ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward
Looking Statements
This
section of the report includes a number of forward-looking statements that reflect our current views with respect to future events
and financial performance. Forward-looking statements are often identified by words like: believe, expect, estimate, anticipate,
intend, project and similar expressions, or words which, by their nature, refer to future events. Actual results could differ
materially from those anticipated in these forward looking statements as a result of any number of factors, including those set
forth in this Quarterly Report, and in the Company’s most recent Annual Report on Form 10-K filed on February 13, 2018.
All
written and oral forward-looking statements made in connection with this Quarterly Report on Form 10-Q that are attributable to
us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties
that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements, which apply only
as of the date of this quarterly report. These forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results or our predictions.
Overview
The
following discussion is an overview of the important factors that management focuses on in evaluating our businesses, financial
condition and operating performance and should be read in conjunction with the financial statements included in this Quarterly
Report on Form 10-Q.
The
Company is subject to a number of risks similar to other companies in the medical device industry. These risks include but are
not limited to rapid technological change, uncertainty of market acceptance of our products, uncertainty of regulatory approval,
competition from substitute products and larger companies, the need to obtain additional financing, compliance with government
regulation, protection of proprietary technology, product liability, and the dependence on key individuals.
Our
Business
We
are engaged in the business of designing, developing, manufacturing and marketing of biomaterial internal fixation devices. We
hold one medical device permit from the China Food and Drug Administration (“CFDA”) for our product - polymer orthopaedic
internal fixation screws and two patents issued by the State Intellectual Property Office of the P.R.C. (“SIPO”).
Our polyamide materials, their uses and manufacturing processes are protected by Patent No. ZL971190739. A new patent, No. ZL201410647464.1
titled “Bone Fracture Plate Made of High Polymer Materials” was granted to us in January 2018. Our polyamide materials
are used in producing screws, binding wires, rods and related products. These products are used in a variety of applications including
orthopedic trauma, sports related medical treatment, or cartilage injuries, and reconstructive dental procedures. At this time,
our company is the sole patent holder and market permit holder of PA technologies in China, as well as the only company currently
engaged in clinical trials, manufacturing and marketing for PA orthopaedic internal fixation devices in the PRC. Our products
are made of a very unique material called PA6-P(MMA-CO-NVP)-HA (“PA”). Our PA products, such as screws, binding wires,
rods, suture anchors and rib-pins consist of enhanced fibers and high molecular polymers which are designed to facilitate quick
healing of complex fractures in many areas of the human skeletal system.
Our
products offer a number of significant advantages over existing metal implants and the first generation of degradable implants
(i.e. PLLA) for patients, surgeons and other customers including:
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1.
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A
notably reduced need for a secondary surgery to remove implant due to post-operative complications, therefore avoiding unnecessary
risk and expense on all patient care;
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2.
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Enhancing
the performance of the materials by manufacturing them to be easily fitted to each patient, forming an exact fit;
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3.
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Improving
the biological activity of materials. Clinical trial results have shown that PA implants promote a progressive shift of load
to the new bone creating micro-motion and thereby avoiding bone atrophy due to ‘stress shielding’;
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4.
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Reducing
the chance of post-operative infection;
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5.
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Stimulate
bone tissues to facilitate effective biological integration, benefitting the regeneration of bone;
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6.
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Ease
of post-operative care i.e. no distortion during x-ray imaging;
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7.
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Simple
and cost-effective to manufacture.
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Our
products are designed to replace the traditional internal fixation device made of stainless steel and titanium and overcome the
limitations of previous generations of products such as PLA and PLLA. Our laboratory statistics show that our PA products have
a higher mechanical strength, last longer in degradation ratio and are more evenly absorbed form outer layer inwards as compared
with similar materials such as PLA and PLLA. Thus PA allows increased restoration time for bone healing and re-growth. The Company’s
polymer orthopaedic internal fixation screws received approval from the China Food and Drug Administration (“CFDA”)
in April 2018.
CFDA
Application Process and Approval for PA Screws
The
Company first submitted its application for PA Screws to the CFDA in 2008. The application has been withheld by the CFDA pending
additional clinical trial cases. This is due to the amended CFDA regulations, which unlike previous regulations require the applicant
to specify the position on the body where the clinical trial is carried out. Our amended CFDA application has specified the ankle
fracture as the body part of our clinical trial. This is because bones around this part carry most of the body weight.
