Notes to the Consolidated Financial Statements
December 31, 2021
Expressed in United States Dollars
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Phoenix Rising Companies. (“we,” “us,” “our,” the “Company “PRCX”) is a Nevada corporation incorporated on June 25, 2012 under the name Resort Savers, Inc. On May 28, 2020, the Company’s corporate name was changed to Phoenix Rising Companies. It is based in Puchong, Malaysia. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America, and the Company’s fiscal year end is December 31.
The Company makes investments and acquisitions into sound, transparent markets and industries throughout the world. The Company is principally engaged in the trading of oil, gas and lubricant,. From January 1, 2020, the Company deconsolidated the operations in nutrition and health products.
Admall Share Exchange and Recapitalization
Admall Sdn. Bhd.
On May 16, 2018, the Company closed the acquisition of Admall Sdn. Bhd., a limited liability company incorporated in Malaysia (“Admall”) by way of share exchange (the “Admall Acquisition”). The Company effected the Admall Acquisition pursuant to the terms of that certain Share Exchange Agreement (the “Admall Agreement”), dated February 9, 2018, by and between the Company, Admall, and Mr. Boon Jin “Patrick” Tan, an individual who prior to the closing of the Admall Acquisition held 100% of the outstanding equity interests of Admall. See Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities Exchange Commission on February 9, 2018, which is incorporated herein by reference, for a detailed description of the Admall Agreement.
At the closing of the Admall Acquisition, the Company acquired 100% of the outstanding equity interests of Admall from Mr. Tan, and the Company issued 400,000,000 shares of its common stock, par value $0.0001 per share (“Common Stock”) to Mr. Tan, which at the time of closing represented approximately 81.47% of the Company’s issued and outstanding Common Stock. As a result, Mr. Tan became a stockholder of the Company and Admall became a wholly-owned subsidiary of the Company. For federal income tax purposes, the Admall Acquisition was intended to qualify as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended.
For financial accounting purposes, the Admall Agreement has been accounted for as a reverse acquisition by Admall and resulted in a recapitalization of the Company, with Admall being the accounting acquirer and the Company as the acquired entity. The consummation of the Admall Agreement resulted in a change of control of PRCX. Accordingly, the historical financial statements prior to the acquisition are those of the accounting acquirer, Admall, and have been prepared to give retroactive effect to the reverse acquisition completed on May 16, 2018 and represent the operations of Admall.
As a result of the above, these consolidated financial statements represent Admall as the accounting acquirer (legal acquiree) and PRCX, from May 16, 2018 forward, as the accounting acquiree (legal acquirer), and the legal capital stock (number and type of equity interests issued) is that of PRCX, the legal parent, in accordance with guidance on reverse acquisitions accounted for as a business combination. Therefore, the Company recognized goodwill of $1,219,807.
On January 1, 2020, the Company deconsolidated Admall. As a result, the Company recorded loss on deconsolidation of $1,188,024 and the related goodwill was written off.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Consolidated Financial Statements and related disclosures have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The Consolidated Financial Statements have been prepared using the accrual basis of accounting in accordance with Generally Accepted Accounting Principles (“GAAP”) of the United States and presented in US dollars.
Principles of Consolidation
At December 31, 2021, the principal subsidiaries of the Company were listed as follows:
Entity Name | | Acquisition Date | | Ownership | | | Jurisdiction | | Investments Held By | | Nature of Operation | | Fiscal Year | |
Xing Rui International Investment Holding Group Co., Ltd. (“Xing Rui”)# | | December 22, 2014 | | | 100 | % | | Seychelles | | PRCX | | Holding Company | | January 31 | |
Xing Rui International Investment Group Ltd. (“Xing Rui HK”) # | | December 22, 2014 | | | 100 | % | | Hong Kong, the PRC | | Xing Rui | | Holding Company | | January 31 | |
Huaxin Changrong (Shenzhen) Technology Service Co., Ltd. (“Huaxin”) *# | | August 27, 2015 | | | 100 | % | | the PRC | | Xing Rui | | Holding Company | | December 31 | |
Beijing Yandong Tieshan Oil Products Co., Ltd. (“Tieshan Oil”) * | | January 29, 2016 | | | 51 | % | | the PRC | | Huaxin | | Trading of oil products | | December 31 | |
| | May 16, 2018 | | | 49 | % | | | | | | | | | |
____________
* | The English names used are translated only. |
# | Consolidated based on management accounts. |
These consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with 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. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ from these good faith estimates and judgments.
