NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
NOTE—1 ORGANIZATION
AND BUSINESS BACKGROUND
Cosmos Group Holdings Inc. (the “Company”
or “COSG”) incorporated in the state of Nevada on August 14, 1987, under the name Shur De Cor, Inc. and engaged in
developing certain mining claims. In April 1999, Shur De Cor merged with Interactive Marketing Technology, a New Jersey corporation
that was engaged in the business of developing and direct marketing of consumer products. As the surviving company, Shur De Cor
changed its name to Interactive Marketing Technology, Inc. Shur De Cor's then management resigned and the management of Interactive
New Jersey became the Company’s management. The prior management of Shur De Cor retained Shur De Cor’s business and
assets. The Company filed a registration statement on Form 10-SB on January 19, 2000.
The Company, through a wholly owned subsidiary,
IMT's Plumber, Inc., produced, marketed, and sold a licensed product called the Plumber's Secret, which was discontinued in fiscal
2001. In May 2002, the Company ceased to actively pursue its product development and marketing business and actively sought to
either acquire a third party, merge with a third party or pursue a joint venture with a third party in order to re-enter its former
business of development and direct marketing of proprietary consumer products in the United States and worldwide.
On November 17,
2004, the Company acquired MPL, a company organized under the laws of the British Virgin Islands, and its subsidiaries in accordance
with the terms of a Share Exchange Agreement executed by the parties (the “2004 Agreement”). In connection with the
acquisition, the Company issued an aggregate of 5,481,150 shares of its common stock to Imperial International Limited, a company
incorporated under the laws of the British Virgin Islands (“Imperial”), the sole shareholder of MPL, in exchange for
100% of the issued and outstanding shares of MPL capital stock (the "2004 Share Exchange"). Upon completion of the share
exchange, MPL became the Company's wholly owned subsidiary and the Company’s former owner transferred control of the Company
to Imperial. The Company relied on Rule 506 of Regulation D of the Securities Act of 1933, as amended (the "Act"), in
regard to the shares that we issued pursuant to the 2004 Share Exchange. The Company treated this transaction as a qualified "business
combination" as defined by Rule 501(d). The Company relied on the exemption from registration pursuant to Section 4(2) of,
and or Regulation D promulgated under, the Act in issuing the Company’s securities.
In connection with the 2004 Share Exchange,
the Company: (i) changed its name from Interactive Marketing Technology, Inc. to China Artists Agency, Inc. ("China Artists");
(ii) obtained a new stock symbol, "CAAY", and CUSIP Number, effective on December 21, 2004; (iii) increased its authorized
common stock to 200,000,000 shares; (iv) effectuated a 1 for 1.69 reverse stock split; and (v) spun off the Company’s existing
business into a separate public company, All Star Marketing, Inc., a Nevada corporation ("All Star"). All Star was formed
as a wholly owned subsidiary of the Company. The Spin-off was satisfied by means of a pro-rata share dividend to the Company's
shareholders of record as of December 10, 2004. The purpose of the Spin-Off was to allow the subsidiary to operate as a separate
public company and raise working capital through the sale of its own equity. This allowed the Company’s management to focus
on its business, while at the same time, allowing the spun-off company to have greater exposure by trading as an independent public
company. Additionally, the shareholders and the market would then more easily identify the results and performance of the Company
as a separate entity from that of All Star. In August 2005, the Company changed its name to China Entertainment Group, Inc. and,
effective August 9, 2005, obtained a new stock symbol "CGRP", and CUSIP Number.
Because the Company failed to generate
revenues in its new business, prior management commenced litigation in the Superior Court for Los Angeles County California which
action was removed to the United States District Court for the Central District of California Case No. CV07-1068 GHK. On January
30, 2008, the parties entered into a Settlement Agreement and Conditional Release (the “Settlement Agreement”), pursuant
to which, among other things, the Company’s former management reacquired control of the Company and all assets related to
the Chinese entertainment business were transferred out of the Company. The Company, under its former management, once again entered
the business of locating products to develop and mass market. These efforts did not prove fruitful and the Company, while continuing
its product development business, also began to seek another business to acquire.
On January 22, 2010, the Company filed
a Form 15-12G to withdraw from its reporting obligations.
