Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the Company’s consolidated financial statements, which are included elsewhere in this Form 10-K.
Overview
MakingORG, Inc. (“MakingORG”) was incorporated under the laws of the State of Nevada on August 10, 2012. The trading symbol of the Company 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”).
On November 29, 2016, the Company 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”).
The Company and its subsidiaries purchase Acer truncatum bunge seed oil from China, outsource to third parties to manufacture Acer truncatum bunge related health product, and sell to distributors in PRC.
CBKB entered into a Strategic Cooperation Framework Agreement with Hangzhou Life Century Hualian Supermarket Chain Co., Ltd. (“HLCH”), dated May 25, 2018, pursuant to which the Company agreed to assist HLCH in identifying brand-specific, high tech characteristics products, such as acer truncatum nervonic acid oil, acer truncatum seed oil capsule, acer truncatum edible oil, acer truncatum oil with nervonic acid formula, acer truncatum coffe, acer truncatum tea, canned acer truncatum, acer truncatum cosmetics, acer truncatum skin care products, hair wash products and acer trunncatrum food. This agreement did not continue due to HLCH did not operate well in the year 2019.
In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries and infections have been reported globally. China governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. As a result, we closed our China operations from the end of January 2020 to the end of March 2020.
The ultimate impact of the COVID-19 pandemic on the Company’s operations is still unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated to have a material adverse impact on our business, financial condition and results of operations.
Plan of Operation
Our sole officer and director intends to sell Acer truncatum bunge related health product in the United States and PRC, we might just identify and negotiate with another company for the business combination or merger of that entity with and into our company. We would seek, investigate and, if such investigation warrants, acquire an interest in one or more business opportunities presented to it by persons or firms who or which desire to seek the perceived advantages of a publicly held corporation. At this time, we have no plan, proposal, agreement, understanding or arrangement to acquire or merge with any specific business or company, and the Company has not identified any specific business or company for investigation and evaluation. No member of management or promoter of the Company has had any material discussions with any other company with respect to any acquisition of that company.
We will not restrict our search for another target company to any specific business, industry or geographical location, and the Company may participate in a business venture of virtually any kind or nature. The discussion of the proposed plan of operation under this caption and throughout this Annual Report is purposefully general and is not meant to be restrictive of the Company’s virtually unlimited discretion to search for and enter into potential business opportunities.
The extent of the impact of COVID-19 on our business and financial results will depend on future developments, including the duration and spread of the outbreak within the markets in which we operate, the related impact on our customers and suppliers and the possibility of an economic recession after the virus has subsided, all of which are highly uncertain and ever-changing. Any of these factors could materially increase our costs, negatively impact our sales and damage our results of operations and liquidity. The severity and duration of any such impacts, including after the virus has subsided, cannot be predicted.
Sources of Opportunities
The Company anticipates that business opportunities for possible acquisition will be referred by various sources, including its officers and directors, professional advisers, securities broker-dealers, venture capitalists, members of the financial community, and others who may present unsolicited proposals.
The Company will seek a potential business opportunity from all known sources but will rely principally on personal contacts of its officer and director and consultants as well as indirect associations between them and other business and professional people. It is not presently anticipated that the Company will engage professional firms specializing in business acquisitions or reorganizations.
Evaluation of Opportunities
The analysis of new business opportunities will be undertaken by or under the supervision of the officer and director of the Company. Management intends to concentrate on identifying prospective business opportunities which may be brought to its attention through present associations with management. In analyzing prospective business opportunities, management will consider such matters as the available technical, financial and managerial resources; working capital and other financial requirements; history of operation, if any; prospects for the future; present and expected competition; the quality and experience of management services which may be available and the depth of that management; the potential for further research, development or exploration; specific risk factors not now foreseeable but which then may be anticipated to impact the proposed activities of the Company; the potential for growth or expansion; the potential for profit; the perceived public recognition or acceptance of products, services or trades; name identification; and other relevant factors. The officer and director of the Company will meet personally with management and key personnel of the firm sponsoring the business opportunity as part of her investigation. To the extent possible, the Company intends to utilize written reports and personal investigation to evaluate the above factors. The Company will not acquire or merge with any company for which audited consolidated financial statements cannot be obtained.
It may be anticipated that any opportunity in which the Company participates will present certain risks. Many of these risks cannot be adequately identified prior to selection of the specific opportunity, and the Company’s stockholders must, therefore, depend on the ability of management to identify and evaluate such risk. In the case of some of the opportunities available to the Company, it may be anticipated that the promoters thereof have been unable to develop a going concern or that such business is in its development stage in that it has not generated significant revenues from its principal business activities prior to the Company’s anticipation. There is a risk, even after the Company’s participation in the activity and the related expenditure of the Company’s funds that the combined enterprises will still be unable to become a going concern or advance beyond the development stage. Many of the opportunities may involve new and untested products, processes, or market strategies which may not succeed. Such risks will be assumed by the Company and, therefore, its stockholders.
The Company will not restrict its search for any specific kind of business but may acquire a venture which is in its preliminary or development stage, which is already in operation, or in essentially any stage of its corporate life. It is currently impossible to predict the status of any business in which the Company may become engaged, in that such business may need additional capital, may merely desire to have its shares publicly traded, or may seek other perceived advantages which the Company may offer.
Acquisition of Opportunities
In implementing a structure for a particular business acquisition, the Company may become a party to a merger, consolidation, reorganization, joint venture, franchise or licensing agreement with another corporation or entity. It may also purchase stock or assets of an existing business. On the consummation of a transaction, it is possible that the present management and shareholders of the Company will not be in control of the Company. In addition, the Company’s officer and director may, as part of the terms of the acquisition transaction, resign and be replaced by new officers and directors without a vote of the Company’s stockholders.
