Notes to Financial Statements
December 31, 2015
NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS
HK Graphene Technology Corp., formerly known as Angstron Holdings Corporation (the Company), was incorporated on June 28, 2006 in the state of Nevada under the name Loreto Corporation. The Company pursued its original business plan to create, market and sell greeting cards to wholesalers and retail customers in shopping malls in its own planned retail shops. However, in 2008, the Company decided to redirect its business focus and strategy toward identifying and pursuing business opportunities in the mining sector in South America, and specifically, in Peru. The Company later changed its name to Loreto Resources Corporation, and subsequently to HK International Group Inc., and subsequently to Angstron Holdings Corporation. On July 31, 2015 the Company changed its name to HK Graphene Technology Corporation. As of December 31, 2015, American Compass, Inc. owned 99.9% of the company.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements as of December 31, 2015 and 2014 and for the years then ended have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).
Use of Estimates and Assumptions
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash
Cash equivalents are comprised of certain highly liquid investments with maturities of three months or less when purchased. The Company's cash are with local and national banking institutions and subjected to current FDIC insurance limits of $250,000 per banking institution. As of December 31, 2015 and December 31, 2014, the Company bank balances in these bank accounts exceeded the insured amount by $1,137,807 and $2,679,764, respectively. The Company has not experienced any losses related to this concentration of risk. There are no cash equivalents as of December 31, 2015 and 2014.
Basic Earnings per Share
Basic and diluted earnings or loss per share (EPS) amounts in the financial statements are computed in accordance with ASC Topic 260 10
Earnings per Share,
which establishes the requirements for presenting EPS. Basic EPS is based on the weighted average number of common shares outstanding. Diluted EPS is based on the weighted average number of common shares outstanding and dilutive common stock equivalents. Basic EPS is computed by dividing net income/loss available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator during the period. Weighted average number of shares used to calculate basic and diluted loss per share is considered the same as the effect of dilutive shares is anti-dilutive.
Fair Value of Financial Instruments
The Company estimates the fair value of financial instruments using the available market information and valuation methods. Considerable judgment is required in estimating fair value. Accordingly, the estimates of fair value may not be indicative of the amounts the Company could realize in a current market exchange. As of December 31, 2015 and December 31, 2014, carrying value of assets and liabilities approximated fair value due to the short-term nature and maturity of these instruments.
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Recent Accounting Pronouncements
In June 2014, the FASB issued ASU 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements. ASU 2014-10 eliminates the distinction of a development stage entity and certain related disclosure requirements, including the elimination of inception-to-date information on the statements of operations, cash flows and stockholders' equity. The amendments in ASU 2014-10 will be effective prospectively for annual reporting periods beginning after December 15, 2014, and interim periods within those annual periods, however early adoption is permitted. The Company adopted ASU 2014-10 during the quarter ended September 30, 2014, thereby no longer presenting or disclosing any information required by Topic 915.
Income Taxes
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their perspective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the 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 that includes the enactment date. Valuation allowances are recorded, when necessary, to reduce deferred tax assets to the amount expected to be realized.
As a result of the implementation of certain provisions of ASC 740, Income Taxes (ASC 740), which clarifies the accounting and disclosure for uncertainty in tax position, as defined, ASC 740 seeks to reduce the diversity in practice associated with certain aspect of the recognition and measurement related to accounting for income taxes. We adopted the provisions of ASC 740 as of June 28, 2006, and have analyzed filing positions in each of the federal and state jurisdictions where we are required to file income tax returns, as well as open tax years in these jurisdictions. We have identified the U.S. federal and Nevada as our major tax jurisdictions and generally, we remain subject to Internal Revenue Service examination of our 2007 through 2014 U.S. federal income tax returns. However, we have certain tax attribute carryforwards which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized.
We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to our financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. In addition, we did not record a cumulative effect adjustment related to the adoption of ASC 740. Our policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes. We have no interest or penalties as of December 31, 2015 and 2014.
NOTE 3. GOING CONCERN
During the period ended December 31, 2015, the Company has not generated any revenue and therefore has been unable to generate cash flows sufficient to support its operations and has been dependent on debt and equity financing. In addition to negative cash flow from operations, the Company has experienced recurring net losses, and has an accumulated deficit of $7,496,378 as of December 31, 2015.
These factors raise substantial doubt about the Companys ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Going forward, the Companys plan is to acquire other assets or business operations that will maximize shareholder value.
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NOTE 4. STOCK TRANSACTIONS
Debt Conversion Transaction
On March 8, 2013, the Company entered into Promissory Note Conversion Agreements with each of the holders of the Companys outstanding convertible promissory notes (the Notes), to convert an aggregate of $430,538 of principal and accrued but unpaid interest due under the Notes, representing all of the Companys outstanding indebtedness for money borrowed at March 8, 2013, into a total of 57,405,074 shares (pre-Reverse Stock Split) of the Corporations common stock, $0.001 par value per share (Common Stock), at a conversion rate of $0.0075 per share.
