NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2019 (UNAUDITED) AND DECEMBER 31, 2018
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
Adamant
DRI Processing and Minerals Group (“Adamant’ or “the Company” or “Group”), is a Nevada corporation
incorporated in July 2014 and successor by merger to UHF Incorporated, a Delaware corporation (“UHF”).
Prior
to the sale of certain operations in December 2018, the Company produced Direct Reduced Iron (“DRI”) using advanced
reduction rotary kiln technology with iron ore as the principal raw material. ‘Reduced Iron’ derives its name from
the chemical change that iron ore undergoes when heated in a furnace at high temperatures in the presence of hydrocarbon-rich
gasses. ‘Direct reduction’ refers to processes which reduce iron oxides to metallic iron below iron’s melting
point.
UHF
was the successor to UHF Incorporated, a Michigan corporation (“UHF Michigan”), as a result of domicile merger effected
on December 29, 2011.
On
June 30, 2014, UHF entered into and closed a share exchange agreement, or the Target Share Exchange Agreement, with Target Acquisitions
I, Inc., a Delaware corporation (“Target”), and the stockholders of Target (the “Target Stockholders”),
pursuant to which UHF acquired 100% of the issued and outstanding capital stock of Target for 43,375,638 shares of UHF’s
common stock and one share of UHF’s series A convertible preferred stock, convertible into 17,839,800 shares of common stock.
Following the share exchange, UHF had outstanding 45,920,310 shares of common stock and one share of series A convertible preferred
stock, which was converted into 17,839,800 common shares on August 29, 2014.
For
accounting purposes, the Target Share Exchange was treated as a reverse acquisition, with Target as the acquirer and UHF as the
acquired party. The shares issued to the Target Stockholders were accounted for as a recapitalization of Target and were retroactively
restated for the periods presented because after the share exchange, the Target’s Stockholders owned the majority of UHF’s
outstanding shares and exercised significant influence over the operating and financial policies of the consolidated entity, and
UHF was a non-operating shell with nominal net assets prior to the acquisition. Pursuant to Securities and Exchange Commission
(“SEC”) rules, this is considered a capital transaction rather than a business combination.
On
July 4, 2014, the Company entered into an Agreement and Plan of Merger with UHF, pursuant to which UHF merged with and into Adamant
with Adamant as the surviving entity (the “Merger”), as a result of which each outstanding share of common stock of
UHF at the time of the Merger was converted into one share of the common stock of Adamant, and the outstanding share of series
A Preferred Stock was converted into 17,839,800 shares of common stock. The Merger was effected on August 29, 2014.
As
a result of the acquisition of Target and UHF, the Company now owns all of the issued and outstanding capital stock of Real Fortune
BVI, which in turn owns all of the issued and outstanding capital stock of Real Fortune Holdings Limited, a Hong Kong limited
company (“Real Fortune HK”), which in turn prior to its sale in December 2018, owned all of the issued and outstanding
capital stock of Zhangjiakou Tongda Mining Technologies Service Co., Ltd. (“China Tongda”), a Chinese limited company.
Prior
to December 22, 2018, the Company operated in China through Zhuolu Jinxin Mining Co., Ltd. (“China Jinxin”), the Company’s
variable interest entity (“VIE”) which the Company controlled through a series of agreements between China Jinxin
and China Tongda, and through Haixing Huaxin Mining Industry Co., Ltd. (“China Huaxin”) which was owned by China Tongda.
China
Jinxin is an early stage mining company which processes iron ore and DRI at its production facility in Hebei Province. China Jinxin
currently does not own any mines or hold any mining rights. Through contractual arrangements among China Tongda and China Jinxin,
and its shareholders, the Company controlled China Jinxin’s operations and financial affairs. As a result of these agreements,
China Tongda was considered the primary beneficiary of China Jinxin (see Note 2) and accordingly, China Jinxin’s results
of operations and financial condition prior to December 22, 2018, were consolidated in the Group’s financial statements.
On
January 17, 2014, the Company entered into a series of substantially identical agreements with five shareholders of Haixing Huaxin
Mining Industry Co., Ltd. (“China Huaxin”) pursuant to which the Company acquired 100% of the outstanding shares of
China Huaxin. The consideration paid to the shareholders of China Huaxin for their interests consisted of cash of RMB 10 million
($1.64 million) and 5.1 million shares of the Company’s common stock, valued at $0.014 per share ($71,400). China Huaxin
produces and sells DRI.
On
April 25, 2017, China Tongda incorporated Yancheng DeWeiSi Business Trading Co., Ltd. (“DeWeiSi”) with registered
capital of RMB 10,000,000 ($1.48 million), to be paid before April 19, 2047. DeWeiSi was a wholly-owned subsidiary of China Tongda.
DeWeiSi sells mineral products (except petroleum and petroleum products), hardware products, construction materials, and steel.
During 2017, China Tongda sold 100% ownership of DeWeiSi for RMB 70,000 ($10,710), and the buyer took over the responsibility
of fulfilling the $1.48 million registered capital requirement. The Company recorded $27,094 gain on the sale of DeWeiSi.