It is anticipated that any securities issued in any such reorganization would be issued in reliance on exemptions from registration under applicable Federal and state securities laws. In some circumstances, however, as a negotiated element of this transaction, the Company may agree to register such securities either at the time the transaction is consummated, under certain conditions, or at specified time thereafter. The issuance of substantial additional securities and their potential sale into any trading market which may develop in the Company’s common stock may have a depressive effect on such market. While the actual terms of a transaction to which the Company may be a party cannot be predicted, it may be expected that the parties to the business transaction will find it desirable to avoid the creation of a taxable event and thereby structure the acquisition in a so called “tax free” reorganization under Sections 368(a) (1) or 351 of the Internal Revenue Code of 1986, as amended (the “Code”). In order to obtain tax free treatment under the Code, it may be necessary for the owners of the acquired business to own 80% or more of the voting stock of the surviving entity. In such event, the shareholders of the Company, including investors in this offering, would retain less than 20% of the issued and outstanding shares of the surviving entity, which could result in significant dilution in the equity of such shareholders.
As part of the Company’s investigation, the officer and director of the Company will meet personally with management and key personnel, may visit and inspect material facilities, obtain independent analysis or verification of certain information provided, check references of management and key personnel, and take other reasonable investigative measures, to the extent of the Company’s limited financial resources and management expertise.
The manner in which each Company participates in an opportunity will depend on the nature of the opportunity, the respective needs and desires of the Company and other parties, the management of the opportunity, and the relative negotiating strength of the Company and such other management.
With respect to any mergers or acquisitions, negotiations with target company management will be expected to focus on the percentage of the Company which target company shareholders would acquire in exchange for their stockholdings in the target company. Depending upon, among other things, the target company’s assets and liabilities, the Company’s stockholders will in all likelihood hold a lesser percentage ownership interest in the Company following any merger or acquisition. The percentage ownership may be subject to significant reduction in the event the Company acquires a target company with substantial assets. Any merger or acquisition effected by the Company can be expected to have a significant dilutive effect on the percentage of shares held by the Company’s then stockholders.
The Company will not have sufficient funds (unless it is able to raise funds in a private placement) to undertake any significant development, marketing and manufacturing of any products which may be acquired.
Accordingly, following the acquisition of any such product, the Company will, in all likelihood, be required to either seek debt or equity financing or obtain funding from third parties, in exchange for which the Company would probably be required to give up a substantial portion of its interest in any acquired product. There is no assurance that the Company will be able either to obtain additional financing or interest third parties in providing funding for the further development, marketing and manufacturing of any products acquired.
It is anticipated that the investigation of specific business opportunities and the negotiation, drafting and execution of relevant agreements, disclosure documents and other instruments will require substantial management time and attention and substantial costs for accountants, attorneys and others. If a decision is made not to participate in a specific business opportunity the costs therefore incurred in the related investigation would not be recoverable.
Furthermore, even if an agreement is reached for the participation in a specific business opportunity, the failure to consummate that transaction may result in a loss to the Company of the related costs incurred.
Management believes that the Company may be able to benefit from the use of “leverage” in the acquisition of a business opportunity. Leveraging a transaction involves the acquisition of a business through incurring significant indebtedness for a large percentage of the purchase price for that business.
Through a leveraged transaction, the Company would be required to use less of its available funds for acquiring the business opportunity and, therefore, could commit those funds to the operations of the business opportunity, to acquisition of other business opportunities or to other activities. The borrowing involved in a leveraged transaction would ordinarily be secured by the assets of the business opportunity to be acquired. If the business opportunity acquired is not able to generate sufficient revenues to make payments on the debt incurred by the Company to acquire that business opportunity, the lender would be able to exercise the remedies provided by law or by contract. These leveraging techniques, while reducing the amount of funds that the Company must commit to acquiring a business opportunity, may correspondingly increase the risk of loss to the Company. No assurance can be given as to the terms or the availability of financing for any acquisition by the Company. During periods when interest rates are relatively high, the benefits of leveraging are not as great as during periods of lower interest rates because the investment in the business opportunity held on a leveraged basis will only be profitable if it generates sufficient revenues to cover the related debt and other costs of the financing. Lenders from which the Company may obtain funds for purposes of a leveraged buy-out may impose restrictions on the future borrowing, distribution, and operating policies of the Company. It is not possible at this time to predict the restrictions, if any, which lenders may impose or the impact thereof on the Company.
Critical Accounting Policies and Estimates
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new revenue recognition standard provides a five-step analysis of contracts to determine when and how revenue is recognized. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB deferred the effective date of ASU No. 2014-09 for all entities by one year to annual reporting periods beginning after December 15, 2017. The FASB has issued several updates subsequently, including implementation guidance on principal versus agent considerations, on how an entity should account for licensing arrangements with customers, and to improve guidance on assessing collectability, presentation of sales taxes, noncash consideration, and contract modifications and completed contracts at transition. 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.
Prior to the adoption of ASC 842 on January 1, 2019:
Leases, mainly leases of offices, where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Payments made under operating leases are recognized as an expense on a straight-line basis over the lease term. The Company had no finance leases for any of the periods stated herein.
Upon and thereafter the adoption of ASC 842 on January 1, 2019:
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842) (“Topic 842”), which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; ASU 2018-11, Targeted Improvements; and ASU 2019-01, Codification Improvements. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of income.
The new standard was effective for the Company on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company adopted the new standard on January 1, 2019 and used the effective date as its date of initial application. Consequently, prior period financial information has not been recast and the disclosures required under the new standard have not been provided for dates and periods before January 1, 2019.