COSMOS GROUP HOLDINGS
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
Effective July 22, 2010, the Company merged
with Safe and Secure TV Channel, LLC, a Delaware limited liability company (the “Merger”). In connection with the
Merger, the management of the Company resigned and was replaced by the management and principals of Safe and Secure TV Channel,
LLC. The holders of interests in Safe and Secure TV Channel, LLC exchanged their interests for approximately 50.2% of the issued
and outstanding stock of the Company. In September 2010, the Company effectuated a 9.85 for one stock split to shareholders of
record as of August 23, 2010. After the Merger, the Company became a television network and multimedia information and distribution
company focused on serving the homeland security and emergency preparedness industry.
On February 15, 2016, the Company sold
to Asia Cosmos Group Limited, a private limited liability company incorporated under the laws of British Virgin Islands (“ACOSG”),
500,000 shares of its common stock at a per share price of $0.027. ACOSG’s sole shareholder is Miky Wan. The Company relied
on the exemption from registration pursuant to Section 4(2) of, and Regulation D and/or Regulation S promulgated under the Act
in selling the Company’s securities to ACOSG.
In connection with the private placement
to ACOSG, a change of control occurred and Bryan Glass resigned from his position as President, Secretary, Treasurer and Chairman
of the Company. Miky Wan was appointed to serve as Chief Executive Officer, Chief Operating Officer, President and Director, effective
February 19, 2016. Peter Tong, our Chief Financial Officer, Secretary and director continued in his positions with the Company.
Calvin K.W. Lai, Anthony H.H. Chan, Jenher Jeng, Alice K.M. Tang, Connie Y.M. Kwok were appointed to serve on our Board of Directors
effective February 19, 2016. Effective February 26, 2016, the Company changed its name to Cosmos Group Holdings Inc. and filed
a Certificate of Amendment to such effect with the Nevada Secretary of State. The name change and the related stock symbol change
to “COSG” were approved by the Financial Industry Regulatory Authority on March 31, 2016. The Company also increased
the number of its authorized common stock, par value $0.001, from 90,000,0000 shares to 500,000,000 and its preferred stock, par
value $0.001, from 10,000,000 to 30,000,000 shares. After the private placement, the Company shifted its business plan to focus
on acquiring undervalued companies including those in the Greater China region.
On May 12, 2017, the Company acquired all
of the issued and outstanding shares of Lee Tat from Mr. Koon Wing CHEUNG, Lee Tat’s sole shareholder, in exchange for 10,961,147
shares of our issued and outstanding common stock. In connection with the Lee Tat acquisition, Miky Wan resigned from her positions
as Chief Executive Officer and Chief Operating Officer and Koon Wing CHEUNG and Yongwei HU were appointed to serve as our Chief
Executive Officer and Chief Operating Officer, respectively, and also as our directors. In addition, Anthony H.H. CHAN and Alice
K. M. TANG resigned from their positions as directors, and Zhigang LIAO and Weiming CHEN were appointed to fill the vacancies created
by their resignations. The Company relied on the exemption from registration pursuant to Section 4(2) of, and Regulation D and/or
Regulation S promulgated under the Act in selling the Company’s securities to the shareholders of Lee Tat.
Prior to the acquisition, the Company was
considered as a shell company due to its nominal assets and limited operation. Upon the acquisition, Lee Tat will comprise the
ongoing operations of the combined entity and its senior management will serve as the senior management of the combined entity,
Lee Tat is deemed to be the accounting acquirer for accounting purposes. The transaction will be treated as a recapitalization
of the Company. Accordingly, the consolidated assets, liabilities and results of operations of the Company will become the historical
financial statements of Lee Tat, and the Company’s assets, liabilities and results of operations will be consolidated with
Lee Tat beginning on the acquisition date. Lee Tat was the legal acquiree but deemed to be the accounting acquirer. The Company
was the legal acquirer but deemed to be the accounting acquiree in the reverse merger. The historical financial statements prior
to the acquisition are those of the accounting acquirer (Lee Tat). Historical stockholders’ equity of the accounting acquirer
prior to the merger are retroactively restated (a recapitalization) for the equivalent number of shares received in the merger.
Operations prior to the merger are those of the acquirer. After completion of the share exchange transaction, the Company’s
consolidated financial statements include the assets and liabilities, the operations and cash flow of the accounting acquirer.
The Company, through its subsidiaries,
mainly engages in the provision of truckload transportation service in Hong Kong, in which the Company utilizes its owned trucks
or independent contractor owned trucks for the pickup and delivery of freight from port to the designated destination, upon the
customers’ request.