Foreign Currency Translation and Re-measurement
The Company translates its foreign operations to U.S. dollars in accordance with ASC 830, “Foreign Currency Matters”.
The Company’s functional currency and reporting currency is the U.S. dollar, and our subsidiaries’ functional currency is the Chinese Yuan Renminbi (“CNY”), Malaysian Ringgit (“MYR”) and Hong Kong Dollar (“HKD”).
The Company translates the foreign subsidiaries’ records into U.S. dollar as follows:
| · | Assets and liabilities at the rate of exchange in effect at the balance sheet date |
| · | Equities at historical rate |
| · | Revenue and expense items at the average rate of exchange prevailing during the period |
Concentrations of Credit Risk
The Company’s financial instruments that are exposed to concentrations of credit risk primarily consist of its cash and cash equivalents, and accounts receivable. The Company places its cash and cash equivalents with financial institutions of high credit worthiness. At times, its cash and cash equivalents with a particular financial institution may exceed any applicable government insurance limits. The Company also reviews its accounts receivable in a timely manner. The Company’s management plans to assess the financial strength and credit worthiness of any parties to which it extends funds, and as such, it believes that any associated credit risk exposures are limited.
Tieshan Oil
During the years ended December 31, 2021 and 2020, two customers accounted for 100% of revenues (79% and 21%) and one customer accounted for 90% of revenues, respectively.
During the years ended December 31, 2021 and 2020, two vendors accounted for 100% (61% and 39%) and 99% of a total purchase.
As of December 31, 2021 and 2020, one customer accounted for approximately 100% and 98% of accounts receivable and three vendors accounted for approximately 99% and two vendors accounted for approximately 96% of accounts payable, respectively.
Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, and deposits, amount due from related parties, accounts payable and accrued liabilities, advanced payments, and due to related parties. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.
Inventory
Inventories, consisting of raw material, are primarily accounted for using the first-in-first-out (“FIFO”) method of accounting. Inventories are measured at the lower of cost and net realizable value. The Company estimates the net realizable value of inventories based on an assessment of expected sales prices. Demand levels and pricing competition could change from time to time. If such factors result in an adverse effect on the Company’s products, the Company might be required to reduce the value of its inventories.
Property and equipment
Fixed assets are recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets.
Maintenance and repairs are charged to operations as incurred. Expenditures which substantially increase the useful lives of the related assets are capitalized. When properties are disposed of, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is reported in the period the transaction takes place.
Accounting for the impairment of long-lived assets
The long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. During the year ended December 31, 2020, the Company recorded impairment loss on goodwill of $1,219,807.
Revenue Recognition
Revenues are recognized when control of the promised goods or services are transferred to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company determines a sale price in each contract, and normally has a unique price in each contract. The Company sells oil products to a customer and when the products are transferred to a customer, the Company recognizes the revenue.
The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements:
| · | identify the contract with a customer; |
| · | identify the performance obligations in the contract; |
| · | determine the transaction price; |
| · | allocate the transaction price to performance obligations in the contract; and |
| · | recognize revenue as the performance obligation is satisfied. |
Income Taxes and Deferred Taxes
Tax expense in profit or loss comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination or items recognized directly in equity or other comprehensive income.
Deferred tax is recognized using the liability method for all temporary differences between the carrying amounts of assets and liabilities in the statement of financial position and their tax bases. Deferred tax is not recognized for the temporary differences arising from the initial recognition of goodwill, the initial recognition of assets and liabilities in a transaction which is not a business combination and that affects neither accounting nor taxable profit or loss. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the end of the reporting period.
Financial Instruments and Fair Value Measurements
As defined in ASC 820” Fair Value Measurements,” fair value is 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 (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs 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 measurement) and the lowest priority to unobservable inputs (level 3 measurement).
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. We evaluate all of our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company used a Black Scholes valuation model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within twelve (12) months of the balance sheet date.
