COSMOS GROUP HOLDINGS INC. This discussion summarizes the significant factors affecting the operating results, financial condition, liquidity and cash flows of the Company and its subsidiary for the fiscal years endedDecember 31, 2021 , and 2020. The discussion and analysis that follows should be read together with the section entitled "Cautionary Note Concerning Forward-Looking Statements" and our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this annual report on Form 10-K. Except for historical information, the matters discussed in this section are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond the Company's control. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by
us in
this report.
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Currency and exchange rate
Unless otherwise noted, all currency figures quoted as "U.S. dollars", "dollars" or "US$" refer to the legal currency ofthe United States . References to "Hong Kong Dollar" are to the Hong Kong Dollar, the legal currency of theHong Kong Special Administrative Region ofthe People's Republic of China . Throughout this report, assets and liabilities of the Company's subsidiaries are translated intoU.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.
We are not required to obtain permission from the Chinese authorities to operate or to issue securities to foreign investors.
We, through our subsidiaries are currently engaged in the rendering of financial and money lending services inHong Kong and operating an online platform to sell and distribute the arts and collectibles to end-users, with the use of blockchain technologies and minting tokens.
We are at a development stage company and reported a continuous loss of
Our financial statements for the years endedDecember 31, 2022 and 2021 have been prepared assuming that we will continue as a going concern. 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, capital leases and short-term and long-term debts. Results of Operations.
Comparison of the fiscal years ended
The following table sets forth certain operational data for the years indicated:
Fiscal Years Ended
December 31,
2022 2021
Revenues:
Lending segment $ 6,550,670 $ 6,413,284
Arts and collectibles technology ("ACT") segment 14,059,050 3,645,265
Total revenue 20,609,720 10,058,549
Cost of revenue:
Lending segment (405,972 ) (733,937 )
ACT segment (3,019,794 ) (1,020,704 )
Total cost of revenue (3,425,766 ) (1,754,641 )
Gross profit 17,183,954 8,303,908
Operating expenses:
Sales and marketing (27,371,549 ) (1,680,536 )
Technology and support (43,301,993 ) (9,222,103 )
Corporate development (26,898,128 ) (5,418,075 )
General and administrative expenses (16,651,966 ) (16,077,156 )
Loss from operations (114,223,636 ) (24,093,962 )
Other income (expense), net (6,786,680 ) (621,180 )
Loss before income taxes (103,826,362 ) (24,715,142 )
Income tax expense (299,714 ) (434,257
Net loss $ (104,126,076 ) $ (25,149,399
45
Revenue and Cost of Revenue
For the years ended
Year Ended December 31, 2022
Lending ACT
Segment Segment Total
Revenue from external customers:
Interest income $ 6,550,670 $ - $ 6,550,670
Arts and collectibles technology income - 14,059,050 14,059,050 Total revenue, net 6,550,670 14,059,050 20,609,720 Cost of revenue: Interest expense (405,972 ) - (405,972 )
Arts and collectibles technology expense - (3,019,794 )
(3,019,794 )
Total cost of revenue (405,972 ) (3,019,794 ) (3,425,766 )
Gross profit 6,144,698 11,039,256 17,183,954
Year Ended December 31, 2021
Lending ACT
Segment Segment Total
Revenue from external customers:
Interest income $ 6,413,284 $ - $ 6,413,284
Arts and collectibles technology income - 3,645,265 3,645,265 Total revenue, net 6,413,284 3,645,265 10,058,549 Cost of revenue: Interest expense (733,937 ) - (733,937 )
Arts and collectibles technology expense - (1,020,704 )
(1,020,704 ) Total cost of revenue (733,937 ) (1,020,704 ) (1,754,641 ) Gross profit 5,679,347 2,624,561 8,303,908
Revenue of approximately
Years ended December 31,
2022 2021
Interest income $ 6,550,670 $ 6,413,284 ACT income: - Sale of arts and collectibles products 5,508,675 2,049,956 - Transaction fee income and others
8,550,375 1,595,309
14,059,050 3,645,265
$ 20,609,720 $ 10,058,549 The increase in revenue is attributable to the rapid growth in Arts and collectibles technology business.
Cost of revenue of approximately
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Gross Profit
We achieved a gross profit of $17,183,954 and $8,303,908 for the years ended
December 31, 2022 and 2021, respectively. The increase in gross profit is mainly
attributable to an increase in our ACT volume.