Due
to the uniqueness of our material, there were no established CFDA Product Standards that we could follow during our application
process for our PA Screws. To establish our own Product Standards, the Company had been carrying out extra tests. The Company
submitted its Product Standards and supplementary reports to the CFDA in 2014. In December 2016, the Company received a notice
from the CFDA requesting supplementary report as part of the review process. The Company completed the supplementary report and
submitted it to the CFDA in June 2017.
In
April 2018, the Company’s application for its PA Screws was approved by the CFDA in China (Medical Device Certification
Number: 20183460133).
Process
of Human Trials
As
of July 31, 2018, for medical study and comparison purpose, the Company has completed a total of 83 successful clinical human
trial cases, including 71 cases on ankle fractures and 57 successful PA Binding Wire trial cases. We have been conducting human
trials at the 6 state level hospitals recognized by CFDA for clinical trials in different cities throughout China; including Nanchang,
Changsha, Luoyang, Nanning and Tianjin. The cities and provinces where our clinical trial hospitals are based will be the initial
target regions on our marketing plan. These regions are both densely populated and have experienced high or above medium economic
growth. The clinical trials for the Company’s PA Screws have been completed with 100 percent success rate. Having gained
CFDA approval for PA Screws, the Company is planning to start clinical trials on series of orthopaedic products the Company has
developed using the same unique biomaterial.
Government
Regulation
Medical
implant devices/products manufactured or marketed by the Company in China are subject to extensive regulations by the CFDA. Pursuant
to the related laws and acts, as amended, and the regulations promulgated there under (the “CFDA Regulations”), the
CFDA regulates the clinical testing, manufacture, labeling, distribution and promotion of medical devices. The CFDA also has the
authority to request repair, replacement, or refund of the cost of any device manufactured or distributed by the Company.
Under
the CFDA Regulations, medical devices are classified into three classes (class I, II or III), the basis of the controls deemed
necessary by the CFDA to reasonably assure their safety and efficacy. Under the CFDA’s regulations, class I devices are
subject to general controls (for example, labeling and adherence to Good Manufacturing Practices (“GMP”) requirements)
and class II devices are subject to general and special controls. Generally, class III devices are those which must receive premarket
approval by the CFDA to ensure their safety and efficacy (for example, life-sustaining, life-supporting and certain implantable
devices, or new devices which have not been found substantially equivalent to legally marketed class I or class II devices). The
Company is classified as a manufacturer of class III medical devices. Current CFDA enforcement policy prohibits the marketing
of approved medical devices for unapproved uses.
Before
a new device can be introduced into the market in China, the manufacturer generally must obtain CFDA marketing clearance through
clinical trials. Since the Company is classified as a manufacturer of Class III medical devices, the Company must carry out all
clinical trials in pre-selected CFDA approved hospitals.
Manufacturers
of medical devices for marketing in China are required to adhere to GMP requirements. Enforcement of GMP requirements has increased
significantly in the last several years and the CFDA has publicly stated that compliance will be more strictly scrutinized. From
time to time the CFDA has made changes to the GMP and other requirements that increase the cost of compliance. Changes in existing
laws or requirements or adoption of new laws or requirements could have a material adverse effect on the Company’s business,
financial condition and results of operations. There can be no assurance that the Company will not incur significant costs to
comply with applicable laws and requirements in the future or that applicable laws and requirements will not have a material adverse
effect upon the Company’s business, financial condition and results of operations.
Regulations
regarding the development, manufacturing and sale of the Company’s products are subject to change. The Company cannot predict
the impact, if any, that such changes might have on its business, financial condition and results of operations.
Results
of Operations
The “Results of Operations” discussed
in this section merely reflect the nine and three months ended July 31, 2018 and 2017:
Nine
Months Ended July 31, 2018 and 2017
Revenue
The
Company did not have revenue for both of nine months ended July 31, 2018 and 2017.
Cost
of Goods Sold
The
Company did not have cost of goods sold for both of nine months ended July 31, 2018 and 2017.
Operating
Expenses
The
operating expenses for the nine months ended July 31, 2018 and 2017 was $404,432 and $292,200. Compare to 2017, 2018 was increased
by $112,232 or 38.41%. This increment was a result of $116,600 increase in general and administrative expenses. The depreciation
and research and development expenses did not have significant changes.
Income
(Loss) from Operations
Since
the Company did not have revenue or cost of goods sold, the operating expenses were equal to the net loss from operations. Details
of changes were same as operating expenses.