On
December 22, 2018, the Company entered into an Exchange Agreement, among the Company, certain of its subsidiaries and 16 shareholders
of the Company (“Exiting Shareholders”). Pursuant to the Exchange Agreement, the Company transferred all of the outstanding
shares of its subsidiary, China Huaxin to the Exiting Stockholders in exchange for 48,403,969 shares of the Company’s common
stock. As a result of the consummation of the Exchange Agreement, the Company no longer has an interest in China Huaxin or any
of its assets and liabilities, including the DRI Facility. The company recorded $22,239,222 gain on sale of China Huaxin.
On
December 22, 2018, the Company, certain of its subsidiaries and the Exiting Shareholders also entered into a Termination Agreement.
Pursuant to the Termination Agreement, the Company, China Jinxin, China Tongda, and the Exiting Shareholders terminated the series
of agreements known as variable interest entity agreements, or VIE Agreements, pursuant to which the Company acting through China
Tongda, controlled the operations of China Jinxin and was to receive the economic benefits of the operations of China Jinxin.
As
a result of the termination of the VIE Agreements, control of China Jinxin reverted to the Exiting Shareholders and the Company
no longer has any influence over the operations of China Jinxin or any interest in its assets or the results of its operations.
In consideration for the termination of the VIE Agreements, the Company received 5,378,219 shares of its common stock. The company
recorded $2,688,996 gain on sale of China Jinxin.
On
December 10, 2018, the Company entered into a series of agreements known as variable interest entity agreements, or the VIE Agreements,
with Shenzhen Dingshang Technology Co., Ltd. (“Shenzhen Technology Company”), and its sole shareholder, Ms. Jing Xie.
Shenzhen Technology Company was founded on December 24, 2009, with registered capital of RMB1 million. The Company is dedicated
to the provision of a complete set of intelligent digital implementation plans for exhibition center projects and display booths,
and the provision of innovative model designs for different exhibition centers and real estate. In consideration of her entry
into the VIE Agreements and causing Shenzhen Technology Company to enter into the VIE Agreements, the Company issued 3,000,000
shares of its common stock to Ms. Xie. Through the contractual arrangements among the Company and Shenzhen Technology Company,
and its shareholders, the Company controls Shenzhen Technology Company’s operations and financial affairs. As a result of
these agreements, Adamant is considered the primary beneficiary of Shenzhen Technology Company (see Note 2) and accordingly, Shenzhen
Technology Company’s results of operations and financial condition are consolidated in the Company’s financial statements.
The
consolidated interim financial information as of March 31, 2019 and for the three month periods ended March 31, 2019 and 2018
was prepared without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures, which
are normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted
in the United States of America (“US GAAP”) were not included. The interim consolidated financial information should
be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2018, previously filed with the SEC. In the opinion of management, all adjustments
(which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial
position as of March 31, 2019, results of operations for the three months ended March 31, 2019 and 2018, and cash flows for the
three months ended March 31, 2019 and 2018, as applicable, were made. The interim results of operations are not necessarily indicative
of the operating results for the full fiscal year or any future periods.
The
Group’s current structure at March 31, 2019 is as follows:
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying Consolidated Financial Statements (“CFS”) are prepared in conformity with US GAAP. Adamant, Real Fortune
BVI and Real Fortune HK’s functional currency is the US Dollar (“USD” or “$”), and Adamant’s
VIE Shenzhen Technology Company, China Tongda and its wholly owned subsidiaries’ China Huaxin, and VIE China Jinxin’s
functional currency is Chinese Renminbi (“RMB”). The accompanying CFS are translated from functional currencies and
presented in USD.
Principles
of Consolidation
The
CFS include the financial statements of the Company, its subsidiaries and its VIE (China Jinxin) (up to disposal date) for which
the Company’s subsidiary China Tongda is the primary beneficiary; China Tongda’s 100% owned subsidiaries China Huaxin
(up to disposal date), and Adamant’s VIE (Shenzhen Technology Company). All transactions and balances among the Company,
its subsidiaries and VIE are eliminated in consolidation.
The
Company follows the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Topic 810 which requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss from
the VIE or is entitled to a majority of the VIE’s residual returns.
In
determining China Jinxin to be the VIE of China Tongda, the Company considered the following indicators, among others:
China
Tongda has the right to control and administer the financial affairs and operations of China Jinxin and to manage and control
all assets of China Jinxin. The equity holders of China Jinxin as a group have no right to make any decision about China Jinxin’s
activities without the consent of China Tongda. China Tongda will be paid quarterly, management consulting and technical support
fees equal to all pre-tax profits, if any, of that quarter. If there are no earnings before taxes and other cash expenses, during
any quarter, no fee shall be paid. If China Jinxin sustains losses, they will be carried to the next period and deducted from
the next service fee. China Jinxin has the right to require China Tongda to pay China Jinxin the amount of any loss incurred by
China Jinxin.
The
shareholders of China Jinxin pledged their equity interests in China Jinxin to China Tongda to guarantee China Jinxin’s
performance of its obligations under the Management Entrustment and Option Agreements. If either China Jinxin or its equity owners
is in breach of the Equity Pledge or Exclusive Purchase Option Agreements, then China Tongda is entitled to require the equity
owners of China Jinxin to transfer their equity interests in China Jinxin to it.