Earnings Per Share of Common Stock
The Company has adopted ASC Topic 260, “Earnings per Share,” (“EPS”) which requires presentation of basic EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation. In the accompanying consolidated financial statements, basic earnings per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.
For the years ended December 31, 2021 and 2020, the following common stock equivalents were included in the computation of diluted net income per share.
| | Years Ended | |
| | December 31, | |
| | 2021 | | | 2020 | |
| | (Shares) | | | (Shares) | |
Preferred Stock | | | 150,000,000 | | | | 150,000,000 | |
Convertible notes | | | 135,837,972 | | | | 24,380,149 | |
Warrant | | | 245,366,811 | | | | 245,232,491 | |
Total | | | 531,204,783 | | | | 419,612,640 | |
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, ASC Subtopic 470-20 “Debt—Debt with “Conversion and Other Options” and ASC subtopic 815-40 “Hedging—Contracts in Entity’s Own Equity”. The standard reduced the number of accounting models for convertible debt instruments and convertible preferred stock. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting; and, (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The amendments in this update are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this standard on its consolidated financial statements.
Management has considered all recent accounting pronouncements issued since the last audit of our consolidated financial statements. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s consolidated financial statements.
NOTE 3 - GOING CONCERN
The Company’s consolidated financial statements are prepared using GAAP applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet had sufficient revenues to cover its operating cost, and requires additional capital to commence its operating plan. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. These factors raise substantial doubt about its ability to continue as a going concern.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plan to obtain such resources for the Company include: sales of equity instruments; traditional financing, such as loans; and obtaining capital from management and significant stockholders sufficient to meet its minimal operating expenses. However, management cannot provide any assurance that the Company will be successful in accomplishing any of its plans.
There is no assurance that the Company will be able to obtain sufficient additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to the Company. In addition, profitability will ultimately depend upon the level of revenues received from business operations. However, there is no assurance that the Company will attain profitability. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 4 – ACCOUNTS RECEIVABLE
The Company has performed an analysis on all of its accounts receivable and determined that all amounts are collectible by the Company. As such, all accounts receivable are reflected as a current asset and no allowance for bad debt has been recorded as of December 31, 2021 and 2020. As at December 31, 2021 and 2020, the Company had accounts receivable of $9,318,431 and $0, respectively.
NOTE 5 – INVENTORIES
At December 31, 2021 and 2020, inventories consisted of the following:
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
Finished goods | | $ | 7,733,568 | | | $ | 5,309,894 | |
NOTE 6 – ACCRUED LIABILITIES AND OTHER PAYABLE
At December 31, 2021 and 2020, accrued liabilities and other payable consisted of the following:
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
Accrued interest | | $ | 125,722 | | | $ | 54,299 | |
Other payables | | | 5,475 | | | | 64,695 | |
| | $ | 131,197 | | | $ | 118,994 | |
NOTE 7 – CONVERTIBLE NOTE
At December 31, 2021 and 2020, convertible loans consisted of the following:
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
Convertible Notes - originated in November 22, 2019 | | $ | 4,064 | | | $ | 4,064 | |
Convertible Notes - issued during fiscal year 2020 | | | 605,000 | | | | 893,656 | |
Convertible Notes - issued during fiscal year 2021 | | | 508,750 | | | | - | |
Total convertible notes payable | | | 1,117,814 | | | | 897,720 | |
Less: Unamortized debt discount | | | (169,764 | ) | | | (428,365 | ) |
Total convertible notes | | | 948,050 | | | | 469,355 | |
Less: current portion of convertible notes | | | 730,981 | | | | 287,298 | |
Long-term convertible notes | | $ | 217,069 | | | $ | 182,057 | |
For the years ended December 31, 2021 and 2020, the interest expense on convertible notes was $112,128 and $113,870, and amortization of discount, including interest expense, of $967,101 and $683,951, respectively. As of December 31, 2021 and 2020, the accrued interest was $125,722 and $54,299, respectively.
Conversion
During the year ended December 31, 2021, the Company converted notes with principal amounts and accrued interest of $595,610 into 35,317,393 shares of common stock. The corresponding derivative liability at the date of conversion of $1,377,579 was credited to additional paid in capital
During the year ended December 31, 2020, the Company converted notes with principal amounts and accrued interest of $453,745 into 33,802,868 shares of common stock. The corresponding derivative liability at the date of conversion of $3,599,202 was credited to additional paid in capital.