The new standard provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients”, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements, the latter not being applicable to the Company. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, it has not recognized ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company also elected the practical expedient to not separate lease and non-lease components for all of its leases.
The Company believe the most significant effects of the adoption of this standard relate to (1) the recognition of new ROU assets and lease liabilities on its consolidated balance sheet for its office operating leases and (2) providing new disclosures about its leasing activities. 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.
The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates.
Results of Operations
For the years ended December 31, 2021 and December 31, 2020
| | Years Ended December 31, | | | | | | | |
| | 2021 | | | 2020 | | | Change | | | Percent | |
Net Sales | | $ | 611,328 | | | $ | 238,587 | | | $ | 372,741 | | | | 156 | % |
Cost of Sales | | | 397,120 | | | | 145,470 | | | | 251,650 | | | | 173 | % |
Gross Profit | | | 214,208 | | | | 93,117 | | | | 121,091 | | | | 130 | % |
| | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 102,297 | | | | 97,191 | | | | 5,106 | | | | 5 | % |
Professional fees | | | 88,248 | | | | 92,996 | | | | (4,748 | ) | | | -5 | % |
| | | | | | | | | | | | | | | | |
Total operating expenses | | | 190,545 | | | | 190,187 | | | | 358 | | | | 0 | % |
| | | | | | | | | | | | | | | | |
Other income (expenses): | | | | | | | | | | | | | | | | |
Interest income | | | 2 | | | | 288 | | | | (286 | ) | | | -99 | % |
Interest expense | | | (24,000 | ) | | | (60,267 | ) | | | 36,267 | | | | -60 | % |
Other income | | | 1,348 | | | | 3,948 | | | | (2,600 | ) | | | -66 | % |
Loss on inventory write-down | | | - | | | | (9,420 | ) | | | 9,420 | ) | | | 100 | % |
Total other income (expenses) | | | (22,650 | ) | | | (65,451 | ) | | | 42,801 | | | | 65 | % |
| | | | | | | | | | | | | | | | |
Income (Loss) before income taxes | | | 1,013 | | | | (162,521 | ) | | | 163,534 | | | | -101 | % |
Income tax expense | | | 1,627 | | | | 3,329 | | | | (1,702 | ) | | | -51 | % |
| | | | | | | | | | | | | | | | |
Net loss | | $ | (614 | ) | | $ | (165,850 | ) | | $ | 165,236 | | | | -100 | % |
Sales, cost of sales and gross profit
The Company consolidated sales for the year ended December 31, 2021 was $611,328, an increase of $372,741 or 156% from the sales of $238,587 for the year ended December 31, 2020. Cost of sales for the years ended December 31, 2021 was $397,120, an increase of $251,650 or 173% from cost of sales $145,470 for the year ended December 31, 2020. It resulted in a gross profit of $214,208 for the year ended December 31, 2021, an increase of $121,091 or 130% from the gross profit of $93,117 for the years ended December 31, 2020, respectively. The increase in sales, cost and gross profit was due to the increase sales in PRC because the COVID-19 was affecting less in people’s life in 2021 compared to 2020, when it started to burst out.
Total operating expenses
For the year ended December 31, 2021, total operating expenses were $190,545, which consisted of professional fees of $88,248, China rent expense of $66,448, China salary, office expense and miscellaneous expense of $35,849. For the year ended December 31, 2020, total operating expenses were $190,187, which consisted of professional fees of $92,996, rent expenses of $46,329, China salary and office expense of $44,084, miscellaneous expenses of $6,778. Total operating expenses increased $358, or 0.2%.
Total other income (expense)
For the year ended December 31, 2021, total other expenses were $22,650, which consisted of interest expense of $24,000, interest income of $2 and other income of $1,348. For the year ended December 31, 2020, total other expenses were $65,451, which consisted of interest expense of $60,267, interest income of $288, other income of $3,948 and loss on inventory write-down of $9,420. Total other expense decreased $42,801, or 65% for the year ended December 31, 2021 from the year ended December 31, 2020, primarily due to the decrease in interest expense for beneficial conversion feature and the decrease of loss on inventory write-off.
Net loss
For the year ended December 31, 2021, the Company had a loss of $614, a decrease of loss of $165,236 or 100% from the net loss of $165,850 for the year ended December 31, 2020. The decrease of net loss was due to the reasons stated above.
Liquidity and Capital Resources
As of December 31, 2021, the Company had cash and cash equivalents and total assets of $108,356 and $220,204, compared to the cash and cash equivalents and total assets of $30,700 and $192,543, respectively as of December 31, 2020. As of December 31, 2021, the Company had total liabilities of $756,823, of which $$200,000 is convertible note payable, $128,000 is interest payable, $11,234 is accrued liabilities, $31,171 is lease liabilities and $386,418 is due to our sole officer and director as an unsecured, non-interest-bearing demand loan. As of December 31, 2020, the Company had total liabilities of $732,323, of which $200,000 is convertible note payable and $340,286 is due to our sole officer and director as an unsecured, non-interest-bearing demand loan. As of December 31, 2021, and 2020, the Company had negative working capital amount of $536,619 and $425,677, respectively.
Other than an oral agreement with Mrs. Cui to fund the expenses of the Company, we currently have no agreements and arrangements with any party to obtain funds through bank loans, lines of credit or any other sources. Since the Company has no such arrangements or plans currently in effect, its inability to raise funds for the above purposes will have a severe negative impact on its ability to remain a viable company.
Our operations may be affected by the ongoing COVID-19 pandemic. The ultimate disruption that may result from the virus is uncertain, but it may result in a material adverse impact on our financial position, operations and cash flows.