The
shareholders of China Jinxin irrevocably granted China Tongda or its designated person an exclusive option to acquire, at any
time, all of the assets or outstanding shares of China Jinxin, to the extent permitted by PRC law. The purchase price for the
shareholders’ equity interests in China Jinxin shall be the lower of (i) the actual registered capital of China Jinxin or
(ii) RMB 500,000 ($74,000), unless an appraisal is required by the laws of China.
Each
shareholder of China Jinxin executed an irrevocable power of attorney to appoint China Tongda as its attorney-in-fact to exercise
all of its rights as equity owner of China Jinxin, including 1) attend the shareholders’ meetings of China Jinxin and/or
sign the relevant resolutions; 2) exercise all the shareholder’s rights and shareholder’s voting rights that the shareholder
is entitled to under the laws of the PRC and the Articles of Association of China Jinxin, including but not limited to the sale
or transfer or pledge or disposition of the shares in part or in whole; 3) designate and appoint the legal representative, Chairman
of the Board of Directors (“BOD”), Directors, Supervisors, the Chief Executive Officer, Financial Officer and other
senior management members of China Jinxin; and 4) execute the relevant share purchases and other terms stipulated in the Exclusive
Purchase Option and Share Pledge Agreements.
The
VIE is monitored by the Company to determine if any events have occurred that could cause its primary beneficiary status to change.
These events include whether:
a.
|
China
Jinxin’s governing documents or contractual arrangements are changed in a manner that changes the characteristics or
adequacy of China Tongda’s equity investment at risk.
|
|
|
b.
|
The
equity investment in China Jinxin or some part thereof is returned to its shareholders or China Tongda, and other entities
become exposed to expected losses of China Jinxin.
|
|
|
c.
|
China
Jinxin undertakes additional activities or acquires additional assets, beyond those anticipated at the later of the inception
of China Jinxin or the latest reconsideration event, that increase the entity’s expected losses.
|
|
|
d.
|
China
Jinxin receives an additional equity investment that is at risk, or China Jinxin curtails or modifies its activities in a
way that decreases its expected losses.
|
The
VIE structure of China Jinxin was terminated on December 22, 2018.
On
December 10, 2018, the Company entered into a series of VIE Agreements, with Shenzhen Technology Company, and its sole shareholder,
Ms. Jing Xie. Pursuant to the VIE Agreements, Shenzhen Technology Company became contractually controlled by Adamant. The material
terms of the VIE Agreements are summarized below:
|
(1)
|
Management
Entrustment Agreement:
|
This
Agreement grants the Company the right and obligation to manage all aspects of the operations of Shenzhen Technology Company and
the Board of Directors and shareholders of Shenzhen Technology Company may not take any actions without the Company’s consent.
The scope of the authority granted to the Company includes, but is not limited to, the right to make all major decisions, the
right to manage the assets, capital and finances of Shenzhen Technology Company, authority for all decisions related to human
resources, daily operation management and technical support. To facilitate its exercise of such rights, the Company has been granted
powers of attorney by Ms. Xie, the sole shareholder of Shenzhen Technology Company, granting it the right to participate in all
shareholders’ meetings of Shenzhen Technology Company and to make all significant decisions at such meetings, including
the designation of candidates for election to the Board of Shenzhen Technology Company. In consideration of the Company’s
services, the Company shall be paid quarterly an amount equal to the pre-tax profits of Shenzhen Technology Company and shall
be required to pay to Shenzhen Technology Company the amount of any loss incurred by Shenzhen Technology Company within 30 days
of a request for payment. Further, if Shenzhen Technology Company is unable to pay its debts, the Company will be responsible
therefor. Similarly, if losses sustained by Shenzhen Technology Company result in a capital deficiency, the Company shall be obligated
to make up the deficiency. To facilitate the Company’s management of Shenzhen Technology Company, the Company shall have
access to and the right to maintain all books and records and other relevant documentation of Shenzhen Technology Company. Further,
during the term of the Management Entrustment Agreement, without the Company’s consent, Shenzhen Technology Company will
not issue, purchase or redeem any of its equity securities or debt or create any liens upon its property or assets, other than
for expenses incurred in the ordinary course of business and permitted exceptions; or declare or pay any dividends. The term of
the Management Entrustment Agreement is for 30 years, or until December 10, 2048 and will be extended automatically for successive
10-year periods thereafter, except that the agreement will terminate (i) at the expiration of the initial 30-year term, or any
10-year renewal term, if the Company notify Shenzhen Technology Company not less than 30 days prior to the applicable expiration
date that the Company does not want to extend the term, (ii) upon prior written notice from the Company, or (iii) upon the date
the Company acquires all of the assets or at least 51% of the equity interests of Shenzhen Technology Company.