Other
Income (expenses)
Other
expenses for the nine months ended July 31, 2018 and 2017 was $242,768 and $215,257. Compare to 2017, 2018 was increased by $27,511
or 12.78%.The major changes were the increase of $43,241 in interest paid to stockholder and related parties and offset with reduction
of $8,176 in interest paid to third party and $7,042 in other expenses. Other items had no significant changes.
Net
Income (Loss)
Net
loss for the nine months ended July 31, 2018 and 2017 was $647,200 and $507,457. Compare to 2017, 2018 was increased by $139,743
or 27.54%.The major changes were the increase of $112,232 in operating expenses and the increase of $27,511 in other expenses.
Since the Company did not have revenue or cost of goods sold, the net loss changes were reflected by the changes in operating
expenses and other expenses.
Three
Months Ended July 31, 2018 and 2017
Revenue
The
Company did not have revenue for both of three months ended July 31, 2018 and 2017.
Cost
of Goods Sold
The
Company did not have cost of goods sold for both of three months ended July 31, 2018 and 2017.
Operating
Expenses
The
operating expenses for the three months ended July 31, 2018 and 2017 was $136,219 and $86,778. Compare to 2017, 2018 was increased
by $49,441 or 56.97%. This increment was a result of $46,491 increase in general and administrative expenses. The depreciation
and research and development expenses did not have significant changes.
Income (Loss) from Operations
Since the Company did not have revenue
or cost of goods sold, the operating expenses were equal to the net loss from operations. Details of changes were same as operating
expenses.
Other Income (expenses)
Other expenses for the three months ended
July 31, 2018 and 2017 was $79,619 and $83,231. Compare to 2017, 2018 was decreased by $3,612 or 4.34%.The major changes were
the increase of $15,257 in interest paid to stockholder and related parties and offset with reduction of $3,441 in interest paid
to third party and $15,318 in other expenses. Other items had no significant changes.
Net Income (Loss)
Net loss for the three months ended July
31, 2018 and 2017 was $215,838 and $170,009. Compare to 2017, 2018 was increased by $45,829 or 26.95%.The major changes were the
increase of $49,441 in operating expenses and offset by the reduction of $3,612 in other expenses. Since the Company did not have
revenue or cost of goods sold, the net loss changes were reflected by the changes in operating expenses and other expenses.
The information and results of the
Company for the period from September 25, 2002 (Shenzhen Changhua’s date of inception) to July 31, 2018 and 2017 are
discussed in details as following:
Revenues
The
Company received market permit for one of its product in China in April 2018 and is in its early marketing stage. The Company
does not have any revenue and is expecting its first revenue from sales of its product in Q4 2018. The management team is continuously
looking for fundraising possibilities for product improvement, machinery upgrades, facility expansions, continuous research and
development, and sales and marketing.
Our
facility is located in Shenzhen China, which is built to meet the GMP standards. Our facility covers about 865 square meters,
which includes the combined facilities of offices, laboratories, and workshops. There is one production line for the PA Screw
and another production line for the PA Binding Wire. The annual production capabilities of each production line are 100,000 pieces
for PA Screw, and 240,000 packs for the PA Binding Wires. Both production lines, at their maximum production capacity, are capable
of generating approximately $32,000,000 in annual revenue.
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Estimate current production lines in full capacity
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Output Quantity (Max.)
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Price at ex-factory ($)
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Total Turnover ($)
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PA Screw
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100,000
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(piece)
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200
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20,000,000
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PA Binding Wire
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240,000
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(pack)
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50
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12,000,000
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Total:
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32,000,000
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The
Company will market its products through a hybrid sales force comprised of a managed network of independent regional distributors/sales
agents (80%) and direct sales representatives (20%) in China.
There
are two ways the Company will generate revenue, 1) through our nationwide and regional distributors and 2) through our direct
sales channels.
China’s
Marketing Analysis and Sales Strategy
:
We
have established long term relationships with many hospitals and national distributors in China. Ms. Hui Wang, the Company’s
CEO, has over 25 years’ sales experience in medical distribution. She will be in charge of our sales programs. Professor
Shangli Liu, our chief medical advisor, is one of the highest ranked orthopedic doctors in China as well as being highly renowned
in the rest of the world. He will assist the Company in nationwide product promotion and joint projects with associated academic
institutions and medical schools.
During
product development and clinical trial stages, we developed close relationships with many major national hospitals. We expect
these relationships to boost our revenue generation following CFDA final approval..
