See accompanying notes to unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
MakingORG, Inc. (“MakingORG”) was incorporated under the laws of the State of Nevada on August 10, 2012. The trading symbol is “CQCQ” and the fiscal year end is December 31. On October 20, 2016, MakingORG filed documents registering its intention to transact interstate business in the state of California. On November 29, 2016, MakingORG incorporated HK Feng Wang Group Limited (“HKFW”) under the laws of Hong Kong. On August 22, 2017, HKFW incorporated Chongqing Beauty Kenner Biotechnology Co., Ltd (“CBKB”) under the laws of the People’s Republic of China (“PRC”).
MaingORG, Inc. and subsidiaries (“the Company”) purchase Acer truncatum bunge seed oil from China, outsource to third party to manufacture Acer truncatum bunge related health product, and sell to end user and distributor in the United States and PRC.
NOTE 2 – GOING CONCERN
Pursuant to ASU 2014-15, the Company has assessed its ability to continue as a going concern for a period of one year from the date of the issuance of these unaudited consolidated financial statements. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year from the financial statement issuance date. The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principle, which contemplate continuation of the Company as a going concern. The Company currently suffered recurring loss, generated negative cash flow from operating activities,has an accumulated deficit and has not completed its efforts to establish a stabilized source of revenues sufficient to cover operating costs over an extended period of time. These conditions raise substantial doubt as to its ability to continue as a going concern. These unaudited consolidated financial statements do not include adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Management anticipates that the Company will be dependent, for the near future, on additional investment capital to fund operating expenses. The Company may seek additional funding through additional issuance of common stock and/or borrowings from financial institutions or the majority shareholder to support its normal business operations. In light of management’s efforts, there is no assurance that the Company will be successful in this or any of its endeavors or become financially viable to continue as a going concern.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s most recent Annual Financial Statements filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim period presented have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted.
Principles of Consolidation
The Company’s unaudited consolidated financial statements include the accounts of MakingORG, and its wholly owned subsidiaries, HKFW and CBTB. All intercompany transactions and balances were eliminated in consolidation.
Use of Estimates
The preparation of unaudited consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Company’s unaudited consolidated financial statement date and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with the original maturities of three months or less to be cash equivalents.
Inventories
Inventories consist of finished goods, which are stated at the lower of cost or net realizable value under the first-in-first-out method. The Company reviews its inventories periodically for possible excess and obsolescence to determine if any reserves are necessary.
Revenue Recognition
Effective January 1, 2018, the Company adopted Topic 606, Revenue from Contracts with Customers, using the modified retrospective transition method. The adoption of the new revenue standards as of January 1, 2018 did not change the Company’s revenue recognition as the majority of its revenues continue to be recognized when the customer takes control of its product. 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.
In general, the Company’s performance obligation is to transfer it products to its end user or distributor. Revenues from product sales are recognized when the customer obtains control of the Company’s finished goods product, which occurs at a point in time, typically upon delivery to the customer.
The Company’s revenue mainly generates from sale of acer truncatum bunge related health products, such as Nervonic Acid Oil, coffee and tea. The Company evaluated its product sales contracts and determined that those contracts are generally capable of being distinct and accounted for as separate performance obligations. Performance obligation is satisfied when the finished goods product delivered to the customer.
Shipping and handling costs paid by the Company are included in cost of sales.
During the three months ended March 31, 2019 and 2018, the Company recognized revenue from sale of acer truncatum bunge related health products in an amount of $nil.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expenses incurred for the three months ended March 31, 2019 and 2018 totaled $nil and $1,397, respectively.
Research and Development
Research and development costs are expensed as incurred and are included in general and administrative expenses in the accompanying consolidated statement of operations and totaled $nil for the three months ended March 31, 2019 and 2018, respectively.
Income Taxes
Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are using enacted tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, if more likely than not that the company will not realize tax assets through future operation.
On December 22, 2017, the U.S. enacted the 2017 Tax Cuts and Jobs Act which contains several key tax provisions that affect the Company, including, but not limited to, a one-time mandatory transition tax on accumulated foreign earnings, changes in the sourcing and calculation of foreign income, and a reduction of the corporate income tax rate to 21% effective January 1, 2018. The Company is required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring its U.S. deferred tax assets and liabilities as well as reassessing the net realizability of its deferred tax assets and liabilities.
Basic Income (Loss) Per Share
Basic income (loss) per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net income available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity.
Foreign Currency Transactions
The functional currency for the Company and HKFW is the US dollar. The functional currency for the China subsidiary (CBKB) is the Renminbi (RMB). Assets and liabilities of the China operation are translated from RMB into U.S. dollars at period-end rates, while income and expense are translated at the weighted-average exchange rates for the period. The related translation adjustments are reflected as a foreign currency translation adjustment in accumulated other comprehensive income/(loss) within shareholders’ deficit.
Related Parties
The Company follows Accounting Standards Codification (“ASC”) 850, “Related Party Disclosures,” for the identification of related parties and disclosure of related party transactions.
