| Summary of significant accounting policies | 2. Summary of significant accounting
policies
(a) Basis of presentation The accompanying consolidated financial
statements have been prepared in accordance with U.S. generally accepted accounting principles (’‘GAAP’’). The consolidated financial statements
are presented in the United States dollar (“USD”), rounded to the nearest thousands except share data and per share data,
or otherwise noted.
(b) Principles of consolidation The Group’s consolidated financial
statements include the financial statements of the Company, its subsidiaries and its VIEs. All transactions and balances among the Company,
its subsidiaries and its VIEs have been eliminated upon consolidation. Subsidiaries are those entities in which
the Company, directly or indirectly, controls more than one half of the voting powers; has the power to appoint or remove the majority
of the members of the board of directors; or to cast a majority of votes at the meeting of directors; or has the power to govern the financial
and operating policies of the investee under a statute or agreement among the shareholders or equity holders. A consolidated VIE is an entity in which
the Company, or its subsidiary, through contractual agreements, bears the risks of, and enjoys the rewards normally associated with ownership
of the entity. In determining whether the Company or its subsidiaries are the primary beneficiary, the Company considered whether it has
the power to direct activities that are significant to the VIE’s economic performance, and also the Group’s obligation to
absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially
be significant to the VIE. As a result of the Company’s direct ownership in Sentage WFOE and the VIE Agreements, the Company is
regarded as the primary beneficiary of the VIEs, and we treat the VIEs as the Company’s consolidated entities under U.S. GAAP, for
accounting purposes. The Company has consolidated the financial results of the VIEs in its consolidated financial statements in accordance
with U.S. GAAP. The VIE agreements have not been tested in a court of law in China as of the date of this annual report.
(c) Use of estimates The preparation of the Company’s
consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the balance sheet date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant
items subject to such estimates and assumptions include, but are not limited to, estimate of standalone selling prices of each unit of
accounting in multiple elements arrangements, estimate of breakage, the fair value of identifiable assets acquired, liabilities assumed
and non-controlling interests in business combinations, the useful lives of long-lived assets including intangible assets, the fair value
of the reporting unit for the goodwill impairment test, the allowance for doubtful accounts receivable and other receivables, the realization
of deferred tax assets, the fair value of share-based compensation awards, lease liabilities, right-of-use assets and the recoverability
of long-lived assets. Changes in facts and circumstances may result in revised estimates. Actual results could differ from those estimates,
and as such, differences may be material to the consolidated financial statements.
(d) Functional currency The Group use United States dollar (“US$”)
as its reporting currency. The functional currency of the Company and its subsidiaries incorporated outside of the PRC is US, while the
functional currency of the PRC entities in the Group is RMB as determined based on the criteria of Accounting Standards Codification (“ASC”)
830, Foreign Currency Matters.
(e) Convenience translation Translations of balances in the consolidated
balance sheets, consolidated statements of comprehensive income/(loss) and consolidated statements of cash flows from RMB into US$ as
of and for the year ended December 31, 2021 are solely for the convenience of the readers and were calculated at the rate of US$1.00=RMB
6.3757, representing the index rates stipulated by the Federal Reserve Bank of New York on December 31,2021. No representation is made
that the RMB amounts could have been, or could be, converted, realized or settled into US$ at that rate on December 31, 2021, or at any
other rate. The US$ convenience translation is not required under U.S. GAAP and all US$ convenience translation amounts in the accompanying
consolidated financial statements are unaudited.
(f) Cash Cash includes currency on hand and deposits
held by banks that can be added or withdrawn without limitation. The Company maintains all of its bank accounts in the PRC. The Company’s
cash balances in these bank accounts in the PRC are not insured by the Federal Deposit Insurance Corporation or other programs.
(g) Restricted cash In connection with the Company’s
newly launched prepaid payment network service business, the Company is required to make an initial one-year security deposit with designated
PRC banks in order to be eligible to issue prepaid gift and debit cards to customers. Security deposit is based on 1% of the estimated
proceeds to be collected from the prepaid card issuance and is subject to adjustment as be determined by the PRC banks based on actual
sales volume of the prepaid cards. As of December 31, 2020 and 2021, the Company has not issued any prepaid cards to customers. The Company
records such security deposit as restricted cash.