Series A Preferred Stock Issuance
On March 8, 2013, the Company entered into a Series A Preferred Stock Purchase Agreement with Commonwealth Investments, LLC, a California limited liability company (the Series A Purchaser), pursuant to which, among other items, on March 11, 2013, the Company sold to the Series A Purchaser, and the Series A Purchaser purchased from the Company, 1,300 shares of the Companys Series A Preferred Stock, at the price of $100 per share, for an aggregate purchase price of $130,000, with total offering costs of $37,500. The Series A Preferred Stock is convertible into an aggregate of 127,703,396 shares (post-Reverse Stock Split) of the Companys Common Stock.
Series B Preferred Stock Issuance
On December 7, 2014, the Company entered into a Series B Preferred Stock Purchase Agreement with an accredited investor, Yunfeng Lu (the Series B Purchaser), pursuant to which, among other items, on December 19. 2014, the Company sold to the Series B Purchaser, and the Series B Purchaser purchased from the Company, 3,683 shares of the Companys Series B Preferred Stock, at the price of $91.41 per share, for an aggregate purchase price of $336,667. The Series B Preferred Stock is convertible into Common Stock as of December 7, 2015.
On October 1, 2015, in accordance with the Purchase Agreement between Yunfeng Lu (the Seller), and American Compass Inc., a California corporation (the Purchaser), Seller sold to the Purchaser 3,683 shares of the Companys Series B Convertible Preferred Stock (the Transaction) for an aggregate purchase price of $336,667. As a result of the closing of the Transaction, the Purchaser became the beneficial owner of approximately 99.9% of the Companys issued and outstanding capital stock on a fully-diluted as-converted basis.
Reverse Stock Split
Effective April 16, 2013, the Companys board of directors approved a reverse split of the Companys Common Stock on the basis of one share for each 100 shares issued and outstanding (the Reverse Stock Split). The total number of authorized shares was also increased from 310,000,000 shares, consisting of 300,000,000 shares of Common Stock and 10,000,000 shares of preferred stock, 1,300 shares of which have been designated as Series A Preferred Stock, to 3,000,000,000 shares, consisting of 2,000,000,000 shares of Common Stock and 1,000,000,000 shares of preferred stock, 1,300 shares of which have previously been designated as Series A Preferred Stock.
All shares of Common Stock presented in these financial statements and accompany notes have been retroactively adjusted to reflect the Reverse Stock Split.
NOTE 5. DUE TO RELATED PARTY
During the year ended December 31, 2014, the affiliate company, American Compass, Inc. (ACI) has paid the Companys operating expenses, including legal fees, filing fees and auditing fees. The expenses paid by ACI during the period ended December 31, 2014 totaled $61,974. As of December 31, 2014, the balance of accounts payable to ACI totaled $143,136.
During the year ended December 31, 2015, ACI has continued to pay the Companys operating expenses. The expenses paid by ACI during the period ended December 31, 2015 totaled $5,287. As of December 31, 2015, the balance due to ACI totaled $148,424.
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NOTE 6. LOAN PAYABLE RELATED PARTY
On September 30, 2013, Lianyungang Hybrid Kinetic New Energy Co., Ltd. (LYG), a related party, made a loan to the Company in the amount of $4,000,000. This is an unsecured, 2% interest bearing loan due on October 1, 2016. The Company intends to use the proceeds from the loan for the development of grapheme production technology.
On February 25, 2015, the Company entered into an Investment Agreement (the Investment Agreement) with Lianyungang Hybrid Kinetic New Energy Limited, Inc. (LYG Inc.), a related party, pursuant to which the Company agreed to (a) issue to LYG Inc. 537,418,480 shares of the Companys Common Stock at a per share price of $0.0186 in exchange for $10,000,000, payable by (a) a cash payment of $6,000,000 and (b) the cancellation a certain promissory note issued by the Company to LYG Inc. with a principal amount of $4,000,000, as more fully described in the Current Report on Form 8-K filed on February 27, 2015. The transaction was consummated on April 6, 2016, on which date the Company issued to LYG Inc. 537,418,480 shares of Common Stock in exchange for a cash payment of $6,000,000 the cancellation of the $4,000,000 note. Immediately following the transaction, LYG Inc. owned 99.8% of the issued and outstanding Common Stock of the Company.
NOTE 7. LOANS TO RELATED PARTY
On December 11, 2013, the Company made a loan in the amount of $1,930,000 to ACI (related party) in the form of an unsecured promissory note (2013 Note), with an interest rate equal to 2%, payable upon request. As of May 31, 2014, the accrued interest on the 2013 Note totaled $16,641.95.
On February 24, 2014, the Company made an additional loan in the amount of $1,000,000 to ACI in the form of an unsecured promissory note (February 2014 Note), with an interest rate equal to 2%, payable upon request. As of May 31, 2014, the accrued interest on the February 2014 Note totaled $4,431.64.
