liability claims may arise if any of our healthcare products have a harmful effect on a consumer, who may make a claim for damages or compensation as an injured party. The General Principles of the Civil Law of the PRC, which became effective inJanuary 1987 , state that manufacturers and sellers of defective products causing property damage or injury shall incur civil liabilities for such damage or injuries. The Product Quality Law of the PRC was enacted in 1993 and amended in 2000 to strengthen the quality control of products and protect consumers' rights and interests. Under this law, manufacturers and distributors who produce or sell defective products may be subject to confiscation of earnings from such sales, revocation of business licenses and imposition of fines, and in severe circumstances, may be subject to criminal liability. The Law of the PRC on the Protection of the Rights and Interests of Consumers was promulgated onOctober 31, 1993 and became effective onJanuary 1, 1994 to protect consumers when they purchase or use goods or services. All business operators must comply with this law when they manufacture or sell goods and/or provide services to customers. In extreme situations, product manufacturers and distributors may be subject to criminal liability if their goods or services lead to the death or injuries of customers or other third parties. 8
Summary of Financial Information
We have been significantly impacted by COVID-19 global pandemic. In addition to the devastating effects on human life, the pandemic is having a negative ripple effect on the global economy, leading to disruptions and volatility in the global financial markets.China and many other countries have issued policies intended to stop or slow the further spread of the disease. COVID-19 andChina's response to the pandemic are significantly affecting the economy. There are no comparable events that provide guidance as to the effect the COVID-19 pandemic may have, and, as a result, the ultimate effect of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the effects on the economy, the markets we serve, our business or
our operations.
The following table sets forth certain operational data for the years ended
STATEMENT OF OPERATIONS DATA:
For the Year Ended For the Year Ended
December 31, 2020 December 31, 2019
Revenues $ 1,013,141 $ 3,382,513
Cost of revenue (596,530 ) (2,662,292 )
Gross profit 416,611 720,221
Total operating expenses (887,426 ) (631,750 )
Total other income 9,554 634(Loss) income before income taxes (461,261 )
89,105
Income tax expense (8,215 ) (6,346 )
Net (loss) income (469,476 ) 82,759
Revenue. We generated revenues of$1,013,141 and$3,382,513 for the fiscal years endedDecember 31, 2020 and 2019. All the major customers are located in the PRC. The significant decreases in the revenue due to the outbreak of COVID-19, we expected the revenue would be increased in the future once an efficacious COVID-19 vaccine emerges.
During the years ended
Year ended December 31, 2020 December 31, 2020
Percentage of
Revenues revenues Accounts receivable
Guangdong Hualian Health Industry
Co., Ltd. $ 394,158 39 % $ -
Huaye Little Elephant Health
Industry Co., Ltd. 234,547 23 % -
TOTAL $ 628,705 62 % Total $ -
December 31,
Year ended December 31, 2019 2019
Percentage of Accounts
Revenues revenues receivable
Guangdong Hualian Health Industry
Co., Ltd. $ 1,441,357 43 % $ 530,196
Guangzhou Hualian Gome Technology
Co., Ltd. 1,192,672 35 % -
Shenzhen Tengfengtai Trade Co., Ltd. 565,986 17% - TOTAL$ 3,200,015 95 % Total$ 530,196 Cost of Revenue. Cost of revenue as a percentage of net revenue was approximately 58.88% for the fiscal year endedDecember 31, 2020 . Cost of revenue as a percentage of net revenue was approximately 78.71% for the fiscal year endedDecember 31, 2019 . The decrease of cost of revenue as a percentage of net revenue is attributable to a decrease in import of product from supplier and manufacturer due to the COVID-19 global pandemic.