Convertible Notes – Issued during year ended December 31, 2021
During the year ended December 31, 2021, the Company issued a total principal amount of $743,500 convertible note for cash proceeds of $688,500. The terms of convertible note are summarized as follows:
| · | Term: 12 months - 18 months; |
| · | Annual interest rates: 8%; |
| · | Convertible at the option of the holders at any time or 180 days from issuance |
| · | Conversion prices are based on discounted (35% - 40% discount) lowest trading prices of the Company’s shares during various periods prior to conversion. |
Convertible Notes – Issued during the year ended December 31, 2020
During the year ended December 31, 2020, the Company issued a total principal amount of $1,034,750 convertible note for cash proceeds of $912,000. The terms of convertible note are summarized as follows:
| · | Term: a range from 9 months to 18 months; |
| · | Annual interest rates: 8% - 13%; |
| · | Convertible at the option of the holders at any time or 180 days from issuance; |
| · | Conversion prices are based on discounted (10% - 50% discount) lowest trading prices of the Company’s shares during various periods prior to conversion. |
| · | Certain note allows the principal amount will increase by $15,000 and the discount rate of conversion price will decrease by 20% if the conversion price is less than $0.10 or $0.01. As a result, the discount rate of conversion price changed from 50% to 70% and the Company recognized the penalty of $15,000 and recorded principal amount of $15,000. |
Convertible Notes – Issued during the year ended December 31, 2019
During the year ended December 31, 2019, the Company issued a total principal amount of $338,000 convertible notes for cash proceeds of $310,000. The convertible notes were also provided with a total of 112,500 warrants. The terms of convertible notes are summarized as follows:
| · | Term: 12 months - 18 months; |
| · | Annual interest rates: 8% - 10%; |
| · | Convertible at the option of the holders at any time or 180 days from issuance. |
| · | Conversion prices are based on discounted (35% - 40% discount) lowest trading prices of the Company’s shares during various periods prior to conversion. Certain note has a fixed conversion price of $1. |
The Company determined that the conversion feature met the definition of a liability in accordance with ASC Topic No. 815-40, “Derivatives and Hedging - Contracts in Entity’s Own Stock” and therefore bifurcated the embedded conversion option once the note becomes convertible and accounted for it as a derivative liability. The fair value of the conversion feature was recorded as a debt discount and amortized to interest expense over the term of the note.
The Company valued the conversion feature and warrant using the Black Scholes valuation model. The fair value of the derivative liability for all warrant and the notes that became convertible, including the notes issued in prior years, during the year ended December 31, 2021 amounted to $1,124,804. $653,500 of the value assigned to the derivative liability was recognized as a debt discount to the notes while the balance of $4,713,047 was recognized as a “day 1” derivative loss.
The Company valued the conversion feature and warrant using the Black Scholes valuation model. The fair value of the derivative liability for all warrant and the notes that became convertible, including the notes issued in prior years, during the year ended December 31, 2020 amounted to $3,004,972. $827,000 of the value assigned to the derivative liability was recognized as a debt discount to the notes while the balance of $2,177,972 was recognized as a “day 1” derivative loss.
NOTE 8 – WARRANTS
A summary of activity regarding warrants issued as follows:
| | Warrants Outstanding | |
| | | | | Weighted Average | | | Contractual life | |
| | Shares | | | Exercise Price | | | (in years) | |
Outstanding, December 31, 2019 | | | 116,500 | | | $ | 1.78 | | | | 2.89 | |
Granted | | | 4,441,500 | | | | 0.36 | | | | 5.00 | |
Reset feature | | | 246,981,856 | | | | 0.0069 | | | | - | |
Exercised | | | (6,307,365 | ) | | | 0.0040 | | | | - | |
Forfeited/canceled | | | - | | | | - | | | | - | |
Outstanding, December 31, 2020 | | | 245,232,491 | | | $ | 0.0069 | | | | 4.35 | |
Granted | | | - | | | | - | | | | - | |
Reset feature | | | 17,554,301 | | | | 0.0065 | | | | 3.37 | |
Exercised | | | (17,419,981 | ) | | | 0.0075 | | | | 3.73 | |
Forfeited/canceled | | | - | | | | - | | | | - | |
Outstanding, December 31, 2021 | | | 245,366,811 | | | $ | 0.0065 | | | | 3.37 | |
| | | | | | | | | | | | |
Exercisable warrant at December 31, 2021 | | | 245,366,811 | | | $ | 0.0065 | | | | 3.37 | |
During the year ended December 31, 2020, the Company issued warrants with convertible notes. Each warrant is immediately exercisable into one share of common stock at a price ranging from $0.25 to $5.00 (2019: $1.25 to $5.00) per share. The warrants will expire on the three to five year anniversary of the issuance date. As a result of the reset features, the warrants increased by 17,554,301 and 246,981,856, respectively for the period ended December 31, 2021 and 2020, at a weighted average exercise price of $0.0065 and $0.0070 per share, respectively, as of December 31, 2021 and 2020. The reset feature of warrants was effective at the time that a separate convertible instrument with lower exercise price was issued.