COSMOS GROUP HOLDINGS
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
Description of subsidiaries
Name
|
|
Place of incorporation
and kind of
legal entity
|
|
Principal activities
and place of operation
|
|
Particulars of issued/
registered share
capital
|
|
Effective interest
held
|
|
|
|
|
|
|
|
|
|
Cosmo Group International Holdings Limited
|
|
British Virgin
Islands
|
|
Investment holding
|
|
50,000 shares at US$1 each
|
|
100%
|
|
|
|
|
|
|
|
|
|
Lee Tat Transportation International Limited
|
|
Hong Kong
|
|
Logistic and delivery
|
|
10,000 ordinary shares for HK$10,000
|
|
100%
|
|
|
|
|
|
|
|
|
|
COSG Car International Limited
|
|
Hong Kong
|
|
Investment holding
|
|
10,000 ordinary shares for HK$10,000
|
|
100%
|
|
|
|
|
|
|
|
|
|
Foshan Cosmos Xi Yue Car Rental Company Limited
|
|
People’s Republic
of China (”PRC”)
|
|
Provision of car rental service
|
|
US$200,000
|
|
100%
|
|
|
|
|
|
|
|
|
|
COSG and its subsidiaries are hereinafter
referred to as (the “Company”).
NOTE—2 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
These accompanying consolidated financial
statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S.
GAAP”).
In preparing these consolidated financial
statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance
sheet and revenues and expenses during the years reported. Actual results may differ from these estimates.
The consolidated financial statements include
the accounts of COSG and its subsidiaries. All significant inter-company balances and transactions within the Company have been
eliminated upon consolidation.
·
|
Cash and cash equivalents
|
Cash and cash equivalents consist primarily
of cash in readily available checking and saving accounts. Cash equivalents consist of highly liquid investments that are readily
convertible to cash and that mature within three months or less from the date of purchase. The carrying amounts approximate fair
value due to the short maturities of these instruments.
COSMOS GROUP HOLDINGS
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
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 of December 31, 2017 and 2016, there was no allowance for doubtful accounts.
·
|
Property, plant and equipment
|
Property, 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 life
|
|
|
Service vehicle
|
|
8 years
|
|
|
Expenditure for repairs and maintenance
is expensed as incurred. When assets have retired or sold, the cost and related accumulated depreciation are removed from the accounts
and any resulting gain or loss is recognized in the results of operations.
·
|
Impairment of long-lived assets
|
In accordance with the provisions of ASC
Topic 360, “
Impairment or Disposal of Long-Lived Assets
”, all long-lived assets such as property, plant and
equipment 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 ended December 31, 2017 and 2016.
In accordance with the ASC Topic 605,
“Revenue
Recognition”
, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has
occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.
Revenue is recognized in full upon completion
of delivery to the receiver’s location.
COSMOS GROUP HOLDINGS
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
Cost of revenue consists primarily of direct
labor and fuel cost, which are directly attributable to the rendering of transportation services. Shipping and handling costs,
associated with the custom clearance are borne by the customers.
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 statement of stockholders’ equity, consists of changes in unrealized
gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense
or benefit.
Income taxes are determined in accordance
with the provisions of ASC Topic 740,
“Income Taxes
” (“ASC 740”). Under this method, deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured
using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
ASC 740 prescribes a comprehensive model
for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken
or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements
when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must
initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized
upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.
For the years ended December 31, 2017 and
2016, the Company did not have any interest and penalties associated with tax positions. As of December 31, 2017 and 2016, the
Company did not have any significant unrecognized uncertain tax positions.
The Company conducts major businesses in
Hong Kong and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that
are subject to examination by the foreign tax authority.
Leases that transfer substantially all
the rewards and risks of ownership to the lessee, other than legal title, are accounted for as finance leases. Substantially all
of the risks or benefits of ownership are deemed to have been transferred if any one of the four criteria is met: (i) transfer
of ownership to the lessee at the end of the lease term, (ii) the lease containing a bargain purchase option, (iii) the lease term
exceeding 75% of the estimated economic life of the leased asset, (iv) the present value of the minimum lease payments exceeding
90% of the fair value. At the inception of a finance lease, the Company as the lessee records an asset and an obligation at an
amount equal to the present value of the minimum lease payments. The leased asset is amortized over the shorter of the lease term
or its estimated useful life if title does not transfer to the Company, while the leased asset is depreciated in accordance with
the Company’s depreciation policy if the title is to eventually transfer to the Company. The periodic rent payments made
during the lease term are allocated between a reduction in the obligation and interest element using the effective interest method
in accordance with the provisions of ASC Topic 835-30,
“Imputation of Interest”
.