Sales and Marketing Expenses
Sales and marketing expenses of$27,371,549 and$1,680,536 for the year endedDecember 31, 2022 and 2021, respectively, primarily include costs related to public relations, consultancy fee, advertising and marketing programs, and personnel-related expenses.
Technology and support Expenses
Technology and support expenses of$43,301,993 and$9,222,103 for the year endedDecember 31, 2022 and 2021, respectively, including (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.
Corporate Development Expenses
Corporate development expenses of$26,898,128 and$5,418,075 for the year endedDecember 31, 2022 and 2021, respectively, primarily include personnel-related expenses incurred to support our corporate development.
General and Administrative Expenses ("G&A")
General and administrative expenses of$16,651,966 and$16,077,156 for the year endedDecember 31, 2022 and 2021, respectively. These expenses primarily include 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. G&A expenses increased by approximately$574,810 in the year endedDecember 31, 2022 from$16,077,156 for the same period of 2021. Income Tax Expense
We incurred income tax expense of
We incurred income tax expense of
Liquidity and Capital Resources
As of
We expect to incur significantly greater expenses in the near future as we develop our product offerings 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 believe that we will require approximately$50 million over the next 12-24 months to implement our business plan. For the immediate future, we intend to finance our business expansion efforts through equity purchase by institutional banks, and loans from existing shareholders or financial institutions.
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.
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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.
We require additional funding to meet its ongoing obligations and to fund
anticipated operating losses. Our auditor has expressed substantial doubt about
our ability to continue as a going concern. Our ability to continue as a going
concern is dependent on raising capital to fund its initial business plan and
ultimately to attain profitable operations. These 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.
We expect to incur marketing and professional and administrative expenses as
well expenses associated with maintaining our filings with the Commission. We
will require additional funds during this time and will seek to raise the
necessary additional capital. If we are unable to obtain additional financing,
we may be required to reduce the scope of our business development activities,
which could harm our business plans, financial condition and operating results.
Additional funding may not be available on favorable terms, if at all. We intend
to continue to fund its business by way of equity or debt financing and advances
from related parties. Any inability to raise capital as needed would have a
material adverse effect on our business, financial condition and results of
operations.
If we cannot raise additional funds, we will have to cease business operations. As a result, our common stock investors might lose all of their investment.
Years Ended
December 31,
2022 2021
Net cash provided by (used in) operating activities $ 2,956,351 $ (4,881,128 )
Net cash provided by (used in) investing activities 1,000,911 (2,044,551 )
Net cash (used in) provided by financing activities $ (2,391,447 ) $ 7,187,734 Net Cash Provided by (Used In) Operating Activities.
For the year endedDecember 31, 2022 , net cash provided by operating activities was$2,956,351 , which consisted primarily of a net loss of$104,142,179 , depreciation of property an equipment of$7,540 , amortization of intangible assets of$3,931,641 , imputed interest expense of$949,790 , digital assets paid for expense of$29,607,771 , impairment loss on digital assets of$12,633 , impairment loss on goodwill of$816,263 , shares issued for services rendered of$86,572,168 , loss on disposal of subsidiaries of$4,479,998 and loss on closure ofPhoenix subsidiaries of$649,856 , decrease in loan receivables of$642,598 , loan interest receivables of$124,499 , inventories of$938,151 , an increase in accounts payables of$2,141,273 , accrued consulting service fee of$5,769,457 , produced content cost$53,895 , income tax payable of$299,714 , offset by increase in prepayment and other receivables of$545 , Right-of-use assets and operating lease liabilities of$35,860 and decrease in accrued liabilities
and other payables of$362,793 .
For the year endedDecember 31, 2021 , net cash used in operating activities was$4,881,128 which consisted primarily of a net loss of$25,149,399 , digital assets received of$3,277,589 , an increase in loan receivables of$6,910,730 , an increase in inventory of$894,091 , an increase in prepayment and other receivable of$175,765 , offset by amortization of$829,575 , imputed interest expense of$620,508 , digital assets paid of$3,231,988 , issuance of common stock for goods and services rendered of$25,290,203 , inventories purchase in lieu of shares of$476,903 , a decrease in loan interest receivables of$118,903 , an increase of account payables of$240,156 , an increase in other payable and accruals of$66,385 , loss on written-off of property and equipment of$166,302 , and an increase in income tax payable of$434,257 . 48
We expect to continue to rely on cash generated through financing from our existing shareholders and private placements of our securities to finance our operations and future acquisitions in the next twelve months.