During the years ended
9
Year ended December 31, 2020 December 31, 2020
Percentage of
Vendor Purchases purchases Accounts payable
Zhejiang Hongshiliang Group Tiantai
Mountain Wuyao Co., Ltd. $ 219,007 37 % $ -
Tengfeng (China) Trading Co., Ltd. 71,616 12 % -
Guangzhou Zeli Pharmaceutical
Technology Co., Ltd. 61,222 10 % -
Total: $ 351,845 59 % Total: $ -
Year ended December 31, 2019 December 31, 2019
Percentage of
Vendor Purchases purchases Accounts payable
Heilongjiang Hengyuan Food Co., Ltd. $ 514,856 31 % $ -
Guangzhou Meichuntang Medical
Technology Co., Ltd. 269,262 16 % -
Guangzhou Fancai Packaging and
Printing Co., Ltd. 263,621 16 % -
Guangzhou Zeli Pharmaceutical
Technology Co. , Ltd. 262,462 16 % -
Guangzhou Kinton FSMP Co., Ltd. 251,510 15 % -
Total: $ 1,561,711 94 % Total: $ -
Gross Profit. We achieved a gross profit of $416,611 and $720,221 for the fiscal
years ended December 31, 2020 , and 2019, respectively. The decrease in gross
profit is primarily attributable to the decrease in revenue.
General and Administrative Expenses ("G&A"). We incurred G&A expenses of
$728,994 and $490,865 for the fiscal years ended December 31, 2020 , and 2019,
respectively. The increase in G&A is primarily attributable to operation and
business model restructuring.
Other Income, net. We incurred net other income of $9,554 for the fiscal year
ended December 31, 2020 , as compared to a net income of $634 for the fiscal year
ended December 31, 2019 . Our net other income for the year ended December 31,
2020 consisted of the subsidy funds from Government.
Income Tax Expense. We recorded income tax expense of $8,215 and $6,346 for the
fiscal years ended December 31, 2020 and 2019. The increase in our income tax
expenses is primarily attributable to our increase in revenues from Hong Kong .
Net (Loss) Income. During the year ended December 31, 2020 , we incurred a net
loss of $469,476 , as compared to a net income $82,759 for the year ended
December 31 , 2019.The significant decreases due to a significant decrease in the
revenue due to the outbreak of COVID-19, and increase in G&A is primarily
attributable to operation and business model restructuring.
10
Liquidity And Capital Resources
As of
As ofDecember 31, 2019 , we had cash and cash equivalents of$634,492 , accounts receivable of$530,196 , inventories of$111,617 , prepayments and other receivables of$320,818 , amount due from a director of$11,744 and operating right-of-use assets of$70,819 .
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.
Years Ended December 31,
2020 2019
Net cash generated from operating activities
(67,862 ) (123,919 ) Net cash generated from financing activities 45,862 19,351
Net Cash Generated From Operating Activities.
For the year endedDecember 31, 2020 , net cash generated from operating activities was$343,657 , which consisted primarily of the decrease in prepayment and other receivables of$199,317 , decrease in accounts receivables of$530,196 , increase in accrued liabilities and other payables of$2,316 , increase in accounts payables of$7,827 , increase in tax payables of$8,219 , increase in inventories of$94,655 , an increase in lease liabilities of$47 , and increase in customer deposit of$13,044 . For the year endedDecember 31, 2019 , net cash generated from operating activities was$705,972 , which consisted primarily of the decrease in prepayment and other receivables of$455,091 , increase in accounts receivables of$484,998 , decrease in accrued liabilities and other payables of$1,120 , offset by an decrease in inventories of$789,290 , a decrease in lease liabilities of$81,864 and decrease in customer deposit of$177,761 .
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.
For the year endedDecember 31, 2020 , net cash used in investing activities was$67,862 , consisted primarily of purchase of plant and equipment of$75,060 , and cash from acquisition of legal acquirer of$7,198 . For the year endedDecember 31, 2019 , net cash used in investing activities was$123,919 , consisted primarily of purchase of plant and equipment of$120,622 , and purchase of intangible assets of$3,297 .
Net Cash Generated From Financing Activities.