COSMOS GROUP HOLDINGS
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
·
|
Net (loss) income per
share
|
The Company calculates net (loss) income
per share in accordance with ASC Topic 260,
“Earnings per Share.”
Basic (loss) income per share is computed
by dividing the net (loss) income by the weighted-average number of common shares outstanding during the year. Diluted (loss)
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.
·
|
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 statement of operations.
The reporting currency of the Company is
the United States Dollar ("US$"). The Company's subsidiaries in Hong Kong maintain their books and records in their local
currency, Hong Kong Dollars ("HK$"), which is the functional currency as being the primary currency of the economic environment
in which these entities operate.
In general, for consolidation purposes,
assets and liabilities of its subsidiaries whose functional currency is not the US$ are translated into US$, in accordance with
ASC Topic 830-30,
“Translation of Financial Statement
”, using the exchange rate on the balance sheet date.
Revenues and expenses are translated at average rates prevailing during the year. The gains and losses resulting from translation
of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income
within the statement of stockholders’ equity.
Translation of amounts from its reporting
currencies into US$ has been made at the following exchange rates for the respective year:
|
|
2017
|
|
|
2016
|
|
Year-end HK$:US$1 exchange rate
|
|
|
7.80
|
|
|
|
7.75
|
|
Annual average HK$:US$1 exchange rate
|
|
|
7.80
|
|
|
|
7.75
|
|
Contributions to retirement plans (which
are defined contribution plans) are charged to general and administrative expenses in the accompanying consolidated statements
of operation as the related employee service is provided.
Parties, which can be a corporation or
individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or
exercise significant influence over the other party in making financial and operational decisions. Companies are also considered
to be related if they are subject to common control or common significant influence.
ASC Topic 280, “
Segment Reporting
”
establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal
organization structure as well as information about geographical areas, business segments and major customers in financial statements.
The Company operates in one reportable operating segment in Hong Kong.
COSMOS GROUP HOLDINGS
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
·
|
Fair value of financial instruments
|
The carrying value of the Company’s
financial instruments (excluding finance lease): cash and cash equivalents, accounts receivable, amount due to a related party,
accounts payable, income tax payable, amount due to a related party, other payables and accrued liabilities approximate at their
fair values because of the short-term nature of these financial instruments.
Management believes, based on the current
market prices or interest rates for similar debt instruments, the fair value of short-term bank borrowings and note payable approximate
the carrying amount.
The Company also follows the guidance of
the ASC Topic 820-10, “
Fair Value Measurements and Disclosures
” ("ASC 820-10"), with respect to financial
assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes
the inputs used in measuring fair value as follows:
·
|
Level
1
: Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets;
|
·
|
Level 2:
Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. Black-Scholes Option-Pricing model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs; and
|
·
|
Level
3
: Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants
would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including
option pricing models and discounted cash flow models.
|
Fair value estimates are made at a specific
point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
·
|
Recent accounting pronouncements
|
In May 2014, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue
from Contracts with Customers
. The standard provides companies with a single model for accounting for revenue arising
from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue
guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to
the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing
revenue guidance. The guidance permits companies to either apply the requirements retrospectively to all prior periods
presented, or apply the requirements in the year of adoption, through a cumulative adjustment. In August 2015, the FASB
issued ASU 2015-14,
Deferral of the Effective Date
, which defers the required adoption date of ASU 2014-09 by one
year. As a result of the deferred effective date, ASU 2014-09 will be effective for the Company in its first quarter of
fiscal 2018. Early adoption is permitted but not before the original effective date of the new standard of the first quarter
of fiscal 2017. The following ASUs were subsequently issued by the FASB to clarify the implementation guidance in some areas
and add practical expedients: In March 2016, ASU 2016-08,
Revenue from Contracts with Customers: Principal
versus Agent Considerations;
in April 2016, ASU 2016-10,
Revenue from Contracts with Customers:
Identifying Performance Obligations and Licensing;
in May 2016, ASU 2016-12,
Revenue from Contracts with
Customers: Narrow Scope Improvements and Practical Expedients;
and in December 2016, ASU
2016-20,
Technical Corrections and Improvements to Revenue from Contracts with Customers
. The Company’s is
currently finalizing its evaluation of standard product sales arrangements and has identified an adoption impact related to
revenue from certain distributor agreements which was deferred until the period in which the distributor sells through the
inventory to the end customer. In connection with the adoption of ASU 2014-09, the Company will change the recognition of
sales to these distributors whereby revenue will be estimated and recognized in the period in which the Company transfers
control of the product to the distributor; the adoption impact is not expected to be material. Other than this impact, the
Company has not identified any expected impact on the timing and measurement of revenue for standard product sales
arrangements from the adoption of the standard and the Company is currently formalizing its final conclusions. The Company is
also formalizing its evaluation of the impact of adoption on non-product sales arrangements, which represent less than five
percent of revenue.