|
(2)
|
Exclusive
Purchase Option Agreement:
|
Pursuant
to this Agreement Shenzhen Technology Company and its sole shareholder granted the Company an exclusive option to purchase all
of the assets or outstanding shares of Shenzhen Technology Company at such time as the purchase of such assets or shares is permissible
under the laws of the PRC. The options are for an initial period of 30 years and will renew automatically for successive periods
of 10 years each unless voluntarily terminated by the Company. At such time during the term as the Company determines to exercise
its option to purchase either the assets or equity of Shenzhen Technology Company, the Company shall send a notice to Shenzhen
Technology Company or its shareholder, as the case may be. Upon receipt of such notice, Shenzhen Technology Company or its shareholder
shall take such steps and execute such documents as are necessary to transfer the assets or shares. Unless an appraisal is required
by the laws of China, the purchase price of the assets or outstanding equity shall be equal to the lower of (i) the actual registered
capital of Shenzhen Technology Company and (ii) RMB 500,000 ($72,656); provided that if the laws of the PRC do not permit the
purchase at that price, the purchase price shall be the lowest price allowed under the laws of the PRC. All taxes relating to
such purchase shall be borne by the Company.
Ms.
Jing Xie, the sole shareholder of Shenzhen Technology Company entered into a Power of Attorney irrevocably authorizing the Company
to exercise all of her rights as a shareholder of Shenzhen Technology Company. The rights granted include, without limitation,
the right to: (i) attend the shareholders’ meetings of Shenzhen Technology Company and execute actions by written consent;
(ii) exercise all of her rights as a shareholder under the laws of the PRC and the Articles of Association of Shenzhen Technology
Company, including but not limited to the right to transfer or pledge or dispose of her shares in Shenzhen Technology Company;
(iii) designate and appoint the legal representatives, Chairman of the Board of Directors, directors, supervisors, the chief executive
officer, the chief financial officer and other senior management members of Shenzhen Technology Company; (iv) execute the relevant
share and/or asset purchase agreements contemplated in the Exclusive Purchase Option Agreement, and to effect the terms of the
Equity Pledge Agreement and Exclusive Purchase Option Agreement; and (v) transfer allocate, or utilize in some other ways the
cash dividends and non-cash income of Shenzhen Technology Company. The power of attorney shall be in effect as long as Ms. Xie
owns shares of Shenzhen Technology Company.
|
(4)
|
Equity
Pledge Agreement
|
Pursuant
to an Equity Pledge Agreement Ms. Xie, the sole shareholder of Shenzhen Technology Company, has pledged all of her shares in,
representing all of the outstanding shares of, Shenzhen Technology Company as security for the performance by Shenzhen Technology
Company and Ms. Xie of their respective obligations under the VIE Agreements. In addition to pledging her shares in the Equity
Pledge Agreement, Ms. Xie has agreed not to impose any encumbrances or restrictions on the shares, not to sell, lease or transfer
any of the shares and to provide notice to the Company should she receive any notice, order, ruling, verdict or other instrument
in relation to the pledged shares or which may affect the ownership of the pledged shares.
Going
Concern
The
Company had net loss of $107,213 for the three months ended March 31, 2019, and had accumulated deficit of $9.70
million as of March 31, 2019, these conditions raise substantial doubt about the Company’s ability to continue as a going
concern.
The
Company is currently seeking additional potential assets, properties or businesses to acquire, in a business combination, by reorganization,
merger or acquisition. The plan of operation for the next 12 months is to: (i) determine which industries in which the Company
may have an interest; (ii) adopt a business plan regarding engaging in the business of any selected industry; and (iii) commence
operations through funding a start-up enterprise and/or acquiring an existing business or entering into a business combination
with a “going concern” engaged in any industry selected. The Company is unable to predict when and if it may actually
participate in any specific business endeavor, and the Company will be unable to do so until it determines the particular industry
in which the Company may conduct business operations.
Use
of Estimates
In
preparing financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements,
as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates, required by management,
include the recoverability of long-lived assets, allowance for doubtful accounts, and the reserve for obsolete and slow-moving
inventories. Actual results could differ from these estimates.
Business
Combinations
For
a business combination, the assets acquired, the liabilities assumed and any non-controlling interest in the acquiree are recognized
at the acquisition date, measured at their fair values as of that date. In a business combination achieved in stages, the identifiable
assets and liabilities, as well as the non-controlling interest in the acquiree, are recognized at the full amounts of their fair
values. In a bargain purchase in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the
fair value of the consideration transferred plus any non-controlling interest in the acquiree, that excess in fair value is recognized
as a gain attributable to the acquirer.
Deferred
tax liability and assets are recognized for the deferred tax consequences of differences between the tax bases and the recognized
values of assets acquired and liabilities assumed in a business combination in accordance with FASB ASC Subtopic 740-10.
Cash
and Equivalents
Cash
and equivalents include cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the purchase date of such investments.
Accounts
Receivable, net
The
Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts
receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and
changes in customer payment patterns to evaluate the adequacy of these reserves. The Company had $2,638 and $6,090 bad debt allowances
at March 31, 2019 and December 31, 2018, respectively.