China’s
market for PA devices depends on 3 major conditions:
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Patients
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Advanced technology level
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Performance and price of the materials
The
demand for internal fixation medical devices has rapidly increased during the last decade. According to China Health Care Year
Book 2013, the total revenue of Chinese orthopaedic hospitals in 2013 was US$1.28 billion with over 11.5 million patients. From
2009 to 2013, the market size of China’s orthopaedic devices has grown from US$1.1 billion to US$1.92 billion, and it is
estimated to reach US$4 billion in 2020. China has overtaken Japan as the second largest market in the world. The Chinese market
size for trauma treatment implant devices such as our PA Screw and PA Wire was US$1.88 billion in 2013 and US$2.12 billion in
2014 with a growth rate of 12.7%, it is estimated to grow to US$3.02 billion in 2017 and reach US$3.17 billion in 2018 with a
growth rate of 11.6%9. (Source: Shenwan Hongyuan Securities research report).
The
Company has advantages and more opportunities over other competitors due to:
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We are the only company received approval for our unique PA biomaterial by CFDA in China.
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No other similar patent registrations in China.
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We are the only company qualified and permitted to perform PA clinical trials by CFDA to the best of our knowledge.
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We have a timing advantage over other companies in China which would have to go through the preclinical testing for the CFDA permit
on clinical trials.
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Under existing regulations by CFDA, it will take at least 3-5 years for clinical trials of new materials.
Number
of Hospitals at the end of June 2018 Statistic and Census report by the National Health and Family Planning Commission of the
People’s Republic of China.
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Statistic and Census report by National Health and Family Planning Commission of the People’s
Republic of China
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(June 2018)
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June 2018
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June 2017
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Increase / (Decrease)
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Total No. of Hospitals
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31,710
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29,719
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1,991
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Public Hospital
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12,121
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12,566
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(445
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)
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Private Hospital
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19,589
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17,153
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2,436
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Hospital Rating
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AAA
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2,439
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2,286
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153
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AA
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8,569
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8,118
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451
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A
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10,210
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9,461
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749
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In
general, technological advancements and the marketing potential within Asia are the biggest factors in driving significant growth
within the global orthopedic devices market. Another major factor that positively influences this market is the growing number
of aging baby boomers with active lifestyles. This sector represents a large portion of the total population.
Research
and Development
The
Company has developed five proprietary polymer fixation implant product lines, including screws, pins, tacks, rods and binding
wires, which provide an alternative to metal implants and overcome the limitations of first generation polymer fixation devices.
The Company’s product range will ultimately cover the full gamut of components featuring PA macromolecule polymer materials
for implantation, including human orthopaedic and dental applications, as well as veterinary applications. We expect research
and development expenses to grow as we continue to invest in basic and advanced research, clinical trials, product development
and in our intellectual property.
Although
there are substantial research and development (R&D) activities within the Company and, the Company regards R&D activity
as the key to maintain its technological advantage and innovation, there can be no assurance that the Company will be able to
obtain any further clearances or approvals, if required, to market its products for their intended uses on a timely basis, if
at all. Moreover, regulatory approvals, if granted, may include significant limitations on the indicated uses for which a product
may be marketed. Delays in the receipt of or the failure to obtain such clearances or approvals, the need for additional clearances
or approvals, the loss of previously received clearances or approvals, unfavorable limitations or conditions of approval, or the
failure to comply with existing or future regulatory requirements could have a material adverse effect on the Company’s
business, financial condition and results of operations.
Pre-Market
Research
The
Company has been conducting Pre-Market Research before its PA Screws application was approved by the CFDA in April 2018. The research
is intended to estimate the potential market success of the company’s products that can be expected. The research also beyond
the Company’s initial market - China, and covers international markets. Based on the results of our Pre-Market Research
and the positive feedbacks we have received from trade shows and industrial conferences, it is the Company’s intention to
apply for additional international regulatory approvals in due course.
Finance
Costs
As
of July 31, 2018 and October 31, 2017, a stockholder and four related parties had loaned a total of $4,896,876 and $4,349,975
respectively to the Company as unsecured loans repayable on demand and interest is charged at 7% per annum on the amount due.
Total interest expenses on advances from a stockholder and the related parties accrued for the three and nine months ended July
31, 2018 and 2017 were $73,063, $57,788, $212,902 and $169,661 respectively.
As
of July 31, 2018 and October 31, 2017, the Company owed $301,656 and $321,420 respectively to the directors for advances made
on an unsecured basis, repayable on demand. Total imputed interest expenses on advances from the directors, calculated at 5% per
annum, recorded as additional paid-in capital amounted to $3,662, $3,799, $11,303 and $11,819 for the three and nine months ended
July 31, 2018 and 2017 respectively.