COSMOS GROUP HOLDINGS
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
In February 2016, the FASB issued ASU
No. 2016-02,
Leases
. The standard requires that a lessee recognize the assets and liabilities that arise from operating
leases. A lessee should recognize in its balance sheet a liability to make lease payments (the lease liability) and a right-of-use
asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee
is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities.
In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented
using a modified retrospective approach. The guidance in ASU 2016-02 is effective for annual and interim reporting periods beginning
after December 15, 2018.
In March 2016, the FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting,
which changes the accounting for employee share-based payments, including the accounting for income taxes, forfeitures,
and statutory tax withholding requirements, as well as classification in the statement of cash flows. Under the new guidance,
excess tax benefits associated with share-based payment awards will be recognized in the income statement when the awards vest
or settle, rather than in stockholders’ equity. In addition, it will increase the number of shares an employer can withhold
to cover income taxes on share-based payment awards and still qualify for the exemption to liability classification. The guidance
was effective for the Company in the first quarter of 2017.
In
November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows - Restricted Cash
, which requires entities
to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of
cash flows. The guidance will be effective for the Company in its first quarter of fiscal 2018. Early adoption is permitted, including
adoption in an interim period, but any adjustments must be reflected as of the beginning of the fiscal year that includes that
interim period. The new standard must be adopted retrospectively.
In
January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other,
which eliminates step
two of the quantitative goodwill impairment test. Step two required determination of the implied fair value of a reporting
unit, and then a comparison of this implied fair value with the carrying amount of goodwill for the reporting unit, in order
to determine any goodwill impairment. Under the new guidance, an entity is only required to complete a one-step
quantitative test, by comparing the fair value of a reporting unit with its carrying amount, and any goodwill impairment
charge is determined by the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the
loss should not exceed the total amount of goodwill allocated to the reporting unit. The standard is effective for the
Company in the first quarter of 2020, with early adoption permitted as of January 1, 2017, and is to be applied on a
prospective basis.
In
March 2017, the FASB issued ASU No. 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement
Benefit Cost
, which changes how employers that sponsor defined benefit pension or other postretirement benefit plans
present the net periodic benefit cost in the statement of operations. The new guidance requires entities to report the service
cost component in the same line item or items as other compensation costs. The other components of net benefit cost are required
to be presented in the statement of operations separately from the service cost component and outside the subtotal of loss from
operations. ASU 2017-07 also provides that only the service cost component is eligible for capitalization. The standard is
effective for the Company in the first quarter of 2018, with adoption to be applied on a retrospective basis.
In
May 2017, the FASB issued ASU No. 2017-09,
Compensation-Stock Compensation: Scope of Modification Accounting
,
which provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based
payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should
only be applied if there is a change to the value, vesting conditions or award classification and would not be required if the
changes are considered non-substantive. The amendments of this ASU are effective for the Company in the first quarter of 2018,
with early adoption permitted.
In
August 2017, the FASB issued ASU No. 2017-12,
Derivatives and Hedging - Targeted Improvements to Accounting for Hedging
Activities
, which modifies the presentation and disclosure of hedging results. Further, it provides partial relief on the timing
of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in income.
The amendments in this ASU are effective for the Company in the first quarter of 2019.
COSMOS GROUP HOLDINGS
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
In
November 2017, the FASB has issued ASU No. 2017-14,
Income Statement—Reporting Comprehensive Income
(Topic 220),
Revenue
Recognition
(Topic 605), and
Revenue from Contracts with Customers
(Topic 606). ASU 2017-14 includes amendments to certain
SEC paragraphs within the FASB Accounting Standards Codification (Codification). ASU 2017-14 amends the Codification to incorporate
the following previously issued guidance from the SEC. ‘The amendments in ASU No. 2017-14 amends the Codification to incorporate
SEC Staff Accounting Bulletin (SAB) No. 116 and SEC Interpretive Release on Vaccines for Federal Government Stockpiles (SEC Release
No. 33-10403) that bring existing SEC staff guidance into conformity with the FASB’s adoption of and amendments to ASC Topic
606, Revenue from Contracts with Customers.