(h) Accounts receivable Accounts receivable include service fees
generated from the Company’s loan recommendation and prepaid payment network services. The Company reduces accounts receivable
by recording an allowance for doubtful accounts to account for the estimated impact of collection issues resulting from a client’s
inability or unwillingness to pay valid obligations to the Company. The Company determines the adequacy of allowance for doubtful accounts
based on individual account analysis, historical collection trend, and best estimate of specific losses on individual exposures. The Company
establishes a provision for doubtful receivable when there is objective evidence that the Company may not be able to collect amounts due.
Actual amounts received may differ from management’s estimate of credit worthiness and the economic environment. Delinquent account
balances are written-off against the allowance for doubtful accounts after the management has determined that the likelihood of collection
is not probable. As of December 31, 2021 and 2020, there was US$54,896 and nil
(i) Plant and equipment,
net Plant and equipment are stated at cost
less accumulated depreciation and any recorded impairment. Gains or losses arising from the disposal
of an item of plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the item
and are recognized in profit or loss on the date of disposal. The estimated useful lives are presented
below.
Office equipment and furniture 3 -
Transportation vehicles 3-5 years
Leasehold improvement Lesser of useful life and lease term Depreciation on plant and equipment is
calculated on the straight-line method over the estimated useful lives of the assets. Expenditures for maintenance and repairs,
which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and
betterments which substantially extend the useful life of assets are capitalized. The cost and related accumulated depreciation of assets
retired or sold are removed from the respective accounts, and any gain or loss is recognized in the consolidated statements of comprehensive
income in other income (expenses).
(j) Impairment of long-lived
assets Long-lived assets with finite lives,
primarily property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. If the estimated cash flows from the use of the asset and its eventual disposition are below the asset’s
carrying value, then the asset is deemed to be impaired and written down to its fair value. There were no impairments of these assets
as of December 31, 2021 and 2020.
(k) Fair value of financial
instruments The Group applies ASC 820, Fair Value
measurements and Disclosures, for fair value measurements financial assets and financial liabilities and for fair value measurements of
non-financial items that are recognized or disclosed at fair value in the financial statements on a recurring and non-recurring basis.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required
or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and
it considers assumptions that market participants would use when pricing the asset or liability. ASC 820 also establishes a framework
for measuring fair value and expands disclosures about fair value measurements. ASC 820 establishes a fair value hierarchy
that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
ASC 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measureme nts)
and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair
value hierarchy are as follows:
● Level
1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Group has the ability to access
at the measurement date.
● Level
2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly.
● Level
3 inputs are unobservable inputs for the asset or liability. The
level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that
is significant to the fair value measurement in its entirety. In situations where there is little, if any, market activity for the asset
or liability at the measurement date, the fair value measurement reflects management’s own judgments about the assumptions that
market participants would use Unless otherwise disclosed, the fair
value of the Company’s financial instruments, including cash, restricted cash, accounts receivable, prepaid expenses and other current
assets, accounts payable, deferred revenue and accrued expenses and other current liabilities approximate the fair value of the respective
assets and liabilities as of December 31, 2021 and 2020 based upon the short-term nature of the assets and liabilities. The balance of
due to related parties also approximate the fair value because it was paid by cash from related parties to the Company as working capital. The functional currency for Sentage
and Sentage HK is the United States dollar (“US$”). However, Sentage, and Sentage HK currently only serve as the holding companies
and did not have active operations as of the date of this annual report. The Company operates its business through its VIEs in the PRC
as of December 31, 2021. The functional currency of the Company’s VIEs is the Chinese Yuan (“RMB”). The Company’s
consolidated financial statements have been translated into US$. Assets and liabilities accounts are translated using the exchange rate
at each reporting period end date. Equity accounts are translated at historical rates. Income and expense accounts are translated at the
average rate of exchange during the reporting period. The resulting translation adjustments are reported under other comprehensive income.
Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the results of operations. The RMB is not freely convertible into
foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that
the RMB amounts could have been, or could be, converted into US$ at the rates used in translation. The following table outlines the currency
exchange rates that were used in creating the consolidated financial statements in this report:
As of December 31,
2020 2021
Year-end spot rate US$1=RMB 6.5327 US$1=RMB 6.3757
Average rate US$1=RMB 6.8969 US$1=RMB 6.4508
(l) Revenue recognition On January 1, 2018, the Company adopted
Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with customers”, using the modified retrospective
approach. The Company adopted ASC 606, “Revenue
from Contracts with Customers” for all periods presented. Consistent with the criteria of ASC 606, the Company follows five steps
for its revenue recognition: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract,
(iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize
revenue when (or as) the entity satisfies a performance obligation. The primary sources of the Group’s revenues
are as follows:
(1) Revenue from consumer loan repayment and collection management services Loans facilitated through the Company
were consumer loan products ranging from 30,000 RMB (approximately $4,342) to 80,000 RMB (approximately US$11,579). Loan term ranges from
one year to four years. All the Company’s clients are individual customers who entered into service agreements with the Company.
All these loans were facilitated through the Company’s offline loan recommendation services before November 2017. Since November
2017, the Company has not provided any intermediary services for any new customers in anticipation of changes in related governing regulations
in China, and the Company has been focusing on providing services related to consumer loan repayment and collection management to its
customers. These consumer loan repayment and collection management services are a part of the Company’s service obligation in its
service agreements with its customers. Pursuant to the service agreements, customers authorized the Company to monitor and manage the
repayment and collection process of outstanding loans for a fixed service fee, which was paid upfront by customers. The Company is required
to monitor loans within the loan term to ensure timely repayment of loans when they become due. Pursuant to the Company’s agreements
with customers, loan repayment and collection management services are parts of bundled services offered by the Company to customers for
a fixed fee and are not capable of being distinct because the Company is required to concurrently monitor and manage the repayment and
collection process of outstanding loans to be entitled to receive a fixed service fee. As a result, loan management services and collection
management services are not separately identifiable in the context of the contract and accordingly are treated as a bundled single performance
obligation. There is no variable consideration in the contract. Once a specific loan is repaid on time, the Company’s service obligation
related to such loan is satisfied. When a loan becomes delinquent, the Company is then required to assist in collection efforts for an
extended service period of 12 months starting on the day such loan becomes delinquent. No additional fee can be charged for collection
management services provided to delinquent loans beyond the initial fixed fee agreed. If all or a part of the loan is still not repaid
after all collection management efforts are exhausted within such required service period, the Company’s service obligation related
to such loan is satisfied and the Company is not responsible for any loss from an uncollectible loan. The Company’s loan repayment and
collection management services primarily include reconciling borrower repayment record and sending payment reminder and notice periodically,
facilitating repayment upon maturity and collaborating with third-party collection agents and law firms in the event of delinquency etc.
Loan repayment and collection management fees received from the customers upfront are deferred first, and then ratably recognized as revenue
over the loan terms or an extended service period of 12 months starting on the day such loan becomes delinquent, as the Company performs
designated services.
(2) Revenue from services provided to borrower for loan recommendation The Company started to provide recommendation
services where the Company recommends prospective borrowers to funding partners in June 2019. The Company’s performance obligations
include making loan product recommendations to borrower applicants, processing paperwork related to borrowers’ applications based
on their specific needs, evaluating credentials of borrower applicants, appraising borrowers’ properties to be collateralized through
data analysis and on-site inspection, and recommending qualified borrowers to various funding partners for loan approval. The Company
receive a service fee from a borrower if he or she is approved for a loan and such loan is then funded by one of our funding partners.
The Company acquires borrowers through cooperating with third-party referral partners as well as through its own borrower development
efforts. For borrowers acquired through cooperating with third-party referral partners, pursuant to the service agreement between the
Company and the referral partners, referral partners first charge borrowers service fees for their referrals. The Company then charges
the referral partners a commission ranging from 1.5% to 2% based on the loan proceeds disbursed to the borrowers. For borrowers developed
directly by the Company, the Company charges the borrowers a service fee of 1.75% to 3% of the loan amount received by the borrowers.