Net
Loss
The
net loss attributable to common stockholders for the three and nine months ended July 31, 2018 and 2017 were $215,838, $170,009,
$647,200 and $507,457 respectively. We do not have any revenue from inception to July 31, 2018 but have to incur operating expenses
for the upkeep of the Company and the clinical trials.
Liquidity
and Capital Resources
We
had a working capital deficit of $5,586,496 and $5,055,542 as of July 31, 2018 and October 31, 2017 respectively. Our working
capital deficit is due to the fact that we received the CFDA approval for one product in April 2018 and we are in the process
to produce, market and sell our product in China. We had no revenues during the period and that our sole source of financing is
loans from our related parties and stockholders. Meanwhile, we have been upgrading our facilities and continuing R&D works.
Cash
Flows
Net
Cash Used in Operating Activities
Net
cash used in operating activities was $601,678 and $331,618 in the nine months ended July 31, 2018 and 2017 respectively. This
amount was attributable primarily to the net loss after adjustment for non-cash items, such as depreciation, loss on disposal
of property and equipment, imputed interest on advances from directors, and others like charges in other receivables and prepaid
expenses and other payables and accrued expenses.
Net
Cash Used in Investing Activities
We
recorded $50,386 net cash used and $1,202 net cash from in investing activities in the nine months ended July 31, 2018 and 2017
respectively. This amount reflected purchases of property and equipment, primarily for research and development to our facilities.
Net
Cash Provided by Financing Activities
Net
cash provided by financing activities in the nine months ended July 31, 2018 and 2017 was $660,919 and $333,370 respectively,
which represented advances from a stockholder, directors and related parties, loan repayment to directors and advances to a related
company.
Operating
Capital and Capital Expenditure Requirements
Our
ability to continue as a going concern and support the commercialization of current products is dependent upon our ability to
market our product while obtaining additional financing in the near term. We anticipate that such funding will be in the form
of equity financing from sales of our common stock. However, there is no assurance that we will be able to raise sufficient funding
from the sale of our common stock to fund our business plan should we decide to proceed. We anticipate continuing to rely on advances
from our related parties and stockholders in order to continue to fund our business operations.
We
believe that our existing cash, cash equivalents at July 31, 2018, will be insufficient to meet our cash needs. Our minimum cash
requirement for the next 12 months is projected to be $600,000. This amount may increase if we decide to start clinical trials
on new products. Once we start production and marketing of our PA Screws, our revenue will cover our basic expenditures. Otherwise,
we will continue to rely on external investments and shareholder’s loans to meet our cash needs. The management is actively
pursuing additional funding and strategic partners, which will enable the Company to implement our business plan, business strategy,
to continue research and development, clinical trials or further development that may arise.
We
intend to spend more to support the commercialization of current products and on research and development activities, including
new products development, regulatory and compliance, clinical studies, and the enhancement and protection of our intellectual
property portfolio.
OFF-BALANCE
SHEET ARRANGEMENTS
We
do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to our investors.
CRITICAL
ACCOUNTING POLICIES
The
preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate
our estimates, including but not limited to those related to income taxes and impairment of long-lived assets. We base our estimates
on historical experience and on various other assumptions and factors that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Based on our ongoing review, we plan to adjust to our judgments and estimates where facts and circumstances
dictate. Actual results could differ from our estimates.
We
believe the following critical accounting policies are important to the portrayal of our financial condition and results and require
our management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the
effect of matters that are inherently uncertain.
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1.
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Property
and equipment
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Property
and equipment are stated at cost, less accumulated depreciation. Expenditures for additions, major renewals and betterments are
capitalized and expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation
is provided on a straight-line basis, less estimated residual value over the assets estimated useful lives. The estimated useful
lives of the assets are 5 years.
In
accordance with FASB Codification Topic 360 (ASC Topic 360), “Accounting for the impairment or disposal of Long-Lived Assets”,
long-lived assets and certain identifiable 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. For purposes of evaluating
the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows related to the
long-lived assets. The Company reviews long-lived assets to determine that carrying values are not impaired.
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3.
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Fair
value of financial instruments
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FASB
Codification Topic 825 (ASC Topic 825), “Disclosure About Fair Value of Financial Instruments,” requires certain disclosures
regarding the fair value of financial instruments. The carrying amounts of other receivables and prepaid expenses, other payables
and accrued liabilities and due to a stockholder, directors and related parties approximate their fair values because of the short-term
nature of the instruments. The management of the Company is of the opinion that the Company is not exposed to significant interest
or credit risks arising from these financial statements.