In
September 2017, the FASB has issued ASU No. 2017-13,
Revenue Recognition
(Topic 605),
Revenue from Contracts with Customers
(Topic 606),
Leases
(Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement
at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments.” The amendments
in ASU No. 2017-13 amends the early adoption date option for certain companies related to the adoption of ASU No. 2014-09 and ASU
No. 2016-02. Both of the below entities may still adopt using the public company adoption guidance in the related ASUs, as amended.
The effective date is the same as the effective date and transition requirements for the amendments for ASU 2014-09 and ASU 2016-02.
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.
NOTE—3 GOING
CONCERN UNCERTAINTIES
The accompanying consolidated financial
statements have been prepared using the going concern basis of accounting, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
The Company has experienced a net loss
of $127,642 and negative operating cash flows of $297,301 for the year ended December 31, 2017. Also, at December 31, 2017, the
Company has incurred an accumulated deficit of $129,105 and working capital deficit of $175,138.
The continuation of the Company as a going
concern through December 31, 2018 is dependent upon the continued financial support from its stockholders. Management believes
the Company is currently pursuing additional financing for its operations. However, there is no assurance that the Company will
be successful in securing sufficient funds to sustain the operations.
These and other factors raise substantial
doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that
may result in the Company not being able to continue as a going concern.
NOTE—4 PURCHASE
DEPOSITS
Purchase deposits represent deposit payments
made to the vendor for procurement, which are unsecure, interest-free and relieved against account payable when the goods are received
by the Company.
COSMOS GROUP HOLDINGS
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
NOTE—5 PROPERTY,
PLANT AND EQUIPMENT
Property, plant and equipment consisted
of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Service vehicle, at cost
|
|
$
|
159,658
|
|
|
$
|
159,658
|
|
Less: accumulated depreciation
|
|
|
(56,095
|
)
|
|
|
(35,497
|
)
|
|
|
$
|
103,563
|
|
|
$
|
124,161
|
|
Depreciation expense for the years ended
December 31, 2017 and 2016 were $19,834 and $19,958, as part of cost of revenue, respectively.
NOTE—6 AMOUNTS
DUE TO RELATED PARTIES
The amounts represented temporary advances
to the Company by related parties, which were unsecured, interest-free and had no fixed terms of repayments. Imputed interest from
related party loan is not significant.
NOTE—7 OBLIGATION
UNDER FINANCE LEASE
The Company purchased a service vehicle
under a finance lease agreement with the effective interest rate of 2.25% per annum, due through May 29, 2020, with principal and
interest payable monthly. The obligation under the finance lease is as follows:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Finance lease
|
|
$
|
50,584
|
|
|
$
|
71,022
|
|
Less: interest expense
|
|
|
(2,251
|
)
|
|
|
(2,265
|
)
|
|
|
|
|
|
|
|
|
|
Net present value of finance lease
|
|
$
|
48,333
|
|
|
$
|
68,757
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
20,000
|
|
|
$
|
20,124
|
|
Non-current portion
|
|
|
28,333
|
|
|
|
48,633
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,333
|
|
|
$
|
68,757
|
|
As of December 31, 2017, the maturities
of the finance lease for each of the three years are as follows:
Years ending December 31:
|
|
|
|
2018
|
|
$
|
20,000
|
|
2019
|
|
|
20,000
|
|
2020
|
|
|
8,333
|
|
|
|
|
|
|
Total
|
|
$
|
48,333
|
|
COSMOS GROUP HOLDINGS
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
NOTE—8 INCOME
TAXES
For the years ended December 31, 2017 and
2016, the local (“United States of America”) and foreign components of loss before income taxes were comprised of the
following:
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Tax jurisdiction from:
|
|
|
|
|
|
|
|
|
- Local
|
|
$
|
(112,406
|
)
|
|
$
|
42,259
|
|
- Foreign
|
|
|
(526
|
)
|
|
|
(21,129
|
)
|
(Loss) income before income taxes
|
|
$
|
(112,932
|
)
|
|
$
|
21,130
|
|
The provision for income taxes consisted
of the following:
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
- Local
|
|
$
|
–
|
|
|
$
|
–
|
|
- Foreign
|
|
|
14,503
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
- Local
|
|
|
–
|
|
|
|
–
|
|
- Foreign
|
|
|
207
|
|
|
|
1,964
|
|
Income tax expense
|
|
$
|
14,710
|
|
|
$
|
1,964
|
|
The effective tax rate in the years presented
is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rate. The Company
operates in various countries: United States of America, BVI, Hong Kong and the PRC that are subject to taxes in the jurisdictions
in which they operate, as follows:
United States of America
COSG is registered in the State of Nevada
and is subject to the tax laws of United States of America.