For the year ended
For the year ended
Material Commitments
As of the date of this Annual Report, we do not have any material commitments.
11
Off-Balance Sheet Arrangements.
The Company does not have any off-balance sheet arrangements and it is not anticipated that the Company will enter into any off-balance sheet arrangements.
Summary of Significant Accounting Policies
Basis of presentation and consolidation
The Company's consolidated financial statements have been prepared in conformity with accounting principles generally accepted inthe United States (GAAP). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (ASC) and Accounting Standards Update (ASU) of theFinancial Accounting Standards Board (FASB). All adjustments considered necessary for a fair presentation have been included. These adjustments consist of normal and recurring accruals, as well as non-recurring charges. The consolidated financial statements are presented in US Dollars and include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. The results of subsidiaries acquired or disposed of during the periods are included in the consolidated statements of operations from the effective date of acquisition or up to the effective date of disposal.
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. Accounts receivable Accounts receivable are recorded at the invoiced amount and do not bear interest, which are due within contractual payment terms, generally 30 to 90 days from completion of service. Credit is extended based on evaluation of a customer's financial condition, the customer credit-worthiness and their payment history. Accounts receivable outstanding longer than the contractual payment terms are considered past due. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. At the end of fiscal year, the Company specifically evaluates individual customer's financial condition, credit history, and the current economic conditions to monitor the progress of the collection of accounts receivables. The Company will consider the allowance for doubtful accounts for any estimated losses resulting from the inability of its customers to make required payments. For the receivables that are past due or not being paid according to payment terms, the appropriate actions are taken to exhaust all means of collection, including seeking legal resolution in a court of law. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers. As ofDecember 31, 2020 andDecember 31, 2019 , there was no allowance for doubtful accounts. Inventories
Inventories are stated at the lower of cost or market value (net realizable value), cost being determined on a first-in-first-out method. Costs include material and manufacturing overhead costs. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. As ofDecember 31, 2020 and 2019, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs. 12 Plant and equipment
Plant 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 lives Residual value
Furniture, fixture and equipment 3 years 5%
Motor vehicle 3.33 to 4 years 5%
Expenditures for repairs and maintenance are expensed as incurred. When assets
have been 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.
Intangible assets
Intangible assets represented trademarks of their products and are stated at
cost less accumulated amortization and any recognized impairment loss.
Amortization is provided over the term of their registrations on a straight-line
basis, which is 10 years and will expire in 2028.
Amortization expense for the years ended
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 plant and equipment, as well as intangible assets held and used 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. There has been no impairment charge for the periods presented. Revenue recognition
The Company adopted Accounting Standards Codification ("ASC") 606 - Revenue from
Contracts with Customers" ("ASC 606"). Under ASC 606, a performance obligation
is a promise within a contract to transfer a distinct good or service, or a
series of distinct goods and services, to a customer. Revenue is recognized when
performance obligations are satisfied and the customer obtains control of
promised goods or services. The amount of revenue recognized reflects the
consideration to which the Company expects to be entitled to receive in exchange
for goods or services. Under the standard, a contract's transaction price is
allocated to each distinct performance obligation. To determine revenue
recognition for arrangements that the Company determines are within the scope of
ASC 606, the Company performs the following five steps:
? 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.
The Company recognizes revenue from the sale of their healthcare products upon
delivery to the customers, whereas the title and risk of loss are fully
transferred to the customers. The Company records its revenues, net of value
added taxes ("VAT"). The Company is subject to VAT which is levied on the
majority of the products at the rate of 17% on the invoiced value of sales. The
Company experienced no product returns and recorded no reserve for sales returns
for the years ended December 31, 2020 and 2019.
13
Income taxes
The Company adopted the ASC 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 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.
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.
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 financial statements have been expressed in US$. In addition, the
Company is operating in Hong Kong SAR and the People's Republic of China and
maintain its books and record in its local currency, Hong Kong Dollars ("HK$")
and Renminbi ("RMB"), 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 subsidiaries
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 year. 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 statements of
changes in shareholder's equity.