The Company determined that the warrants qualify for derivative accounting due to the reset feature of warrants, which led to no explicit limit to the number of shares to be delivered upon future settlement of the exercised warrants.
Aggregate intrinsic value is the sum of the amounts by which the quoted market price of the Company’s stock exceeded the exercise price of the warrants at December 31, 2020 for those warrants for which the quoted market price was in excess of the exercise price (“in-the-money” warrants). The intrinsic value of the warrants as of December 31, 2021 is $436,049.
NOTE 9 – DERIVATIVE LIABILITIES
The Company analyzed the conversion option for derivative accounting consideration under ASC 815, “Derivatives and Hedging, and hedging,” and determined that the instrument should be classified as a liability since the conversion option becomes effective at issuance resulting in there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.
ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item.
The Company determined our derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of December 31, 2021. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each convertible note and warrant is estimated using the Black-Scholes valuation model. The following weighted-average assumptions were used in the years ended December 31, 2021 and 2020:
| | Year ended | | | Year ended | |
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
Expected term | | 0.09 - 4.47 years | | | 0.04 - 5.00 years | |
Expected average volatility | | 162% - 363% | | | 175% - 494% | |
Expected dividend yield | | | - | | | | - | |
Risk-free interest rate | | 0.02% - 0.97% | | | 0.08% - 1.47% | |
The following table summarizes the changes in the derivative liabilities during the years ended December 31, 2021 and 2020:
Fair Value Measurements Using Significant Observable Inputs (Level 3) | |
Balance - December 31, 2019 | | $ | 356,395 | |
Addition of new derivatives recognized as debt discounts | | | 827,000 | |
Addition of new derivatives recognized as loss on derivatives | | | 2,177,972 | |
Settled on issuance of common stock | | | (4,131,345 | ) |
Gain on change in fair value of the derivative | | | 17,384,346 | |
Balance - December 31, 2020 | | $ | 16,614,368 | |
Addition of new derivatives recognized as debt discounts | | | 653,500 | |
Addition of new derivatives recognized as loss on derivatives | | | 471,304 | |
Settled on issuance of common stock | | | (2,291,904 | ) |
Gain on change in fair value of the derivative | | | (12,678,784 | ) |
Balance - December 31, 2021 | | $ | 2,768,484 | |
The following table summarizes the loss on derivative liability included in the income statement for the years ended December 31, 2021 and 2020, respectively.
| | Years Ended | |
| | December 31, | |
| | 2021 | | | 2020 | |
Day one loss due to derivative liabilities on convertible notes | | $ | 471,304 | | | $ | 2,177,972 | |
Change in fair value of the derivative liabilities | | | (12,678,784 | ) | | | 17,384,346 | |
| | $ | (12,207,480 | ) | | $ | 19,562,318 | |
NOTE 10 - STOCKHOLDERS’ (DEFICIT) EQUITY
The capitalization of the Company consists of the following classes of capital stock as of December 31, 2021:
Preferred Stock
The Company has authorized 15,000,000 shares of preferred stock with a par value of $0.0001 per share. The Board of Directors are authorized to divide the authorized shares of Preferred Stock into one or more series, each of which shall be so designated as to distinguish the shares thereof from the shares of all other series and classes. No shares of preferred stock have been issued.