On December 22, 2017, the United States
enacted the Tax Cuts and Jobs Act (the “Act”) resulting in significant modifications to existing law. The Company has
completed the accounting for the effects of the Act during the quarter ended December 31, 2017. The Company’s financial statements
for the year ended December 31, 2017 reflect certain effects of the Act which includes a reduction in the corporate tax rate from
34% to 21% as well as other changes.
As of December 31, 2017, the operation
in the United States of America incurred $1,902,503 of cumulative net operating losses which can be carried forward to offset future
taxable income. The net operating loss carryforwards begin to expire in 2037, if unutilized. The Company has provided for a full
valuation allowance against the deferred tax assets of $399,525 on the expected future tax benefits from the net operating loss
carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.
COSMOS GROUP HOLDINGS
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
BVI
Under the current BVI law, the Company
is not subject to tax on income.
Hong Kong
The Company’s subsidiaries operating
in Hong Kong are subject to the Hong Kong Profits Tax at a standard income tax rate of 16.5% on the assessable income arising in
Hong Kong during its tax year. The reconciliation of income tax rate to the effective income tax rate for the years ended December
31, 2017 and 2016 is as follows:
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
2,240
|
|
|
$
|
(21,129
|
)
|
Statutory income tax rate
|
|
|
16.5%
|
|
|
|
16.5%
|
|
Income tax expense at statutory rate
|
|
|
370
|
|
|
|
(3,486
|
)
|
Tax effect from non-deductible items
|
|
|
22,784
|
|
|
|
20,257
|
|
Tax effect from deductible items
|
|
|
(3,656
|
)
|
|
|
(9,529
|
)
|
Tax losses utilized
|
|
|
(4,995
|
)
|
|
|
(7,242
|
)
|
Income tax expense
|
|
$
|
14,503
|
|
|
$
|
–
|
|
The PRC
The Company’s subsidiary operating
in the PRC is subject to the Corporate Income Tax Law of the People’s Republic of China at a unified income tax rate of 25%.
There has been no operation in the PRC during the year ended December 31, 2017
The following table sets forth the significant
components of the deferred tax assets and liabilities of the Company as of December 31, 2017 and 2016:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Accelerated depreciation
|
|
$
|
12,999
|
|
|
$
|
12,870
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
399,525
|
|
|
$
|
5,026
|
|
Less: valuation allowance
|
|
|
(399,525
|
)
|
|
|
(5,026
|
)
|
Deferred tax assets, net
|
|
$
|
–
|
|
|
$
|
–
|
|
Management believes that it is more likely
than not that the deferred tax assets will not be fully realizable in the future. Accordingly, the Company provided for a full
valuation allowance against its deferred tax assets of $399,525 as of December 31, 2017. In 2017, the valuation allowance increased
by $394,499, primarily relating to net operating loss carryforwards from the local regime.
COSMOS GROUP HOLDINGS
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
NOTE—9 STOCKHOLDERS’
EQUITY
The Company’s authorized share is
2,000,000,000 common shares with a par value of $0.001 per share.
On May 12, 2017, the Company completed
the acquisition of 100% equity interest in Lee Tat Transportation International Limited in exchange of 10,961,147 shares of its
common stock. These common stocks were subsequently issued to the shareholders of Lee Tat Transportation International Limited.
On December 29, 2017, the Company approved
the proposed 1-for-20 Reverse Stock Split. The reverse stock split was approved by FINRA and became effective on February 6, 2018.
All share and earnings per share information have been retroactively adjusted to reflect the stock split in the financial statements.
As of December 31, 2017, the Company had
a total of 21,492,933 shares of its common stock issued and outstanding.