Cash Flows from Operating Activities
For the year ended December 31, 2021, net cash flows provide by operating activities is $29,748, resulting from a net loss of $614, a net increase of $137,086 or 128% from the net cash used in operating activities of $107,338 for the year ended December 31, 2020. It caused by the decrease of loss of $165,236 or 99%, increase by accounts receivable change of $95,796 or 207%, amortization of right-of-use of assets of $69,352, accrued liabilities change of $16,811, etc, offset by the decrease caused by Prepaid expenses change of $110,093, lease liabilities of $42,475, amortization of debt discount of $36,267, inventory of $34,442, etc. For the year ended December 31, 2020, net cash flows used in operating activities was $107,338, resulting from a net loss of $165,850, an increase by inventory write-down of $9,420, an increase in amortization of debt discount of $36,267, decreased by amortization of right-of-use of assets of $250, decreased by lease liabilities of $14,534, decreased by changes in accounts receivable of $46,292, accrued liability of $10,403 and customer deposit of $6,741, increased by inventory, prepaid expenses and interest payable of $91,045.
Cash Flows from Investing Activities
For the year ended December 31, 2021, no cash flow from investing activity, while the cash flow used in investing activities was $11,594 for the year ended December 31, 2020, which was caused by the loan payment to related party.
Cash Flows from Financing Activities
The Company financed the operations primarily from the advances from the its sole officer and director. For the year ended December 31, 2021 and 2020, cash flows provided by advances from the Company’s sole officer and director of $$46,132 and 54,417, respectively, a decrease of $8,285 or 15%.
Going Concern Consideration
The Company had net losses of $614 and $165,850 for the years ended December 31, 2021 and 2020 respectively. In addition, the Company had an accumulated deficits of $1,162,307 and $1,161,693 and generated not enough/negative cash flows from operating activities as of and for the years ended December 31, 2021 and 2020, respectively. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on its ability to raise additional capital. The Company’s consolidated financial statements do not include any 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.
These consolidated financial statements have been prepared on a going concern basis, which assumes the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to repay its debt obligations, to obtain necessary equity financing to continue operations, and the attainment of profitable operations. 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 are no assurances that the Company will be successful in this or any of its endeavors or become financially viable and continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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 an Amended and Restated 12% Convertible Promissory Note, both parties agreed to extend a 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.
On September 1, 2019, 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, 2020 with no additional consideration. The Company recognized a discount on the note of $54,400 at the amended agreement date. Since the conversion feature of conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method.
On September 1, 2020, the Company entered 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, 2022 with no additional consideration. The Company recognized a discount on the note of $0 at the amended agreement date.
The Company recognized interest expense related to the convertible note of $24,000 and $54,267 for the years ended December 31, 2021 and 2020, respectively. There was no unamortized debt discount as of December 31, 2021 and 2020 respectively. As of December 31, 2021, and 2020, net balance of the convertible note were $200,000.
Operating Lease
The Company has an operating lease for its office space from a third party in the United States. 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 lease does 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 lease expired on August 31, 2020.
The Company signed a lease agreement with a related party in China in June 2020, an entity in which CBKB’s supervisor is a shareholder. It called for a monthly rent of RMB40,000 (approximately $6,000). The lease was for one year and was subject to renewal. The lease was 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 terms 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 fora 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 5.25%. The lease did not contain any residual value guarantees or material restrictive covenants. The Company currently had no finance leases.
As of December 31, 2021, total future minimum annual lease payments under operating lease were as follows, by years:
Ending December 31, | | Operating Leases | |
2022 | | $ | 31,471 | |
Total lease payments | | | 31,471 | |
Less: Interest | | | (300 | ) |
Present value of lease liabilities | | $ | 31,171 | |
Material Definitive Agreement
MakingOrg, Inc.’s subsidiary, Chongqing Beauty Kenner Biotechnology Co., Ltd., entered into a Strategic Cooperation Framework Agreement (the “Agreement”) with Hangzhou Life Century Hualian Supermarket Chain Co., Ltd. (“HLCH”), dated May 25, 2018, pursuant to which the Company agreed to assist HLCH in identifying brand-specific, high tech characteristics products, such as acer truncatum nervonic acid oil, acer truncatum seed oil capsule, acer truncatum edible oil, acer truncatum oil with nervonic acid formula, acer truncatum coffe, acer truncatum tea, canned acer truncatum, acer truncatum cosmetics, acer truncatum skin care products, hair wash products and acer trunncatrum food. The Company has initiated the marketing effort per agreement, however, the result has not met the expectation and the Company is still finding solutions.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Item 8. Financial Statements.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
MakingORG, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of MakingORG, Inc. and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operation, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2021, and the related notes. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt About the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations, has a net capital deficiency, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue recognition
As described in Note 2 and 6 to the consolidated financial statements, the Company generates its revenue from sales of acer truncatum bunge related health products exclusively from one customer. The Company evaluates its product sales contracts and determines the contracts with its customer are distinct and contain one performance obligation. Performance obligation is satisfied when finished goods delivered to the customer.
We identified the revenue recognition as a critical audit matter. Auditor judgement is involved in performing our audit procedures to evaluate whether the timing and amount of revenue recognition was appropriately stated.
The primary procedures we performed to address this critical audit matter included:
| · | We evaluated the relationship between the Company and the customer, and the reasonableness of the key terms of product sales contracts. |
| | |
| · | We evaluated the performance obligations identified by the Company against the five-step model prescribed at ASC 606, Revenue form Contracts with Customers, and evaluated the management’s conclusion. |
| | |
| · | We tested the accuracy and cutoff of the revenue recognized by management through verifying the evidence of deliveries and value-added invoices issued. |
| | |
/s/ Simon & Edward, LLP
(PCAOB #2485)
Rowland Heights, California
April 15, 2022
We have served as the Company’s auditor since 2016.