Series A Preferred Stock
The Company is designated to issue 1,500,000 shares of Series A Preferred Stock at a par value of $0.0001. The Series A Preferred Stock shall have liquidation preference over any other class of stock and voting rights on the basis of one hundred votes for each shares of Series A Preferred Stock. The Preferred Stock can be converted to common stock, at a conversion rate of 100 common shares for each preferred stock. The Company evaluated the conversion feature and concluded that it did not qualify as a derivative transaction. The Company evaluated the convertible preferred stock under FASB ACS 470-20-30 and recorded a beneficial conversion feature of $1,999,373 as deemed dividend.
During the year ended December 31, 2020, the Company issued 1,500,000 shares of Series A Preferred Stock to our officer for compensation valued at $1,999,373.
As at December 31, 2021 and 2020, the Company had 1,500,000 preferred shares issued and outstanding.
Common Stock
The Company has authorized 1,000,000,000 shares of common stock with a par value of $0.0001 per share. Each common share entitles the holder to one vote, in person or proxy, on any matter on which action of the stockholders of the corporation is sought.
During the year ended December 31, 2021, the Company issued 48,207,931 shares of common stock as follows;
| · | 35,317,393 shares of common stock issued for conversion of debt of $565,610 |
| | |
| · | 12,890,538 shares of common stock issued for cashless exercise of warrant |
| | |
During the year ended December 31, 2021, the Company cancelled 250,000 shares of common stock.
During the year ended December 31, 2020, the Company issued 115,959,487 shares of common stock as follows;
| · | 33,802,868 shares for conversion of debt of $453,745 |
| · | 60,000,000 shares valued at $24,522,000 for acquisition of Wandi, in which 7,600,000 shares to a related party at $3,106,120 |
| · | 9,450,000 shares valued at $233,724 for services |
| · | 4,500,000 shares to related parties valued at $59,981 for services |
| · | 2,206,619 shares to a related party for settlement of debt of $110,331 |
| · | 6,000,000 shares for exercise of cashless warrant |
As at December 31, 2021 and 2020, the Company had 169,127,299 and 121,169,368 common shares issued and outstanding.
Subscription receivable
On February 24, 2020 the Company entered into a Purchase Agreement (the “Agreement”) with Mr. Liu FaKuan (“Seller”), the sole owner of Henan Wandi Mining Product Development Co., Ltd. (“Wandi”), a corporation organized in the People’s Republic of China (“PRC”), pursuant to which the Company will effect an acquisition of Wandi by acquiring from the Seller all outstanding equity interests of Wandi. Wandi owns 49% of a coal mine known as You Zhou Shenhuo Kuanfa Mining Company Ltd., (the “Mine”), with Zhengshou Yshong Coal Industry Co., Ltd. (a State-owned enterprise) owning the remaining 51% of the Mine.
Pursuant to the Agreement, the Company issued 60,000,000 restricted common shares of stock of the Company to the Seller, valued at $24,522,000. The obligations of the parties to complete the acquisition is subject to the fulfillment (or, in some cases waiver) of due diligence and certain closing conditions. Upon closing of the acquisition Seller shall transfer to Company 100% of the issued and outstanding equity interests of Wandi, which will then become a wholly owned subsidiary of the Company.
As of December 31, 2021, the Company does not have control of Wandi. As a result, the Company determined not to consolidate Wandi and recorded share issuance for acquisition of Wandi as a subscription receivable for $24,522,000, until the common shares of Wandi are delivered.
NOTE 11 – RELATED PARTY TRANSACTIONS
Due to related party
As of December 31, 2021 and 2020, the Company recorded due to related parties as follows. The loan is non-interest bearing and due on demand.
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
Loan from directors | | $ | 24,193 | | | $ | 90,826 | |
Loan from related party | | | - | | | | 16,712 | |
| | $ | 24,193 | | | $ | 107,538 | |
During the years ended December 31, 2021 and 2020, the Company borrowed $10,131 and $2,500 from a director and a related party respectively and repaid $107,538 and $23,556 to the related parties, respectively.
During the year ended December 31, 2020, the Company offered and sold 4,250,000 shares of common stock valued at $56,649 to a director in exchange for consideration of performance as an officer and director of the Company and issued 250,000 shares of common stock valued at $3,332 to a related party for services rendered. A further 2,206,619 shares of common stock were to a related party for settlement of debt of $110,331.