NOTE—10 NET
(LOSS) INCOME PER SHARE
Basic net (loss) income per share is computed
using the weighted average number of common shares outstanding during the year. The dilutive effect of potential common shares
outstanding is included in diluted net (loss) income per share. The following table sets forth the computation of basic and diluted
net income per share for the years ended December 31, 2017 and 2016:
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shareholders
|
|
$
|
(127,642
|
)
|
|
$
|
19,166
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – Basic and diluted
|
|
|
17,683,866
|
|
|
|
10,961,147
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share – Basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
NOTE—11 PENSION
COSTS
The Company is required to make contribution
to their employees under a government-mandated defined contribution pension scheme for its eligible full-time employees in Hong
Kong. The Company is required to contribute a specified percentage of the participants’ relevant income based on their ages
and wages level. During the years ended December 31, 2017 and 2016, $7,701 and $7,028 contributions were made accordingly.
NOTE—12 RELATED
PARTY TRANSACTIONS
The Company has been provided free office
space by its stockholder. The management determined that such cost is nominal and did not recognize the rent expense in its consolidated
financial statements.
Apart from the transactions and balances
detailed elsewhere in these accompanying consolidated financial statements, the Company has no other significant or material related
party transactions during the years presented.
COSMOS GROUP HOLDINGS
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
NOTE—13 CONCENTRATIONS
OF RISK
The Company is exposed to the following concentrations of risk:
(a) Major
customers
For the years ended December 31, 2017 and
2016, the customers who accounts for 10% or more of the Company’s revenues and its outstanding receivable balances as at
year-end dates, are presented as follows:
|
|
Year ended December 31, 2017
|
|
|
December 31, 2017
|
|
Customers
|
|
Revenues
|
|
|
Percentage
of revenues
|
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
295,534
|
|
|
|
38%
|
|
|
$
|
–
|
|
Customer B
|
|
|
183,390
|
|
|
|
24%
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
478,924
|
|
|
|
62%
|
|
Total:
|
$
|
–
|
|
|
|
Year ended December 31, 2016
|
|
|
December 31, 2016
|
|
Customers
|
|
Revenues
|
|
|
Percentage
of revenues
|
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
172,971
|
|
|
|
39%
|
|
|
$
|
32,777
|
|
Customer B
|
|
|
84,926
|
|
|
|
19%
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
257,897
|
|
|
|
58%
|
|
Total:
|
$
|
32,777
|
|
All customers are located in Hong Kong.
(b) Major
vendors
For the year ended December 31, 2017, one
vendor represented more than 10% of the Company’s operating cost. This vendor accounted for 14% of the Company’s operating
cost amounting to $48,246 with $0 of accounts payable at December 31, 2017.
For the year ended December 31, 2016, one
vendor represented more than 10% of the Company’s operating cost. This vendor accounted for 23% of the Company’s operating
cost amounting to $26,862 with $0 of accounts payable at December 31, 2016.
All vendors are located in Hong Kong.
(c) Credit
risk
Financial instruments that are potentially
subject to credit risk consist principally of trade receivables. The Company believes the concentration of credit risk in its trade
receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company
does not generally require collateral from customers. The Company evaluates the need for an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical trends and other information.
COSMOS GROUP HOLDINGS
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017
AND 2016
(Currency expressed in United States
Dollars (“US$”), except for number of shares)
(d) Interest rate risk
As the Company has no significant interest-bearing
assets, the Company’s income and operating cash flows are substantially independent of changes in market interest rates.
The Company’s interest-rate risk
arises from finance lease. The Company manages interest rate risk by varying the issuance and maturity dates variable rate debt,
limiting the amount of variable rate debt, and continually monitoring the effects of market changes in interest rates. As of December
31, 2017 and 2016, borrowing under finance lease was at fixed rate.
NOTE—14 COMMITMENTS
AND CONTINGENCIES
(a) Operating lease commitments
As of December 31, 2017, the Company has
no material commitments under operating leases.
(b) Capital commitment
As of December 31, 2017, the Company has
no material capital commitments in the next twelve months.
NOTE—15 SUBSEQUENT
EVENTS
In accordance with ASC Topic 855, “
Subsequent
Events
”, which establishes general standards of accounting for and disclosure of events that occur after the balance
sheet date but before financial statements are issued, the Company has evaluated all events or transactions that occurred after
December 31, 2017, up through the date the Company issued the unaudited condensed financial statements. During the period, the
Company did not have any material recognizable subsequent events.
On December 29, 2017, the Company approved
the proposed 1-for-20 Reverse Stock Split on December 29, 2017. The reverse stock split was approved by FINRA and became effective
on February 6, 2018.