MAKINGORG, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | December 31, 2021 | | | December 31, 2020 | |
| | | | | | |
ASSETS |
Current Assets | | | | | | |
Cash and cash equivalents | | $ | 108,356 | | | $ | 30,700 | |
Accounts receivable – related party | | | - | | | | 48,934 | |
Advances to vendor and others | | | 80,677 | | | | 2,000 | |
Due from related party | | | - | | | | 12,256 | |
Right-of-use assets - operating leases | | | 31,171 | | | | - | |
Total Current Assets | | | 220,204 | | | | 93,890 | |
| | | | | | | | |
Right-of-use assets - operating leases | | | - | | | | 98,653 | |
| | | | | | | | |
Total Assets | | $ | 220,204 | | | $ | 192,543 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
Current Liabilities | | | | | | | | |
Convertible note payable | | $ | 200,000 | | | $ | - | |
Interest payable | | | 128,000 | | | | 104,000 | |
Accrued liabilities | | | 11,234 | | | | 4,747 | |
Lease liabilities - operating leases | | | 31,171 | | | | 70,534 | |
Due to related party | | | 386,418 | | | | 340,286 | |
Total Current Liabilities | | | 756,823 | | | | 519,567 | |
| | | | | | | | |
Long-Term Liabilities | | | | | | | | |
Convertible note payable, noncurrent | | | - | | | | 200,000 | |
Lease liabilities – operating lease, noncurrent | | | - | | | | 12,756 | |
Total Long-term Liabilities | | | - | | | | 212,756 | |
| | | | | | | | |
TOTAL LIABILITIES | | | 764,023 | | | | 732,323 | |
| | | | | | | | |
Commitment and Contingencies | | | | | | | | |
| | | | | | | | |
Stockholders’ Equity (Deficit) | | | | | | | | |
Preferred stock, par value $0.001; 50,000,000 shares authorized, zero shares issued and outstanding | | | - | | | | - | |
Common stock, par value $0.001; 150,000,000 shares authorized, 35,540,000 shares issued and outstanding as of December 31, 2021 and 2020 | | | 35,540 | | | | 35,540 | |
Additional paid-in capital | | | 583,882 | | | | 583,882 | |
Accumulated other comprehensive income | | | 6,266 | | | | 2,491 | |
Accumulated deficit | | | (1,162,307 | ) | | | (1,161,693 | ) |
Total Stockholders’ Deficit | | | (536,619 | ) | | | (539,780 | ) |
| | | | | | | | |
Total Liabilities and Stockholders’ Deficit | | $ | 220,204 | | | $ | 192,543 | |
See accompanying notes to consolidated financial statements.
MAKINGORG, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| | For the years ended December 31, | |
| | 2021 | | | | 2020 | |
| | | | | | | |
REVENUE – RELATED PARTY | | $ | 611,328 | | | $ | 238,587 | |
COST OF REVENUE | | | 397,120 | | | | 145,470 | |
GROSS PROFIT | | | 214,208 | | | | 175,069 | |
| | | | | | | | |
OPERATING EXPENSES | | | | | | | | |
Selling, general and administrative | | | 102,297 | | | | 97,191 | |
Professional fees | | | 88,248 | | | | 92,996 | |
TOTAL OPERATING EXPENSES | | | 190,545 | | | | 190,187 | |
| | | | | | | | |
INCOME (LOSS) FROM OPERATIONS | | | 23,663 | | | | (97,070 | ) |
| | | | | | | | |
OTHER INCOME (EXPENSE) | | | | | | | | |
Interest income | | | 2 | | | | 288 | |
Interest expense | | | (24,000 | ) | | | (60,267 | ) |
Other income, net | | | 1,348 | | | | 3,948 | |
Loss on inventory write-down | | | - | | | | (9,420 | ) |
TOTAL OTHER EXPENSE, NET | | | (22,650 | ) | | | (65,451 | ) |
| | | | | | | | |
INCOME (LOSS) BEFORE INCOME TAX | | | 1,013 | | | | (162,521 | ) |
| | | | | | | | |
Income tax | | | 1,627 | | | | 3,329 | |
| | | | | | | | |
NET LOSS | | $ | (614 | ) | | $ | (165,850 | ) |
| | | | | | | | |
OTHER COMPREHENSIVE ITEM: | | | | | | | | |
Foreign currency translation income | | | 3,775 | | | | 5,373 | |
| | | | | | | | |
TOTAL COMPREHENSIVE LOSS | | $ | (3,161 | ) | | $ | (160,477 | ) |
| | | | | | | | |
NET LOSS PER COMMON SHARE: BASIC AND DILUTED | | $ | (0.000 | ) | | $ | (0.002 | ) |
| | | | | | | | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: BASIC AND DILUTED | | | 35,540,000 | | | | 35,540,000 | |
See accompanying notes to consolidated financial statements.
MAKINGORG, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
| | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | | Additional | | | Other | | | | | | Total | |
| | Common Stock | | | Paid-in | | | Comprehensive | | | Accumulated | | | Stockholders’ | |
| | Shares | | | Amount | | | Capital | | | Income | | | Deficit | | | Deficit | |
Balance, December 31, 2019 | | | 35,430,000 | | | $ | 35,430 | | | $ | 583,882 | | | $ | (2,882 | ) | | $ | (995,843 | ) | | $ | (379,303 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation loss | | | - | | | | - | | | | - | | | | 5,373 | | | | - | | | | 5,373 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (165,850 | ) | | | (165,850 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2020 | | | 35,430,000 | | | | 35,430 | | | | 583,882 | | | | 2,491 | | | | (1,161,693 | ) | | | (539,780 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation loss | | | - | | | | - | | | | - | | | | 3,775 | | | | - | | | | 3,775 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (614 | ) | | | (614 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2021 | | | 35,540,000 | | | $ | 35,540 | | | $ | 583,882 | | | $ | 6,266 | | | $ | (1,162,307 | ) | | $ | (536,619 | ) |
See accompanying notes to consolidated financial statements.