Lease
The Company determines if an arrangement is or contains a lease at inception. Operating leases with lease terms of more than 12 months are included in operating lease assets, accrued and other current liabilities, and long-term operating lease liabilities on its consolidated balance sheet. Operating lease assets represent its right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments over the lease term. Operating lease assets and liabilities are recognized based on the present value of the remaining lease payments discounted using its incremental borrowing rate. Lease expense is recognized on a straight-line basis over the lease term.
Segment Reporting
The Company follows Financial Accounting Standards Board (“FASB”) ASC Topic 280, “
Segment Reporting
” for its segment reporting. The Company aggregates its operating segments into one reporting segment, as management believes that its operating segments have similar operating characteristics and similar long term operating performance.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk including the Company’s own credit risk.
In addition to defining fair value, the standard expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
Level 2 – inputs are based upon significant observable inputs other than quoted prices included in Level 1, such as quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
The carrying amounts of financial assets and liabilities in the consolidated balance sheets for cash and cash equivalents, accrued expenses and due to related party approximate their fair value due to the short-term duration of those instruments. Notes payable are recorded at agreed values.
Stock-Based Compensation
The Company accounts for share-based compensation awards to nonemployees in accordance with FASB ASC 718and FASB ASC 505-50. Under FASB ASC 718 and FASB ASC 505-50, stock compensation granted to non-employees has been determined as the fair value of the consideration received or the fair value of equity instrument issued, whichever is more reliably measured and is recognized as an expense as the goods or services are received.
Recent Adopted Accounting Pronouncements
In June 2018, the FASB issued ASU 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees for goods and services and aligns most of the guidance on such payments to nonemployees with the requirements for share-based payments granted to employees. ASU 2018-07 is effective on January 1, 2019. Early adoption is permitted. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“Topic 842”) (as subsequently amended by ASU 2018-01, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01) which requires a lessee to recognize assets and liabilities on the balance sheet for those leases classified as operating leases under previous guidance. Based on a preliminary assessment, the Company expect that its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use (“ROU”) assets upon adoption, resulting in a significant increase in the assets and liabilities on its consolidated balance sheets. There was no change in its leasing activities as a result of adoption. Upon adoption, as of January 1, 2019, the Company recognized operating lease liabilities of $14,079 based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases, as well as corresponding ROU assets of $13,454, the $625 difference attributable to the offset of the deferred rent existing as of January 1, 2019. See Note 8 for further details.
Recently Issued Accounting Pronouncement Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, (Topic 326), Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments which amends the current accounting guidance and requires the use of the new forward-looking “expected loss” model, rather than the “incurred loss” model, which requires all expected losses to be determined based on historical experience, current conditions and reasonable and supportable forecasts. This guidance amends the accounting for credit losses for most financial assets and certain other instruments including trade and other receivables, held-to-maturity debt securities, loans and other instruments. ASU 2016-13 is effective for public entities for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company is evaluating the impact of the adoption of ASU 2016-13 on its financial position and results of operations.
NOTE 4 – INVENTORIES
The components of the Company’s inventories were packaging materials, raw materials and finished goods. Inventory consisted of the following as of March 31, 2019 and December 31, 2018:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Finished goods
|
|
$
|
33,302
|
|
|
$
|
33,302
|
|
Inventory reserve
|
|
|
(13,876
|
)
|
|
|
(11,101
|
)
|
Total inventory
|
|
$
|
19,426
|
|
|
$
|
22,201
|
|
NOTE 5 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets include primarily prepaid consulting fee, deposit for packaging materials and security deposit for rent. As of March 31, 2019, and December 31,2018 prepaid expenses and other current assets was $351,887 and $4,500, respectively.
NOTE 6 – DUE TO RELATED PARTY
During the three months ended March 31, 2019 and 2018, the Company’s sole officer loaned the Company $20,000 and $124, respectively. As of March 31, 2019 and December 31, 2018, the Company was obligated to the officer, for an unsecured, non-interest bearing demand loan with a balance of $250,903 and $230,903, respectively.
NOTE 7 – CONVERTIBLE NOTE PAYABLE
On September 1, 2016, the Company entered into a convertible note agreement in the principal amount of $200,000 with an unrelated party. The note bears interest at 12% per annum and the holder is able to convert all unpaid interest and principal into common shares at $3.50 per share. The note matures on September 1, 2018. The Company recognized a discount on the note of $38,857 at the agreement date. The interest expense was due every six months commencing on March 1, 2017 until the principal amount of this convertible note is paid in full.
On September 1, 2018, the Company entered into an amended and restated 12% convertible promissory note. Pursuant to the amended convertible promissory note, both parties agreed to extend the convertible note agreement to September 1, 2019 with no additional consideration. The Company recognized a discount on the note of $40,000 at the amended agreement date.
The Company recognized interest expense related to the convertible note of $16,000 and $10,856, respectively, for the three months ended March 31, 2019 and 2018. The unamortized debt discount at March 31, 2019 and December 31, 2018 was $16,667 and $26,667, respectively. As of March 31, 2019 and December 31, 2018, net balance of the convertible note amounted to $183,333 and $173,33, respectively.