Property
and Equipment, net
Property
and equipment are stated at cost, less accumulated depreciation. Major repairs and betterments that significantly extend original
useful lives or improve productivity are capitalized and depreciated over the period benefited. Maintenance and repairs are expensed
as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is
computed using shorter of useful lives of the property or the unit of depletion method. For shorter-lived assets the straight-line
method over estimated lives ranging from 3 to 20 years is used as follows:
Office
Equipment
|
|
3-5
years
|
Machinery
|
|
10
years
|
Vehicles
|
|
5
years
|
Building
|
|
20
years
|
Impairment
of Long-Lived Assets
Long-lived
assets, which include property and equipment and intangible assets, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability
of long-lived assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted
future cash flows expected to be generated by it. If the carrying amount of an asset exceeds its estimated undiscounted future
cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds its FV. FV is generally
determined using the asset’s expected future discounted cash flows or market value, if readily determinable. Based on its
review, the Company believes that, as of March 31, 2019 and December 31, 2018, there was no impairment of long-lived assets.
Income
Taxes
Income
taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts
at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected
to be realized.
The
Company follows ASC Topic 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition of income
tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest
and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.
Under
the provisions of ASC Topic 740, when tax returns are filed, it is likely that some positions taken would be sustained upon examination
by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period
during which, based on all available evidence, management believes it is more likely than not that the position will be sustained
upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated
with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount
of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The
portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as
a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties
that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits are classified
as interest expense and penalties are classified in selling, general and administrative expenses in the statements of income.
At March 31, 2019 and December 31, 2018, the Company did not take any uncertain positions that would necessitate recording a tax
related liability.
Adamant
is subject to U.S. corporate income taxes on its taxable income at a rate of up to 21% for taxable years beginning after December
31, 2017 and U.S. corporate income tax on its taxable income of up to 35% for prior tax years. On December 22, 2017, the Tax Cut
and Jobs Act (“Tax Act”) was signed into law. The Tax Act introduced a broad range of tax reform measures that significantly
changed the federal income tax laws. The provisions of the Tax Act that may have significant impact on the Company, including
the permanent reduction of the corporate income tax rate from 35% to 21% effective for tax years including or commencing on January
1, 2018, one-time transition tax on post-1986 foreign unremitted earnings, provision for Global Intangible Low Tax Income (“GILTI”),
deduction for Foreign Derived Intangible Income (“FDII”), repeal of the corporate alternative minimum tax, limitation
of various business deductions, and modification of the maximum deduction of net operating loss with no carryback but indefinite
carryforward provision. Many provisions in the Tax Act are generally effective in tax years beginning after December 31, 2017.
Taxpayers may elect to pay the one-time transition tax over eight years, or in a single lump-sum payment.
To
the extent that portions of its U.S. taxable income, such as Subpart F income or GILTI, are determined to be from sources outside
of the U.S., subject to certain limitations, the Company may be able to claim foreign tax credits to offset its U.S. income tax
liabilities. Any remaining liabilities are accrued in the Company’s consolidated statements of comprehensive income and
estimated tax payments are made when required by U.S. law.
The
Act also created new taxes on certain foreign-sourced earnings such as global intangible low-taxed income (“GILTI”)
under IRC Section 951A, which is effective for the Company for tax years beginning after January 1, 2018. For the three months
ended March 31, 2019, the Company has calculated its best estimate of the impact of the GILTI in its income tax provision in accordance
with its understanding of the Act and guidance available as of the date of this filing.
Revenue
Recognition
In
May 2014 the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which
supersedes all existing revenue recognition requirements, including most industry specific guidance. This new standard requires
a company to recognize revenues when it transfers goods or services to customers in an amount that reflects the consideration
that the company expects to receive for those goods or services. The FASB subsequently issued the following amendments to ASU
No. 2014-09 that have the same effective date and transition date: ASU No. 2016-08, Revenue from Contracts with Customers (Topic
606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The
Company adopted these amendments with ASU 2014-09 (collectively, the new revenue standards).
The
new revenue standards became effective for the Company on January 1, 2018, and were adopted using the modified retrospective method.
The adoption of the new revenue standards as of January 1, 2018 did not change the Company’s revenue recognition as the
Company does not have significant sales yet. As the Company did not identify any accounting changes that impacted the amount of
reported revenues with respect to its product revenues, no adjustment to retained earnings was required upon adoption.
Under
the new revenue standards, the Company recognizes revenues when its customer obtains control of promised goods or services, in
an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues
following the five step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance
obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations
in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
Cost
of Goods Sold / Cost of Services Provided
Cost
of goods sold (“COGS”) for China Jinxin and China Huaxin consists primarily of fuel and power, direct material and
labor, depreciation of mining plant and equipment, attributable to the production of iron ore concentrate. Any write-down of inventory
to lower of cost or market is also recorded in COGS. Cost of services provided for Shenzhen Technology Company was mainly the
labor cost for designing, assembling, installing and setting up exhibition center projects and display booths, and creating innovative
model designs for different exhibition centers and real estate projects.
Concentration
of Credit Risk
The
operations of the Company are in the PRC. Accordingly, the Company’s business, financial condition, and results of operations
may be influenced by the political, economic, and legal environments in the PRC, and by the general state of the PRC economy.