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. 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 shareholders' 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.
Retirement plan costs
Contributions to retirement plans (which are defined contribution plans) are
charged to general and administrative expenses in the accompanying statements of
operation as the related employee service is provided.
14
Leases
The Company adopted Topic 842, Leases ("ASC 842"), using the modified
retrospective approach through a cumulative-effect adjustment and utilizing the
effective date of January 1, 2019 as its date of initial application, with prior
periods unchanged and presented in accordance with the previous guidance in
Topic 840, Leases ("ASC 840").
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 ("ROU") 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 asset 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 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.
Lease expense is recognized on a straight-line basis over the lease terms. Lease
expense includes amortization of the ROU assets and accretion of the lease
liabilities. Amortization of ROU assets is calculated as the periodic lease cost
less accretion of the lease liability. The amortized period for ROU assets is
limited to the expected lease term.
The Company has elected a practical expedient to combine the lease and non-lease
components into a single lease component. The Company also elected the
short-term lease measurement and recognition exemption and does not establish
ROU assets or lease liabilities for operating leases with terms of 12 months or
less.
Related parties
The Company follows the ASC 850-10,
Pursuant to section 850-10-20 the related parties include: a) affiliates of theCompany; 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 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. 15 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 orun -asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings orun -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 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.
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.
16
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. Unless otherwise discussed,
the Company believes that the impact of recently issued standards that are not
yet effective will not have a material impact on its financial position or
results of operations upon adoption.
Recently Adopted Accounting Standards
InJune 2016 , the FASB issued guidance that affects loans, trade receivables and any other financial assets that have the contractual right to receive cash. Under the new guidance, an entity is required to recognize expected credit losses rather than incurred losses for financial assets. The new guidance is effective for fiscal years beginning afterDecember 15, 2019 and interim periods within those fiscal years. The Company adopted the new guidance effectiveJanuary 1, 2020 , with no material impact to the Company's consolidated financial position, results of operations or cash flows. InAugust 2018 , the FASB issued guidance which modifies certain disclosure requirements over fair value measurements. The guidance is effective for fiscal years beginning afterDecember 15, 2019 , including all interim periods within that fiscal year. The Company adopted the new guidance effectiveJanuary 1, 2020 . The Company does not currently classify any of its derivative contracts or restoration plan assets as Level 3 assets or liabilities, nor did the Company have any transfers amongst fair value levels during the year endedDecember 31, 2020 . As a result, the guidance did not have an impact on Company's the fair value measurement disclosures upon adoption. InJanuary 2017 , the FASB issued guidance which eliminates the second step from the traditional two-step goodwill impairment test. Under current guidance, an entity performed the first step of the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount; if an impairment loss was indicated, the entity computed the implied fair value of goodwill to determine whether an impairment loss existed, and if so, the amount to recognize. Under the new guidance, an impairment loss is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value (the Step 1 test), with no further testing required. Any impairment loss recognized is limited to the amount of goodwill allocated to the reporting unit. The new guidance is effective for public companies that areSecurities and Exchange Commission ("SEC") registrants for fiscal years beginning afterDecember 15, 2019 . The Company adopted the new guidance onJanuary 1, 2020 , and applied the guidance prospectively to its goodwill impairment tests.
Accounting Standards Not Yet Adopted as of
InDecember 2019 , the FASB issued new guidance to simplify the accounting for income taxes by removing certain exceptions to the general principles and also simplification of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The new guidance is effective for fiscal years beginning afterDecember 15, 2020 and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of this new guidance on its consolidated financial statements. InMarch 2020 , the FASB issued guidance to address certain accounting consequences from the anticipated transition from the use of theLondon Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The new guidance contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance is optional and may be elected over time as reference rate reform activities occur. During the year endedDecember 31, 2020 , the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based on matches the index of the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company's consolidated financial statements upon adoption.
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