As of April 11, 2014 the total balance of all loans made to ACI was $2,930,000. On May 16, 2014, ACI repaid the outstanding balances on the 2013 Note and February 2014 Note, resulting in a zero balance of all loans made to ACI as of such date.
On June 10, 2014, the Company entered into an agreement, forgiving a total of $21,073 in interest payments owed to the Company by ACI.
On August 8, 2014, the Company made a loan in the amount of $1,000,000 to ACI in the form of an unsecured promissory note (August 2014 Note), with an interest rate equal to 3%, payable on February 23, 2017.
On November 26, 2014, the Company made a loan in the amount of $1,000,000 to ACI in the form of an unsecured promissory note (November 2014 Note), with an interest rate equal to 3%, payable on November 25, 2017.
On December 18, 2014, ACI repaid the August 2014 Note and the November 2014 Note. Both promissory notes bear no interest so long as they are paid in full on or before their respective maturity dates. As result, the Company forgave a total of $12,659 in interest payments owed.
As of December 31, 2015, the total balance for all loans made to ACI was $0 and the accrued interest totaled $0.
NOTE 8. RESEARCH AND DEVELOPMENT
On November 3, 2014, the Company assumed all rights and duties under that certain Sponsored Research Agreement No. 20150727 entered into between Hybrid Kinetic Motors Corporation, a Delaware Corporation (HKMC), and The Regents of the University of California (the University), pursuant to which HKMC agreed to sponsor the development of advance energy storage devices for EV and REEV (the Research). The Research commenced on October 1, 2014 and will continue for a period of three (3) years through September 30, 2017. The cost to the Company for the Universitys performance thereunder will be $150,000 per year, for a total of $450,000.
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NOTE 9. CONTRIBUTION EXPENSES
Effective as of June 1, 2015, the Company entered into a Gift Agreement (the Agreement) with The Regents of the University of California (Regents of the University), acting through the offices of the Henry Samueli School of Engineering and Applied Science at the University of California, Los Angeles (UCLA School of Engineering and Applied Science), pursuant to which the Company agreed to pledge $3,500,000 over a seven (7) year period with the initial payment of $500,000 made on December 31, 2015, to the Regents of the University, in support of a research center at the UCLA School of Engineering and Applied Science. In exchange for such payment, the University of California, Los Angeles has agreed to create the HK Graphene Technology Corporation Research Center, to be located at the UCLA School of Engineering and Applied Science.
Pursuant to substantially similar agreements, the Company contributed $10,000 to Rice University and $250,000 to John Hopkins University as of December 31, 2015.
NOTE 10. TAXES
Net deferred tax assets consist of the following components as of December 31, 2015 and 2014:
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|
|
|
|
|
|
2015
|
|
2014
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Deferred tax assets:
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|
|
|
|
NOL carryover
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$
|
2,347,654
|
$
|
1,816,365
|
Valuation allowance
|
|
(2,347,654)
|
|
(1,816,365)
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Net deferred tax asset
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$
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-
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$
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-
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The income tax provision is summarized as follows:
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|
|
|
|
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2015
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2014
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Income tax benefit at statutory rate
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$
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(531,289)
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$
|
(141,117)
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Valuation allowance
|
|
531,289
|
|
141,117
|
Net deferred tax asset
|
$
|
-
|
$
|
-
|
At December 31, 2015, the Company had net operating loss carry forwards of approximately $5.9 million that may be offset against future taxable income through 2035. No tax benefit has been reported in the December 31, 2015 and 2014 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.
NOTE 11. SUBSEQUENT EVENTS
On March 28, 2016, the parties to the Investment Agreement consummated the transactions contemplated thereunder, including the Companys issuance of 537,418,480 shares of Common Stock to LYG Inc. in exchange for $10,000,000, of which (a) $6,000,000 was paid in cash, and (b) $4,000,000 was paid in the form of the cancellation of a promissory note. Immediately following the transaction, LYG Inc. owned 99.8% of the issued and outstanding Common Stock of the Company.
On December 22, 2015, American Compass, Inc., a California corporation (the Seller), and Ford Cheer International Limited, a company organized and existing under the laws of the British Virgin Islands (the Purchaser), entered into a Securities Purchase Agreement (the Purchase Agreement) pursuant to which the Seller agreed to sell to the Purchaser and the Purchaser agreed to purchase from the Seller, 3,683 shares of the Companys Series B Preferred Stock, for an aggregate purchase price of $336,667 (the Transaction). Upon the consummation of the Transaction on January 3, 2016, the Purchaser was the beneficial owner of approximately 73.5% of the Companys issued and outstanding capital stock, on a fully-diluted basis, representing a change of control of the Company.
These financial statements were approved by management and available for issuance on April 7, 2016. Subsequent events have been evaluated through this date.
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