MAKINGORG, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | For the years ended December 31, | |
| | 2021 | | | 2020 | |
| | | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
Net loss | | $ | (614 | ) | | $ | (165,850 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Loss on inventories write-down | | | - | | | | 9,420 | |
Amortization of debt discount | | | - | | | | 36,267 | |
Changes in assets and liabilities: | | | | | | | | |
Accounts receivable | | | 49,504 | | | | (46,292 | ) |
Inventories | | | - | | | | 34,442 | |
Prepaid expenses and other current assets | | | (77,490 | ) | | | 32,603 | |
Interest payable | | | 24,000 | | | | 24,000 | |
Accrued liabilities | | | 6,408 | | | | (10,403 | ) |
Customer deposit - related party | | | - | | | | (6,741 | ) |
Lease liabilities | | | 27,941 | | | | (14,784 | ) |
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES | | | 29,748 | | | | (107,338 | ) |
| | | | | | | | |
CASH FLOWS FROM/USED BY INVESTING ACTIVITIES | | | | | | | | |
Loan to related party | | | - | | | | (11,594 | ) |
CASH FLOWS USED IN INVESTING ACTIVITIES | | | - | | | | (11,594 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
Loan from related party | | | 46,132 | | | | 54,417 | |
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES | | | 46,132 | | | | 54,417 | |
| | | | | | | | |
EFFECT OF EXCHANGE RATE CHANGES ON CASH | | | 1,776 | | | | 1,004 | |
| | | | | | | | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | | | 77,656 | | | | (63,511 | ) |
Cash and cash equivalents, beginning of period | | | 30,700 | | | | 94,211 | |
Cash and cash equivalents, end of period | | $ | 108,356 | | | $ | 30,700 | |
| | | | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | | | | |
Interest paid | | $ | - | | | $ | - | |
Income taxes paid | | $ | 800 | | | $ | 4,129 | |
See accompanying notes to consolidated financial statements.
MAKINGORG, INC. AND SUBSIDIARIES
NOTES TO 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 products, and sell to end user and distributor in the United States and PRC.
In January 2020, the World Health Organization declared an outbreak of the coronavirus (“COVID-19”) to be a Public Health Emergency of International Concern, subsequently declared COVID-19 a global pandemic, and recommended containment and mitigation measures worldwide on March 11, 2020. The Company had experienced some adverse impacts on its business in the PRC Segment, such as limited access to its staff in the PRC in the beginning of the outbreak and restrictions on business travel within the PRC and between USA and PRC. Even though the operations in the PRC segment fully resumed in the third quarter of 2020, the pandemic has created global economic uncertainties and led to negative impact on the financial markets. The extent of the COVID-19 impact to the Company will depend on numerous factors and developments related to COVID-19. Consequently, any potential impacts of COVID-19 remain highly uncertain and cannot be predicted with confidence.
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 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 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 from operations, generated negative cash flow from operating activities and 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. These conditions raise substantial doubt as to its ability to continue as a going concern. These 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.
The Company had net losses of $614 and $165,850 for the years ended December 31, 2021 and 2020 respectively. In addition, the Company had an accumulated deficit of $1,162,307 and $1,161,693, respectively, and generated not enough/negative cash flows from operating activities as of and for years ended December 31, 2021 and 2020, respectively. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on its ability to raise additional capital. The Company’s consolidated financial statements do not include any 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. Considering 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
Principles of Consolidation
The Company’s consolidated financial statements refer to MakingORG, Inc. and its subsidiaries. All intercompany transactions and balances were eliminated in consolidation.
Use of Estimates
The preparation of 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 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
Cash and cash equivalents primarily consist of cash on deposit with banks and financial institutes and petty cash on hands.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivables are reported realizable value, net of allowance for contractual credits and doubtful accounts, which are recognized in the period the related revenue is recorded. Accounts receivable consists principally of receivables from distributor or end user, arising from the sale of the Company’s product. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Management evaluated that there was no allowance for doubtful accounts as of December 31, 2021 and 2020, respectively.
Inventories
Inventories consist of (a) packing materials (b) raw materials and (b) 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. As of December 31, 2021 and 2020, there were no inventory held on hands.
Revenue Recognition
The Company adopted Topic 606, Revenue from Contracts with Customers, using the modified retrospective transition method on January 1, 2018. 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 evaluates 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.
Advertising Expenses
Advertising costs are expensed as incurred. There were no advertising expenses for the years ended December 31, 2021 and 2020.
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 deferred tax assets that, based on available evidence, if more likely than not that the company will not realize tax assets through future operation.
The 2017 Tax Reform Act permanently reduces the U.S. corporate income tax rate to a flat 21% rate. In addition, the 2017 Tax Reform Act also creates a new requirement that certain income (i.e., Global Intangible Low-Taxed Income (“GILTI”)) earned by controlled foreign corporations (“CFCs”) must be included in the gross income of the CFCs’ U.S. shareholder income. The tax law in PRC applies an income tax rate of 25% to all enterprises. The Company’s subsidiary does not receive any preferential tax treatment from local government. The Company has been in loss position for years and zero balances of tax provisions, deferred tax assets and liabilities as of the reporting periods ended.