The
Company accounts for income taxes under The Financial Accounting Standards Board (FASB) Codification Topic 740-10-25 (“ASC
740-10-25”). Under ASC 740-10-25, 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 bases.
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. Under ASC 740-10-25, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized as income in the period included the enactment date.
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5.
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Research
and Development
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Research
and development costs related to both present and future products are expensed as incurred.
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6.
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Foreign
currency translation
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The
reporting currency of the company’s financial statements is the US dollar. The financial statements of the Company’s
subsidiary denominated in currencies other than the US dollar are translated into US dollars using the closing rate method. The
balance sheet items are translated into US dollars using the exchange rates at the respective balance sheet dates. The capital
and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses
items are translated at the average exchange rate for the year. All exchange differences are recorded within equity.
RECENT
ACCOUNTING PRONOUNCEMENTS
Business
Combination: Clarifying the Definition of a Business
In
January 2017, the FASB issued ASU No. 2017-1 “Topic 805, Business Combinations: Clarifying the Definition of a Business”.
The amendments in this update provide a screen to determine when a set is not a business. The screen requires that when substantially
all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group
of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further
evaluated. The amendments in this update affect all reporting entities that must determine whether they have acquired or sold
a business. Public business entities should apply the amendments in this update to annual periods beginning after December 15,
2017, including interim periods within those periods. All other entities should apply the amendments to annual periods beginning
after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The Company does not expect
the adoption of ASU 2017-1 to have a material impact on its consolidated financial statements.
Simplifying
the Test for Goodwill Impairment
In
January 2017, the FASB issued ASU No. 2017-4 “Topic 350: Intangibles-Goodwill and Other: Simplifying the Test for Goodwill
Impairment.” The amendments in this update eliminate step two of the goodwill impairment test and specifies that goodwill
impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount
of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets should be disclosed. The amendments
in this update are effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December
15, 2019; early adoption is permitted. The Company does not expect the adoption of ASU 2017-4 to have a material impact on its
consolidated financial statements.
Share-based
Compensation
In
May 2017, the FASB issued guidance on changes to terms and conditions of share-based payment awards. The amendment provides guidance
about which changes to terms or conditions of a share-based payment award require an entity to apply modification accounting.
The guidance is effective for the fiscal year beginning on January 1, 2018, including interim periods within that year.
In
June 2018, the scope of Topic 718 has been expanded to include share-based payment transactions for acquiring goods and
services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance
on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards
vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment
transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing
share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively
provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of
a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in this Update are effective for
public business entities for fiscal years beginning after December 15, 2018 and after December 15, 2019 for all other entities.
Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606.
The
Company does not anticipate that adoption of these guidance will have a material impact on its consolidated financial statements.
Revenue
Recognition
In
May 2014, the FASB issued guidance on revenue from contracts with customers that will supersede most current revenue recognition
guidance, including industry-specific guidance. Under the new standard, a good or service is transferred to the customer when
(or as) the customer obtains control of the good or service, which differs from the risk and rewards approach under current guidance.
The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions
include capitalization of certain contract costs, consideration of the time value of money in the transaction price and allowing
estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance
also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from
an entity’s contracts with customers. In March, April and May 2016, the FASB issued three additional updates regarding identifying
performance obligations and licensing, certain principal versus agent considerations and various narrow scope improvements based
on practical questions raised by users. In September 2017, the FASB issued additional amendments providing clarification and implementation
guidance. The guidance may be adopted through either retrospective application to all periods presented in the financial statements
(full retrospective approach) or through a cumulative effect adjustment to retained earnings at the effective date (modified retrospective
approach). The guidance is effective for the fiscal periods beginning on January 1, 2018.
Leases
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modifies lease accounting
for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing
key information about leasing arrangements. The new standard, as amended by ASU 2018-01 and ASU 2018-11, is effective for annual
periods beginning after December 15, 2018 on a modified retrospective basis. The Company will adopt ASU 2016-02 in its first quarter
of the year ending October 31 2020. The Company expects its leases designated as operating leases in Note 6, “Commitments
and Contingencies,” will be reported on the consolidated balance sheets upon adoption. However, the ultimate impact of adopting
ASU 2016-02 will depend on the lease terms as of the adoption date.
The
Company has reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoptions
of any such pronouncements may be expected to cause a material impact on the financial condition or the results of operations.