The
Company has cash on hand and demand deposits in accounts maintained with state-owned banks within the PRC. Cash in state-owned
banks is not covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed
to any risks on its cash in these bank accounts.
Statement
of Cash Flows
In
accordance with FASB ASC Topic 230, “Statement of Cash Flows”, cash flows from the Company’s operations are
calculated based upon local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash
flows may not necessarily agree with changes in the corresponding balances on the balance sheet. Cash from operating, investing
and financing activities is net of assets and liabilities acquired.
Fair
Value of Financial Instruments
For
certain of the Company’s financial instruments, including cash and equivalents, accrued liabilities and accounts payable,
carrying amounts approximate their FV due to their short maturities. FASB ASC Topic 825, “Financial Instruments,”
requires disclosure of the FV of financial instruments held by the Company. The carrying amounts reported in the balance sheets
for current liabilities each qualify as financial instruments and are a reasonable estimate of their FVs because of the short
period of time between the origination of such instruments and their expected realization and the current market rate of interest.
Fair
Value Measurements and Disclosures
FASB
ASC Topic 820, “Fair Value Measurements and Disclosures,” defines FV, and establishes a three-level valuation hierarchy
for disclosures of fair value measurement that enhances disclosure requirements for FV measures. The three levels are defined
as follow:
●
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
●
|
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial
instrument.
|
|
|
●
|
Level
3 inputs to the valuation methodology are unobservable and significant to the FV measurement.
|
As
of March 31, 2019, and December 31, 2018, the Company did not identify any assets and liabilities that are required to be presented
on the balance sheet at FV.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
functional currency of China Jinxin, China Huaxin and Shenzhen Technology Company is RMB. For financial reporting purposes, RMB
is translated into USD as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the
balance sheet dates. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period.
Translation
adjustments from using different exchange rates from period to period are included as a component of stockholders’ equity
as “Accumulated other comprehensive income”. Gains and losses resulting from foreign currency transactions are included
in income. There was no significant fluctuation in the exchange rate for the conversion of RMB to USD after the balance sheet
date.
The
Company uses FASB ASC Topic 220, “Comprehensive Income”. Comprehensive income (loss) is comprised of net income and
all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in
capital and distributions to stockholders. Comprehensive loss for the three months period ended March 31, 2019 and 2018 consisted
of net loss and foreign currency translation adjustments.
Share-based
Compensation
The
Company accounts for share-based compensation to employees in accordance with FASB ASC Topic 718, “Compensation –
Stock Compensation”, which requires that share-based payment transactions with employees be measured based on the grant-date
FV of the equity instrument issued and recognized as compensation expense over the requisite service period.
The
Company accounts for share-based compensation awards to non-employees in accordance with FASB ASC Topic 718 and FASB ASC Subtopic
505-50, “Equity-Based Payments to Non-employees”. Share-based compensation associated with the issuance of equity
instruments to non-employees is measured at the FV of the equity instrument issued or committed to be issued, as this is more
reliable than the FV of the services received. The FV is measured at the date that the commitment for performance by the counterparty
has been reached or the counterparty’s performance is complete.
Earnings
(Loss) per Share (EPS)
The
Company presents net income (loss) per share (“EPS”) in accordance with FASB ASC Topic 260, “Earning Per Share.”
Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted
EPS is computed similar to basic EPS except that the denominator is increased to include the number of additional common shares
that would have been outstanding if all the potential common shares, warrants and stock options had been issued and if the additional
common shares were dilutive. Diluted EPS is based on the assumption that all dilutive convertible shares and stock options and
warrants were converted or exercised. Dilution is computed by applying the treasury stock method for the outstanding options and
warrants, and the if-converted method for the outstanding convertible instruments. Under the treasury stock method, options and
warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later) and as if funds obtained
thereby were used to purchase common stock at the average market price during the period. Under the if-converted method, outstanding
convertible instruments are assumed to be converted into common stock at the beginning of the period (or at the time of issuance,
if later).
Segment
Reporting
FASB
ASC Topic 280, “Segment Reporting”, requires use of the “management approach” model for segment reporting.
The management approach model is based on the way a company’s management organizes segments within the Company for making
operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure,
management structure, or any other manner in which management disaggregates a company.
New
Accounting Pronouncements
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure
all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions,
and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement
of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all entities for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the
impact that the standard will have on its CFS.
In
January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the
goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount
by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance
should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15,
2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1,
2017. The Company is currently evaluating the impact of adopting this standard on its CFS.
In
June 2018, the FASB issued ASU 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting,” which expands the scope of ASC 718 to include share-based payment transactions for acquiring
goods and services from non-employees. An entity should apply the requirements of ASC 718 to non-employee awards except for specific
guidance on inputs to an option pricing model and the attribution of cost. The amendments specify that ASC 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 new guidance is effective for SEC filers for fiscal years, and interim reporting
periods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities). Early
adoption is permitted. The Company is evaluating the effects of the adoption of this guidance and currently believes that it will
impact the accounting of the share-based awards granted to non-employees.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present
or future CFS.
3.