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 MakingORG and HKFW is 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 the statements of operations and cash flows 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.
The Company translates the assets and liabilities into U.S. dollars using the rate of exchange prevailing at the balance sheet date and the statements of operations and cash flows are translated at an average rate during the reporting period. Adjustments resulting from the translation from RMB into U.S. dollars are recorded in stockholders’ equity as part of accumulated other comprehensive income. The exchange rates used for financial statements are as follows:
| | Average Rate for the Twelve Months Ended December 31, | |
| | 2021 | | | 2020 | |
China yuan (RMB) | | RMB | 6.452480 | | | RMB | 6.900133 | |
United States dollar ($) | | $ | 1.000000 | | | $ | 1.000000 | |
| | Exchange Rate at | |
| | December 31, 2021 | | | December 31, 2020 | |
China yuan (RMB) | | RMB | 6.355095 | | | RMB | 6.527650 | |
United States dollar ($) | | $ | 1.000000 | | | $ | 1.000000 | |
Related Parties
The Company follows ASC 850, “Related Party Disclosures,” for the identification of related parties and disclosure of related party transactions.
Lease
The Company adopted new lease accounting – ASC 842 on January 1,2019. 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, advances to vendor, accrued expenses, interest payable and due to related party approximate their fair value due to the short-term duration of those instruments. Convertible notes payable is recorded at agreed values.
Recently Issued Accounting Pronouncement Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, (FASB ASC 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, which requires all expected losses to be determined based on historical experience, current conditions and reasonable and supportable forecasts, rather than the “incurred loss” model. 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. The effective date of ASU No. 2016-13 for smaller reporting companies is postponed to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company believes the adoption of ASU No. 2016-13 will not have a material impact on its financial position and results of operations.
The management does not believe that other than disclosed above, the recently issued but not yet adopted accounting pronouncements will have a material impact on its financial position results of operations or cash flows.
NOTE 4 – ADVANCES TO VENDOR AND OTHERS
Advances to vendors and others include primarily $78,677 and nil advance for purchasing of packaging materials out of $80,677 and $2,000 balances as of December 31, 2021 and 2020, respectively.
NOTE 5 – RELATED PARTY TRANSACTIONS
Due to Related Party
The Company lent RMB 80,000 (approximately $12,209) to the Entity A, a related party whose shareholder is a board member of CBKB, and the landlord of the office space CBKB leased in China. The loan has a term of six months and matured on March 31, 2021, with a monthly interest rate of 1%. According to the loan agreement, the loan principal could be applied to the monthly lease payment for two months (RMB 40,000 per month). The related party was not able to pay back the loan on the maturity date and CBKB withheld April and May 2021 lease payments to offset with the loan principal due. The Entity A paid the entire interests of RMB 4,800 back on April 1, 2021.
As of December 31, 2021 and 2020, due to related party were nil and $12,256, respectively.
Due from Related Party
During the years ended December 31, 2021 and 2020, the Company’s Chief Executive Officer (“CEO”) lent the Company $46,132 and $54,417, respectively, with the loan balances totaling $386,418 and $340,286 as of December 31,2021 and 2020. The loans are unsecured, non-interest bearing and due on demand.
Sales to Related Party
The Company sells product to its related party, the Entity A. For the years ended December 31, 2021 and 2020, the Company total revenue generated from the transaction with the related party were $611,328 and $238,587, respectively. As of December 31, 2021 and 2020, accounts receivable due from Entity A were $nil and $48,934, respectively.
Lease Agreement
On June 1, 2020, the Company entered into a lease agreement with Entity A in Chongqing, China for the period from June 1, 2020 to May 31, 2021. Pursuant to the lease agreement, the monthly rent was RMB40,000 (approximately $6,000) which should be paid quarterly. The lease had a one-year term and the Company had the priority to renew the lease. The Company was still leasing the property after the lease term ended and paying the rent quarterly. Refer to Note 8 – Lease for details.
NOTE 6 – BUSINES CONCENTRATION AND RISKS
Concentration of Risk
The Company maintains cash with banks in the USA, People’s Republic of China (“PRC” or “China”), and Hong Kong. Should any bank holding cash become insolvent, or if the Company is otherwise unable to withdraw funds, the Company would lose the cash with that bank; however, the Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts. In China, a depositor has up to RMB 500,000 insured by the People’s Bank of China Financial Stability Bureau (“FSD”). In Hong Kong, a depositor has up to HKD 500,000 insured by Hong Kong Deposit Protection Board (“DPB”). In the United States, the standard insurance amount is $250,000 per depositor in a bank insured by the Federal Deposit Insurance Corporation (“FDIC”).
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. As of December 31, 2021 and 2020, the Company’s cash and cash equivalents were fully insured.
Major customer
For the years ended December 31, 2021 and 2020, the Company generated revenues exclusively from one customer – Entity A in the amounts of $611,328 and $238,587, respectively.
Major vendors
For the years ended December 31, 2021 and 2020, the Company’s purchase from the vendors accounted more than 10% of total purchase were:
| | Years Ended December 31, | |
| | 2021 | | | 2020 | |
| | Amount | | | % of Total Purchase | | | Amount | | | % of Total Purchase | |
Vendor A | | $ | 231,280 | | | | 52 | % | | $ | 65,948 | | | | 82 | % |
Vendor B | | $ | 108,770 | | | | 25 | % | | $ | 7,328 | | | | 9 | % |
Vendor C | | $ | 57,071 | | | | 13 | % | | $ | - | | | | - | % |
NOTE 8 – 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 an Amended and Restated 12% Convertible Promissory Note, both parties agreed to extend a 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.