NOTE 12 – INCOME TAXES
The Company operates in the United States and its wholly-owned subsidiaries operate in Hong Kong and China and files tax returns in these jurisdictions.
Income (loss) from continuing operations before income tax expense (benefit) is as follows:
| | Years Ended | |
| | December 31, | |
| | 2021 | | | 2020 | |
Tax jurisdiction from: | | | | | | |
United States | | $ | 10,352,594 | | | $ | (25,800,824 | ) |
Foreign | | | 13,164 | | | | 20,033 | |
Loss before income taxes | | $ | 10,365,758 | | | $ | (25,780,791 | ) |
Income tax provision is as follows:
| | Years Ended | |
| | December 31, | |
| | 2021 | | | 2020 | |
Tax jurisdiction from: | | | | | | |
United States | | $ | - | | | $ | - | |
Foreign | | | 14,895 | | | | 303,979 | |
Income taxes | | $ | 14,895 | | | $ | 303,979 | |
| | December 31, | |
| | 2021 | | | 2020 | |
Deferred tax assets: | | | | | | |
NOL carryforwards | | | | | | |
United States | | | 894,821 | | | | 708,386 | |
Foreign | | | 8,653 | | | | 6,122 | |
Less: valuation allowance | | | (903,475 | ) | | | (714,508 | ) |
Net deferred tax asset | | | - | | | | - | |
The expected approximate income tax rate for 2021, for United States is 21%, Hong Kong is 17%, the PRC is 25%. The total income tax benefit differs from the expected income tax benefit principally due to the valuation allowance recorded against the deferred tax assets which are principally comprised of net operating losses (“NOLs”) and net of deferred tax liabilities.
The Company applies the authoritative accounting guidance under ASC 740 for the recognition, measurement, classification and disclosure of uncertain tax positions taken or expected to be taken in a tax return. The Company provided a full valuation allowance against its deferred tax assets as of December 31, 2021 and 2020. This valuation allowance reflects the estimate that it is more likely than not that the net deferred tax assets may not be realized.
The Company has approximately $4,261,000 of U.S. and foreign carryforwards, the tax effect of which is approximately $895,821 as of December 31, 2021.
The U.S. NOL carryforwards are subject to certain limitations due to the change in control of the Company pursuant to Internal Revenue Code Section 382. The Company has not performed a study to determine if the NOL carryforwards are subject to these Section 382 limitations. In addition, the Company has foreign NOLs. The Company is still evaluating the impact of a change in stock ownership and the potential limitation of foreign NOLs.
A valuation allowance is recorded on certain deferred tax assets if it has been determined it is more likely than not that all or a portion of these assets will not be realized. The Company has recorded a full valuation allowance of $903,475 and $714,508 for deferred tax assets existing as of December 31, 2021 and 2020, respectively. The valuation allowance as of December 31, 2021 and 2020 is attributable to NOL carryforwards in the United States and foreign jurisdictions.
NOTE 13 - SEGMENTED INFORMATION
At December 31, 2021 and 2020, the Company operates in one industry segment, oil and gas, and two geographic segments with China being where majority current assets and equipment are located.