NOTE RECEIVABLE-BANK ACCEPTANCES
The
Company sold goods or provided services to its customers and received commercial notes (bank acceptances) from them in lieu of
payments. The Company discounted the commercial notes with the banks or endorsed the commercial notes to vendors for payment of
their own obligations or to get cash from third parties. Most of the commercial notes have a maturity of less than one year. As
of March 31, 2019 and December 31, 2018, the Company had notes receivable of $15,883 and $15,583, respectively.
4.
OTHER RECEIVABLES
Other
receivables consisted of the followings at March 31, 2019 and December 31, 2018:
|
|
2019
|
|
|
2018
|
|
Social Security
|
|
$
|
232
|
|
|
$
|
300
|
|
Other
|
|
|
446
|
|
|
|
438
|
|
Receivable from disposal of vehicle
|
|
|
-
|
|
|
|
22,584
|
|
Total
|
|
$
|
678
|
|
|
$
|
23,322
|
|
5.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following at March 31, 2019 and December 31, 2018:
|
|
2019
|
|
|
2018
|
|
Production equipment
|
|
$
|
858,380
|
|
|
$
|
858,380
|
|
Office equipment
|
|
|
72,922
|
|
|
|
71,544
|
|
Total
|
|
|
931,302
|
|
|
|
929,924
|
|
Less: Accumulated depreciation
|
|
|
(542,065
|
)
|
|
|
(517,356
|
)
|
Net
|
|
$
|
389,237
|
|
|
$
|
412,568
|
|
Depreciation
for the three months ended March 31, 2019 and 2018 was $23,468 and $717,184, respectively. Depreciation for the three months ended
March 31, 2019 was for Shenzhen Technology Company and Real Fortune. Depreciation for the three months ended March 31, 2018 was
for China Huaxin, China Jinxin and Real Fortune.
6.
RELATED PARTIES TRANSACTIONS
The
Company had advances from related parties of $4,455 and $4,371 at March 31, 2019 and December 31, 2018, respectively. The advance
was from the Company’s management, bore no interest a2nd payable upon demand.
7.
ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued
liabilities and other payables were $94,462 and $11,424, respectively, at March 31, 2019 and December 31, 2018, mainly
consisted of accrued payroll, accrued legal fee and other miscellaneous accrued liabilities.
8.
STOCKHOLDERS’ EQUITY
In
March
, 2019, the Company entered into a Subscription Agreement
with Wanli Liu for the sale of 2,498,750 shares of the Company’s common stock for $49,975 ($0.02 per share). The issuance
and sale of the shares was exempt from the registration requirements of the Securities Act pursuant to Regulation S. Wanli Liu
is a non-U.S. Person. The certificates representing the shares are imprinted with a restrictive legend. The stock certificates
were issued in May 2019.
In March 2019, the Company entered into
a Subscription Agreement with the Company’s former CEO (resigned in May 2019) for the sale of 633,333 shares of the Company’s
common stock for $19,000 ($0.03 per share). The stock certificates were issued in May 2019.
9.
INCOME TAXES
The
Company’s operating subsidiary is governed by the Income Tax Laws of the PRC and various local tax laws. Effective January
1, 2008, China adopted a uniform tax rate of 25% for all enterprises (including foreign-invested enterprises).
The
following table reconciles the statutory rates to the Company’s effective tax rate for the three months ended March 31,
2019 and 2018:
|
|
2019
|
|
|
2018
|
|
US statutory rates (benefit)
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
Tax rate difference
|
|
|
0.9
|
%
|
|
|
8.3
|
%
|
Valuation allowance on NOL
|
|
|
20.1
|
%
|
|
|
12.7
|
%
|
Tax per financial statements
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
10.
STATUTORY RESERVES
Pursuant
to the corporate law of the PRC effective January 1, 2006, the Company is required to maintain one statutory reserve by appropriating
money from its after-tax profit before declaration or payment of dividends. The statutory reserve represents restricted retained
earnings. As of March 31, 2019 and December 31, 2018, the statutory reserve was $557,253.
11.
OPERATING RISKS
The
Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks associated with, among others, the political, economic and
legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
The
Company’s sales, purchases and expenses are denominated in RMB and all of the Company’s assets and liabilities are
also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange
transactions are required by law to be transacted only by authorized financial institutions. Remittances in currencies other than
RMB may require certain supporting documentation in order to effect the remittance.
12.
BUSINESS ACQUISITION AND UNAUDITED PRO FORMA INFORMATION
On
December 10, 2018, the Company entered into a series of agreements known as variable interest entity agreements, or the VIE Agreements,
with Shenzhen Technology Company, and its sole shareholder, Ms. Jing Xie. In consideration of Ms. Xie’s entry into the VIE
Agreements and causing Shenzhen Technology Company to enter into the VIE Agreements, the Company has agreed to issue 3,000,000
shares of its common stock to Ms. Xie. The market stock price was $0.008 per share at acquisition date. The acquisition was accounted
as a business combination in accordance with ASC Topic 805 “Business Combination.”