NOTE 8 – LEASE
The Company has operating lease for its leases office space from a third party. The Company determined if an arrangement is a lease inception of the contract and whether a contract is or contains a lease by determining whether it conveys the right to control the use of identified asset for a period of time. The contact provides the right to substantially all the economic benefits from the use of the identified asset and the right to direct use of the identified asset, we consider it to be, or contain, a lease.
Leases is classified as operating at inception of the lease. Operating leases result in the recognition of ROU assets and lease liabilities on the balance sheet. ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term as of the commencement date. Because the leases do not provide an explicit or implicit rate of return, the Company determines incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments on an individual lease basis. The incremental borrowing rate for a lease is the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments for the asset under similar term, which is 7.33%. Lease expense for the lease is recognized on a straight-line basis over the lease term.
The Company’s leases do not contain any residual value guarantees or material restrictive covenants. Leases with a lease term of 12 months or less are not recorded on the balance sheet and lease expense is recognized on a straight-line basis over the lease term. The remaining term as of March 31, 2019 is 17 months. The Company currently has no finance leases.
During the three months ended March 31, 2019, cash paid for amounts included in the measurement of lease liabilities- operating cash flows from operating lease was $2,250.
The components of lease expense consist of the following:
|
|
Classification
|
|
Three Months
Ended
March 31,
2019
|
|
Operating lease cost
|
|
S,G&A expense
|
|
$
|
2,156
|
|
|
|
|
|
|
|
|
Net lease cost
|
|
|
|
$
|
2,156
|
|
Balance sheet information related to leases consists of the following:
|
|
Classification
|
|
March 31,
2019
|
|
Assets
|
|
|
|
|
|
Operating lease ROU assets
|
|
Right-of-use assets
|
|
$
|
11,544
|
|
|
|
|
|
|
|
|
Total leased assets
|
|
|
|
$
|
11,544
|
|
Liabilities
|
|
|
|
|
|
|
Current portion
|
|
|
|
|
|
|
Operating lease liabilities
|
|
Current maturities of operating lease liabilities
|
|
$
|
8,393
|
|
|
|
|
|
|
|
|
Non-current portion
|
|
|
|
|
|
|
Operating lease liabilities
|
|
Long-term portion of operating lease liabilities
|
|
|
3,682
|
|
|
|
|
|
|
|
|
Total lease liabilities
|
|
|
|
$
|
12,075
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
1.42
|
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
7.33
|
%
|
Cash flow information related to leases consists of the following:
|
|
Three Months
Ended
March 31,
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
2,004
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
Operating leases
|
|
|
1,910
|
|
As previously discussed, the Company adopted Topic 842 by applying the guidance at adoption date, January 1, 2019. As required, the following disclosure is provided for periods prior to adoption, which continue to be presented in accordance with ASC 840. Future minimum lease payment under non-cancellable lease as of March 31, 2019 are as follows:
Ending December 31,
|
|
Operating
Leases
|
|
2019
|
|
$
|
6,750
|
|
2020
|
|
|
6,000
|
|
Total lease payments
|
|
|
12,750
|
|
Less: Interest
|
|
|
(675
|
)
|
Present value of lease liabilities
|
|
$
|
12,075
|
|
NOTE 9 – STOCKHOLDERS’ DEFICIT
Common Stock
On January 4, 2019, the Company issued 110,000 shares of common stock with a fair value of $462,000 for consulting service. During the three months ended, the Company incurred non-cash stock compensation expense for this consulting fee of $115,500.
NOTE 10 – INCOME TAXES
The Company accounts for income taxes under ASC 740, “Income Taxes”. ASC 740 requires the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax basis of assets and liabilities and the tax rates in effect when these differences are expected to reverse. It also requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company is subject to taxation in the United States and certain state jurisdictions. The provision for income taxes differs from the amounts which would be provided by applying the statutory federal income tax rate of 21% to the net loss before provision for income taxes. HKFW in Hong Kong are governed by the Inland Revenue Ordinance Tax Law of Hong Kong, and are generally subject to a profits tax at the rate of 16.5% on the estimated assessable profits. CBNB in the PRC is governed by the Income Tax Law of the PRC concerning the private enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments.
Provision for income tax incurred for the three months ended March 31, 2019 and 2018 totaled $nil and $nil, respectively.
Net deferred tax assets consist of the following components as of:
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax asset:
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
103,630
|
|
|
$
|
70,546
|
|
Valuation allowance
|
|
|
(103,630
|
)
|
|
|
(70,546
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Due to the change in ownership provisions of the Income Tax laws of United States of America, net operating loss carry forwards of approximately $367,000, which expires in 2032, for federal income tax reporting purposes are subject to annual limitations. When a change in ownership occurs, net operating loss carry forwards may be limited as to use in future years. Tax filings for the Company for the years 2014 and 2015 are available for examination by stat tax jurisdictions and federal tax purposes.
NOTE 11– SUBSEQUENT EVENT
The Company has evaluated all subsequent events through the date the unaudited consolidated financial statements were issued and determine that there were no subsequent events or transactions that require recognition or disclosures in the unaudited consolidated financial statements.