At December 31, 2021 and 2020, segment assets and liabilities were as follows:
December 31, 2021 | | Holding Company | | | Oil and gas | | | Total Consolidated | |
Assets | | | | | | | | | |
Current assets | | $ | 201,429 | | | $ | 17,103,738 | | | $ | 17,305,167 | |
Non-current assets | | | 1,979,787 | | | | - | | | | 1,979,787 | |
Liabilities | | | | | | | | | | | | |
Current liabilities | | | 3,720,085 | | | | 10,241,510 | | | | 13,961,595 | |
Long term liabilities | | | 217,069 | | | | - | | | | 217,069 | |
Net assets | | $ | (1,755,938 | ) | | $ | 6,862,228 | | | $ | 5,106,290 | |
December 31, 2020 | | Holding Company | | | Oil and gas | | | Total Consolidated | |
Assets | | | | | | | | | |
Current assets | | $ | 355,490 | | | $ | 9,773,716 | | | $ | 10,129,206 | |
Non-current assets | | | 1,979,787 | | | | - | | | | 1,979,787 | |
Liabilities | | | | | | | | | | | | |
Current liabilities | | | 17,138,155 | | | | 3,107,033 | | | | 20,245,188 | |
Long term liabilities | | | 182,057 | | | | - | | | | 182,057 | |
Net assets | | $ | (14,984,935 | ) | | $ | 6,666,683 | | | $ | (8,318,252 | ) |
For the year ended December 31, 2021 and 2020, segment revenue and net income were as follows:
Year Ended December 31, 2021 | | Holding Company | | | Oil and gas | | | Total Consolidated | |
Revenue | | $ | - | | | $ | 13,430,991 | | | $ | 13,430,991 | |
Cost of goods sold | | | - | | | | (13,362,614 | ) | | | (13,362,614 | ) |
Operating expenses | | | (754,087 | ) | | | (45,283 | ) | | | (799,370 | ) |
Other income | | | 11,096,752 | | | | - | | | | 11,096,752 | |
Provision for income taxes | | | - | | | | (14,895 | ) | | | (14,895 | ) |
Net income | | $ | 10,342,665 | | | $ | 8,199 | | | $ | 10,350,864 | |
Year Ended December 31, 2020 | | Holding Company | | | Oil and gas | | | Total Consolidated | |
Revenue | | $ | - | | | $ | 14,355,341 | | | $ | 14,355,341 | |
Cost of goods sold | | | - | | | | (14,281,300 | ) | | | (14,281,300 | ) |
Operating expenses | | | (3,041,551 | ) | | | (45,311 | ) | | | (3,086,862 | ) |
Other expenses | | | (22,767,970 | ) | | | - | | | | (22,767,970 | ) |
Provision for income taxes | | | - | | | | (20,541 | ) | | | (20,541 | ) |
Net income (loss) | | $ | (25,809,521 | ) | | $ | 8,189 | | | $ | (25,801,332 | ) |
NOTE 14 – EARNINGS (LOSS) PER SHARES
Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the periods. Diluted net income per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of convertible preferred stock and convertible notes that are computed using the if-converted method, and outstanding warrants that are computed using the treasury stock method.
| | Years Ended | |
| | December 31, | |
| | 2021 | | | 2020 | |
Numerator: | | | | | | |
Net income (loss) | | $ | 10,350,864 | | | $ | (27,800,705 | ) |
Change in fair value of derivative liabilities | | | (12,207,480 | ) | | | - | |
Interest on convertible debts | | | (137,045 | ) | | | - | |
Net loss - diluted | | $ | (1,993,661 | ) | | $ | (27,800,705 | ) |
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted average common shares outstanding - Basic | | | 139,754,668 | | | | 87,872,217 | |
Effect of dilutive shares | | | | | | | | |
Series A Preferred Stock | | | 150,000,000 | | | | - | |
Convertible notes | | | 126,394,828 | | | | - | |
Warrants | | | 219,892,652 | | | | - | |
Weighted average common shares outstanding - Diluted | | | 636,042,148 | | | | 87,872,217 | |
| | | | | | | | |
Net income per common share: | | | | | | | | |
Basic | | $ | 0.07 | | | $ | (0.32 | ) |
Diluted | | $ | (0.00 | ) | | $ | (0.32 | ) |
For the year ended December 31, 2020, the convertible instruments are anti-dilutive and therefore, have been excluded from earnings (loss) per share.
NOTE 15 - SUBSEQUENT EVENTS
In accordance with ASC Topic 855, “Subsequent Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before this audited financial statements are issued, the Company has evaluated all events or transactions that occurred after December 31, 2021, up through the date was the Company issued the audited consolidated financial statements.
Subsequent to December 31, 2021, the following transactions occurred:
| · | The Company issued 73,050,000 shares for conversion of debt of $242,581. |
| | |
| · | The Company issued convertible notes a total of $112,500, which the term of notes is 1 year and annual interest rate is 8%. Notes are convertible at the option of the holders after 6 months of issuance date of the note and conversion price are Conversion prices are based on the discounted (35% discount) lowest trading prices of the Company’s shares during 10 periods prior to conversion. Certain note has a floor price of $0.01. |