Such revenue is recognized at the point when the Company’s performance obligations are satisfied and the loan proceeds are disbursed
to a specific borrower. For the years ended December 31, 2021, 2020 and 2019, the Company earned $1,177,822, $2,087,717 and $260,388 recommendation
service revenue, respectively. Contract fulfillment costs associated
with loan recommendation services primarily consist of employee salary, bonus and business travel costs incurred by the Company to fulfill
its performance obligations. Contract fulfillment costs are only capitalized when the costs generate or enhance resources that will be
used in satisfying future performance obligations of the contract and the costs are expected to be recovered. For the years ended December
31, 2021 and 2020, the Company did not capitalize contract fulfillment costs, but expensed as incurred, due to immateriality of such costs.
(3) Revenue from prepaid payment network services In 2012, one of the Company’s VIE
subsidiaries, Qingdao Buytop, was granted a third-party payment service license by the relevant authority in China. The Company started
to provide prepaid payment network services to merchant customers in August 2019. The Company is licensed to issue generic and branded
prepaid gift and debit cards and provide related services to various merchants, such as supermarket and department stores. In connection
with the prepaid payment network services, the Company expects to generate revenue from: (1) technology consulting and support services
fees related to payment solution planning, design, and management; (2) prepaid card payment services fees related to the issuance and
use of prepaid cards. Technology consulting and support
services are short-term in nature, with service period ranging from one to three months, and related service fees are recognized as
revenue at point when payment solution, design and management services are rendered, completed and accepted by customers. For
merchant customers who need prepaid card payment services such as collecting and processing information necessary for prepaid card
issuance and authorizing transaction requests after verifying transaction information, the Company charges service fee equal to 0.3%
to 0.5% of each transaction amount and recognizes revenue at the point when the prepaid cards issued by merchant customers are used
by their end user card holders. For the years ended December 31, 2021, 2020 and 2019, the Company earned $928,565, $432,958 and
$86,052 revenue from providing technology consulting and support service revenue to customers, respectively. As of December 31, 2021
and 2020, the Company has not issued any prepaid cards to customers. Contract Assets and Liabilities The Company did not have contract assets
as of December 31, 2021 and 2020. Contract liabilities are recognized
for contracts where payment has been received in advance of delivery. The Company’s contract liabilities, which are reflected in
its consolidated balance sheets of nil
(m) Income taxes The Company accounts for current income
taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist
between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income
in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. An uncertain tax position is recognized
only if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized
is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income
tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income taxes have been
incurred during the years ended December 31, 2021, 2020 and 2019. The Company does not believe that there was any uncertain tax provision
on December 31, 2021, 2020 and 2019. The Company’s subsidiary and VIEs in China are subject to the income tax laws of the PRC. No
significant income was generated outside the PRC for the fiscal years ended December 31, 2021, 2020 and 2019. As of December 31, 2021,
all of the tax returns of the Company’s PRC subsidiary and VIEs remain available for statutory examination by PRC tax authorities.
(n) Value added tax (“VAT”) The Company is a general taxpayer and
is subject to applicable VAT tax rate of 6% . VAT is reported as a deduction to revenue when incurred. Entities that are VAT general taxpayers
are allowed to offset qualified input VAT tax paid to suppliers against their output VAT liabilities.
(o) Earnings per Share The Company computes earnings per share
(“EPS”) in accordance with ASC 260, “Earnings per Share” (“ASC 260”). ASC 260 requires companies with
complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common
shares outstanding for the period. Diluted presents the dilutive effect on a per share basis of potential common shares (e.g., convertible
securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later.
Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are
excluded from the calculation of diluted EPS. As of December 31, 2021 and 2020, there were no dilutive shares.
(p) Statutory reserve In accordance with the Company Laws of
the PRC, the PRC Entities registered as PRC domestic companies must make appropriations from its after-tax profit as determined under
the PRC GAAP to non-distributable reserve funds including a statutory surplus fund and a discretionary surplus fund. The appropriation
to the statutory surplus fund must be at least 10% of the after-tax profits as determined in accordance with the legal requirements in
the PRC. Appropriation is not required if the surplus fund has reached 50% of the registered capital of the respective company. Appropriation
to the discretionary surplus fund is made at the discretion of the respective company. The use of the statutory reserves are
restricted to the off-setting of losses or increasing capital of the respective company. All these reserves are not allowed to be transferred
to their investors in terms of cash dividends, loans or advances, nor can they be distributed except under liquidation.