According
to ASC Topic 805, the allocation of Shenzhen Technology Company’s purchase price among assets acquired and liabilities assumed
is based on estimates of the fair values. Under purchase method of accounting, the total purchase price is allocated to tangible
assets and intangible assets acquired and liabilities assumed based on their estimated fair values with the excess changed to
goodwill. Or in opposite, if the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value
of the consideration transferred that excess in earnings is recognized as a gain attributable to the acquirer. Accordingly, the
Company recognized a bargain purchase gain of $6,530 from this acquisition.
The
following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
|
|
Amount
|
|
Cash & equivalents
|
|
$
|
12,724
|
|
Accounts receivable, net
|
|
|
44,791
|
|
Other receivables
|
|
|
24,585
|
|
Property and equipment, net
|
|
|
7,796
|
|
Accounts payable
|
|
|
(41,367
|
)
|
Other payables and accrued liabilities
|
|
|
(17,999
|
)
|
Purchase price
|
|
|
(24,000
|
)
|
Bargain purchase gain
|
|
$
|
6,530
|
|
The
following unaudited pro forma consolidated results of operations of Adamant and Shenzhen Technology Company for the three months
ended March 31, 2018, presents the operations of Adamant and Shenzhen Technology Company as if the acquisition of Shenzhen Technology
Company occurred on January 1, 2018. The pro forma results are not necessarily indicative of the actual results that would have
occurred had the acquisition been completed as of the beginning of the periods presented, nor are they necessarily indicative
of future consolidated results.
|
|
For the Three months Ended
March 31, 2018
|
|
|
|
|
|
Net sales
|
|
$
|
33,311
|
|
|
|
|
|
|
Net loss
|
|
|
(1,430,318
|
)
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding
|
|
|
69,760,110
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.02
|
)
|
13.
DISPOSAL OF SUBSIDIARIES
On
December 22, 2018, Adamant entered into an Exchange Agreement (the “Exchange Agreement”), among the Company, certain
of its subsidiaries and 16 shareholders of the Company holding in the aggregate 53,782,198 shares of the Company’s
common stock (the “Exiting Shareholders”).
Pursuant
to the Exchange Agreement, the Company transferred all of the outstanding shares of its subsidiary, China Huaxin, to the Exiting
Stockholders in exchange for 48,403,969 shares of the Company’s common. The market stock price was $0.01 per share at disposal
date.
The
following table summarizes the carrying value of the assets and liabilities disposed of China Huaxin at the closing date of disposal.
The excess of the selling price over the carrying value of the net assets disposed was recorded as gain from disposal of subsidiary
of $22,239,222.
|
|
Amount
|
|
Cash
|
|
$
|
9,353
|
|
Inventory
|
|
|
425,239
|
|
Fixed assets, net
|
|
|
14,398,387
|
|
Intangible assets, net
|
|
|
2,562,013
|
|
Goodwill
|
|
|
5,830,629
|
|
Accounts payable
|
|
|
(2,879,080
|
)
|
Accrued liabilities and other payables
|
|
|
(9,376,386
|
)
|
Notes Payable – unrelated party
|
|
|
(2,558,355
|
)
|
Notes Payable – related party
|
|
|
(7,022,963
|
)
|
Advance from related party
|
|
|
(23,144,019
|
)
|
Selling Price
|
|
|
(484,040
|
)
|
Gain on sale of China Huaxin
|
|
$
|
22,239,222
|
|
On
December 22, 2018, the Company, certain of its subsidiaries and the Exiting Shareholders also entered into a Termination Agreement
(the “Termination Agreement”). Pursuant to the Termination Agreement, the Company, China Jinxin, China Tongda, and
the Exiting Shareholders terminated the series of agreements known as variable interest entity agreements, or VIE Agreements,
pursuant to which the Company acting through China Tongda, controlled the operations of China Jinxin and was to receive the economic
benefits of the operations of China Jinxin. As a result of the termination of the VIE Agreements, control of China Jinxin reverted
to the Exiting Shareholders and the Company no longer has any influence over the operations of China Jinxin or any interest in
its assets or the results of its operations. In consideration for the termination of the VIE Agreements, the Company received
an aggregate of 5,378,219 shares of its common stock. The market stock price was $0.01 per share at disposal date.
The
following table summarizes the carrying value of the assets and liabilities disposed of China Jinxin at the closing date of disposal.
The excess of the selling price over the carrying value of the net assets disposed was recorded as gain from disposal of subsidiary
of $2,688,996.
|
|
Amount
|
|
Cash
|
|
$
|
146
|
|
Inventory
|
|
|
11,270
|
|
Other current assets
|
|
|
3,820,088
|
|
Fixed assets, net
|
|
|
5,102,761
|
|
Intangible assets, net
|
|
|
292,702
|
|
Accounts payable
|
|
|
(222
|
)
|
Accrued liabilities and other payables
|
|
|
(980,670
|
)
|
Advance from related parties
|
|
|
(9,890,498
|
)
|
Long term payable
|
|
|
(801,375
|
)
|
Long term loan
|
|
|
(189,416
|
)
|
Selling price
|
|
|
(53,782
|
)
|
Gain on sale of China Jinxin
|
|
$
|
2,688,996
|
|