COSMOS GROUP HOLDINGS INC. 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 8.
Unless otherwise noted, all currency figures quoted as "
Overview
We are a
Through our physical arts and collectibles business, 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
We conduct our DOT operations from
We receive fiat and cryptocurrency from the sale of art and collectibles and collection of transaction fees derived from the secondary and subsequent sales of the collectibles. 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 currencies that are pegged with US dollar.
We conduct our financing/money lending business through our
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There may be prominent risks associated with our operations being in
As a
Our corporate chart is below:
[[Image Removed: cosg_10qimg6.jpg]]
Note 1: In
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
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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
Other Activities
On
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
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
Results of Operations.
The recent outbreak of COVID-19, which has been declared by the
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.
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As of
Stock Based Compensation
The Company recognized a one-time
Name No. of Common Shares LUNG Yuen 6,000,000CHAN Chi Keung 6,000,000 FU Wah 8,000,000 TOTAL 20,000,000
The consultancy fee expenses of
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,
Comparison of the three months ended
The following table sets forth certain operational data for the three months
ended
Three months ended
March 31,
2022 2021
Revenue:
Lending segment $ 1,666,141 $ 1,601,622
Arts and collectibles technology ("ACT") segment 2,514,806 -
Total revenue 4,180,947 1,601,622
Cost of revenue:
Lending segment (46,906 ) (503,947 )
ACT segment (665,759 ) -
Gross profit 3,468,282 1,097,675
Operating expenses:
Sales and marketing (19,364,656 ) (29,263 )
Corporate development (18,988,606 ) -
Technology and support (24,353,672 ) -
General and administrative (2,729,002 ) (855,739 )
(Loss) income from operations (61,967,654 ) 212,673
Total other income (expense), net (216,335 ) 2,298
(Loss) income before income taxes (62,183,989 ) 214,971
Income tax expense (211,155 ) (6,056 )
NET (LOSS) INCOME $ (62,395,144 ) $ 208,915 Revenue. Revenue for the three months ended
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Cost of Revenue. Cost of revenue of approximately
Gross Profit. We achieved a gross profit of
Sales and marketing. We incurred sales and marketing expenses of
Corporate development. We incurred corporate development expenses of
Technology and support. We incurred technology and support expenses of
General and administrative. We incurred general and administrative expenses of
Other Income (expense), net. We incurred net other income of (
Income Tax Expense. Our income tax expense for the three months ended
Net (Loss) Income. During the three months ended
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Liquidity and Capital Resources
As of
We expect to incur significantly greater expenses in the near future as we develop our artificial intelligence education business or enter into strategic partnerships. We also expect our general and administrative expenses to increase as we expand our finance and administrative staff, add infrastructure, and incur additional costs related to being reporting act company, including directors' and officers' insurance and increased professional fees.
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
Three Months Ended
March 31,
2022 2021
Net cash provided by (used in) operating activities
34,125 159,443
Net cash provided by (used in) financing activities
Net Cash Provided by (Used In) Operating Activities.
For the three months ended
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For the three months ended
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 Investing Activities.
For the three months ended
Net Cash Provided By (Used In) Financing Activities.
For the three months ended
For the three months ended
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
We had the following contractual obligations and commercial commitments as ofMarch 31, 2022 : Contractual Less than More than 5 Obligations Total 1 year 1-3 Years 3-5 Years Years $ $ $ $ $ Amounts due to related parties 20,105,289 20,105,289 - - - Tax obligation 629,296 629,296 - - - Accounts payable 239,358 239,358 - - - Loan payable 911,240 911,240 - - - Other contractual liabilities (1) 62,724,289 62,724,289 - - - Commercial commitments - - - - - Bank loan repayment - - - - - Total obligations 84,609,472 84,609,472 - - -
(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
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As of
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in
? 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.
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? 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
The Company's cryptocurrencies are deemed to have an indefinite useful life, therefore amounts are not amortized, but rather are assessed for impairment.
? Loan receivables, net
Loans receivables are carried at unpaid principal balances, less the allowance for loan losses and charge-offs. The loans receivables portfolio consists of real estate mortgage loans, 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 Topics 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.
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The ALL reflects management's evaluation of the loans presenting identified loss potential, as well as the risk inherent in various components of the portfolio. There is significant judgment applied in estimating the ALL. These assumptions and estimates are susceptible to significant changes based on the current environment. Further, any change in the size of the loan portfolio or any of its components could necessitate an increase in the ALL even though there may not be a decline in credit quality or an increase in potential problem loans.
? Revenue recognition
The Company adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09") using the full retrospective transition method. The Company's adoption of ASU 2014-09 did not have a material impact on the amount and timing of revenue recognized in its consolidated financial statements.
Under ASU 2014-09, the Company recognizes revenue when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
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.
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
Arts and Collectibles Technology Business
Commencing from
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 to the customers. The minted item of the individual art or collectibles which are 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, is recognized 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.
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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 customer 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 is comprised 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 in time the transaction is processed.
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
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.
? Related parties
The Company follows the ASC 850-10,
Pursuant to section 850-10-20 the related parties include a) affiliates of the
The condensed consolidated financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: a) the nature of the relationship(s) involved; b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d) amount due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
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? 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.
? Recent accounting pronouncements
In
In
In
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The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.
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