(q) Comprehensive income Comprehensive income consists of two
components, net income and other comprehensive income. The foreign currency translation gain or loss resulting from translation of the
financial statements expressed in RMB to US$ is reported in other comprehensive income in the consolidated statements of comprehensive
income.
(r) Statement of Cash Flows In accordance with ASC 230, “Statement
of Cash Flows”, cash flows from the Company’s operations are formulated based upon the local currencies using the average
exchange rate in the period. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not
necessarily agree with changes in the corresponding balances on the balance sheets.
(s) Related parties and transactions The Company identifies related parties,
and accounts for, discloses related party transactions in accordance with ASC 850, “Related Party Disclosures” and other relevant
ASC standards. 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. Transactions between related parties
commonly occurring in the normal course of business are considered to be related party transactions. Transactions between related parties
are also considered to be related party transactions even though they may not be given accounting recognition. While ASC does not provide
accounting or measurement guidance for such transactions, it nonetheless requires their disclosure.
(t) Deferred initial public
offering (“IPO”) costs The Company complies with the requirement
of the ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (“SAB”) Topic 5A — “Expenses of Offering”. Deferred
offering costs consist of underwriting, legal and other expenses incurred through the balance sheet date that are directly related to
the intended IPO. Deferred offering costs will be charged to shareholders’ equity upon the completion of the IPO. Should the IPO
prove to be unsuccessful, these deferred costs, as well as additional expenses to be incurred, will be charged to operations. As of December
31, 2021 and 2020, the Company capitalized $ Nil
(u) Recent Adopted Accounting Pronouncements In August 2018, the FASB Accounting
Standards Board issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements
for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements.
ASU 2018-13 is effective for all entities for fiscal years beginning after December 15, 2019, with early adoption permitted for any removed
or modified disclosures. The removed and modified disclosures were adopted on a retrospective basis and the new disclosures were adopted
on a prospective basis. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
(v) Recent Accounting Pronouncements
Not Yet Adopted In June 2016, the FASB issued ASU No.
2016-13, “Financial Instruments—Credit Losses” (“ASU 2016-13”), which introduces new guidance for credit
losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on
certain types of financial instruments, including, but not limited to, trade and other receivables, held-to-maturity debt securities,
loans and net investments in leases. The new guidance also modifies the impairment model for available-for-sale debt securities and requires
the entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. The
standard also indicates that entities may not use the length of time a security has been in an unrealized loss position as a factor in
concluding whether a credit loss exists. The ASU is effective for Emerging Growth Company (“EGC”) for fiscal years beginning
after December 15, 2022 and interim periods within those fiscal years and effective for public companies excluding EGC and smaller reporting
companies for fiscal years beginning after December 15, 2019. Early adoption is permitted for all entities for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. The Group is in the process of evaluating the impact of
ASU 2016-13 on its consolidated financial statements. In January 2017, the FASB issued guidance
which simplifies the current two-step goodwill impairment test by eliminating Step two of the test. The guidance requires a one-step impairment
test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the
amount by which the carrying amount exceeds the reporting unit’s fair value, if any. This guidance is effective for EGC for fiscal
years beginning after December 15, 2022 and interim periods within those fiscal years and effective for public companies excluding EGC
and smaller reporting companies for fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early
adoption is permitted for the interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Group
is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures. In December 2019, the FASB issued ASU
No. 2019-12 (“ASU 2019-12”), Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies the accounting for income
taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and
simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments
in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all
other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years
beginning after December 15, 2022. Early adoption of the amendments is permitted. The Group is not early adopting the standard and it
is in the process of evaluation the impact of adoption of this new standard on its consolidated financial statements. Other accounting standards that have
been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated
financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or
are unrelated to its consolidated financial condition, results of operations, cash flows or disclosures. |