Net Cash Provided by (Used In) Investing Activities.
The net cash provided by investing activities of$1,000,911 for the year endedDecember 31, 2022 mainly consisted of cash from acquisition of non-controlling interest of$1,005,654 and offset by payment to acquire property and equipment of$2,859 and purchase of intangible assets of$1,884 .
The net cash used in investing activities of
For the year endedDecember 31, 2022 , net cash used in financing activities was$2,391,447 consisting primarily of proceeds from loan payable of$1,333,700 and proceeds from convertible note payables of$412,783 and offset by repayment to related parties of$4,137,930 . For the year endedDecember 31, 2021 , net cash provided by financing activities was$7,187,734 consisting of advance from related parties of$11,444,456 and repayment of loan payable of$4,256,722 . 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 2023 to be significantly higher than 2022. As ofDecember 31, 2022 , we had an accumulated deficit of$130,571,682 . 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 ofDecember 31, 2022 : Less than More than
Contractual Obligations Total 1 year 1-3 Years
3-5 Years 5 Years
$ $ $ $ $
Commercial commitments - - -
Operating lease obligations 166,525 136,800 29,725 - -
Total obligations 166,525 136,800 29,725 - -
49
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.
Critical Accounting Policies and Estimates.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted inthe United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our consolidated financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the presentation of our financial condition and results of operations and require management's subjective or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to consolidated financial statements and because of the possibility that future events affecting the estimate may differ significantly from management's current judgments. We believe the following accounting policies are critical in the preparation of our consolidated financial statements. ? Use of estimates and assumptions In preparing these 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 years 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 impairment loss on digital assets, valuation and useful lives of intangible assets and deferred tax valuation allowance. 50 ? 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.
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? 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 and 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 years
presented.
? 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.
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Lending Business
The Company is licensed to originate personal loan, company loan and mortgage
loan in Hong Kong . During the years ended December 31, 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
Commencing fromOctober 1, 2021 , the Company launched 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 involves 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 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. 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 averageU.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.
Recently Issued 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.
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Recently adopted accounting pronouncements
OnOctober 28, 2021 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08"). ASU 2021-08 amends Accounting Standards Codification 805 ("ASC 805") to require acquiring entities to apply Topic 606 - Revenue from Contracts with Customers to recognize and measure contract assets and contract liabilities in a business combination. The Company early adopted the standard onJanuary 1, 2022 . The adoption of the standard did not have a material impact on the Company's consolidated financial statements. OnMarch 31, 2022 , theSecurities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin No. 121 ("SAB 121").SAB 121 sets out interpretive guidance from the staff of theSEC regarding the accounting for obligations to safeguard crypto assets that an entity holds for its customers. Safeguarding is defined as taking actions to secure customer crypto assets and the associated cryptographic key information and protecting them from loss, theft, or other misuse. The guidance requires an entity to recognize a liability for the obligation to safeguard the users' assets, and recognize an associated asset for the crypto assets safeguarded. Both the liability and asset should be measured initially and subsequently at the fair value of the crypto assets being safeguarded. The guidance also requires additional disclosures related to the nature and amount of crypto assets that the entity is responsible for holding for its customers, with separate disclosure for each significant crypto asset, and the vulnerabilities the entity has due to any concentration in such activities. The adoption of the standard did not have a material impact on the Company's consolidated financial statements.
Accounting pronouncements pending adoption
OnJune 30, 2022 , FASB issued Accounting Standards Update No. 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions ("ASU 2022-03"). ASU 2022-03 clarifies that a contractual sale restriction prohibiting the sale of an equity security is a characteristic of the reporting entity holding the equity security and is not included in the equity security's unit of account. The standard requires specific disclosures related to equity securities that are subject to contractual sale restrictions, including (1) the fair value of such equity securities reflected in the balance sheet, (2) the nature and remaining duration of the corresponding restrictions, and (3) any circumstances that could cause a lapse in the restrictions. The new standard is effective for the Company for its fiscal year beginningJanuary 1, 2024 , with early adoption permitted. The Company is currently evaluating the impact of adopting the standard on the Company's consolidated financial statements. The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.
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