On September 1, 2019, 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, 2020 with no additional consideration. The Company recognized a discount on the note of $54,400 at the amended agreement date. Since the conversion feature of conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method.
On September 1, 2020, 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, 2022 with no additional consideration. The Company recognized a discount on the note of $0 at the amended agreement date.
The Company recognized interest expense related to the convertible note of $24,000 and $54,267, respectively, for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, and 2020, the Company had $128,000 and $104,000 interest payable associated with the $200,000 convertible note, respectively.
NOTE 9 – LEASE
The Company adopted ASC 842 on January 1, 2019. The Company entered an operating lease for its China office with Entity A with monthly rent of RMB40,000 (approximately $6,100) on June 1, 2020. The lease was for one year and the Company renewed the lease. Leases was classified as operating at the 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 terms 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 5.25%. The lease does not contain any residual value guarantees or material restrictive covenants. The remaining term including the renewal term as of December 31, 2021 was five months. The Company has no finance lease. The components of lease expense consist of the following:
| | | | Years Ended December 31, | |
| | Classification | | 2021 | | | 2020 | |
Operating lease cost | | Selling, General & Administrative expenses | | $ | 70,848 | | | $ | 46,329 | |
Balance sheet information related to leases consists of the following:
| | Classification | | December 31, 2021 | | | December 31, 2020 | |
Assets | | | | | | | | |
Operating lease ROU assets | | Right-of-use assets | | $ | 31,171 | | | $ | 98,653 | |
Liabilities | | | | | | | | | | |
Operating lease liabilities | | Current portion | | $ | 31,171 | | | $ | 70,534 | |
Operating lease liabilities | | Long-term portion | | | - | | | | 12,756 | |
Total lease liabilities | | | | $ | 31,171 | | | $ | 83,290 | |
| | | | | | | | | | |
Weighted average remaining lease term | | | | | | | | | | |
Operating leases | | | | | 0.42 | | | | 1.42 | |
| | | | | | | | | | |
Weighted average discount rate | | | | | | | | | | |
Operating leases | | | | | 5.25 | % | | 5.25-7.33 | % |
Cash flow information related to leases consists of the following:
| | Years Ended December 31, | |
| | 2021 | | | 2020 | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
Operating cash flows from operating leases | | $ | 37,195 | | | $ | 47,027 | |
Right-of-use assets obtained in exchange for lease obligations: | | | | | | | | |
Operating leases | | | 71,066 | | | | 139,275 | |
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 December 31, 2021 was as follows:
| | Operating Leases | |
Year ending December 31, 2022 | | $ | 31,471 | |
Less: Interest | | | (300 | ) |
Present value of lease liabilities | | $ | 31,171 | |
NOTE 9 – STOCKHOLDERS’ DEFICIT
Common Stock
No common stock was issued in 2021 and 2020. As of December 31, 2021 the Company had 35,540,000 shares of common stock issued and outstanding.
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. PRC also give tax discount to small enterprise whose annual taxable income exceeding 1 million but not exceeding 3 million.
The Company’s income tax expense is mainly contributed by its subsidiary in PRC.
In addition, the 2017 Tax Act also creates a new requirement that certain income (i.e., Global Intangible Low-Taxed Income (“GILTI”)) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFCs’ U.S. shareholder income. GILTI is the excess of the shareholder’s net CFC tested income over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income. The Company has elected to recognize the tax on GILTI as a period expense in the period the tax is incurred. For the years ended December 31, 2021 and 2020, no GILTI tax obligation existed and the GILTI tax expense was nil.
Provision (benefit) for income tax for the year ended December 31, 2021 consisted of:
Year ended December 31, 2021 | | Federal | | | State | | | Foreign | | | Total | |
Current | | $ | - | | | $ | 800 | | | $ | 827 | | | $ | 1,627 | |
Deferred | | | - | | | | - | | | | - | | | | - | |
Total | | $ | - | | | $ | 800 | | | $ | 827 | | | $ | 1,627 | |
Provision (benefit) for income tax for the year ended December 31, 2020 consisted of:
Year ended December 31, 2020 | | Federal | | | State | | | Foreign | | | Total | |
Current | | $ | - | | | $ | 800 | | | $ | 2,529 | | | $ | 3,329 | |
Deferred | | | - | | | | - | | | | - | | | | - | |
Total | | $ | - | | | $ | 800 | | | $ | 2,529 | | | $ | 3,329 | |
Net deferred tax assets consist of the following components as of:
| | December 31, | |
| | 2021 | | | 2020 | |
Deferred tax asset: | | | | | | |
Net operating loss carry forwards | | $ | 182,688 | | | $ | 159,635 | |
Valuation allowance | | | (182,688 | ) | | | (159,635 | ) |
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 $481,000, 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 after 2015 are available for examination by state tax jurisdictions and federal tax purposes.
NOTE 11 – SEGMENT REPORTING
The geographical distributions of the Company’s financial information for the years ended December 31, 2021 and 2020 were as follows:
| | For the Years ended December 31, | |
Geographic Areas | | 2021 | | | 2020 | |
Revenue | | | | | | |
PRC | | | 611,328 | | | | 238,587 | |
USA | | | - | | | | - | |
Total Revenue | | $ | 611,328 | | | $ | 238,587 | |
| | | | | | | | |
Income (Loss) from Operations | | | | | | | | |
PRC | | $ | (114,699 | ) | | $ | 5,877 | |
USA | | | 91,036 | | | | (102,947 | ) |
Total Loss from operations | | $ | (23,663 | ) | | $ | (97,070 | ) |
| | | | | | | | |
Net Income (Loss) | | | | | | | | |
PRC | | $ | 115,220 | | | $ | 7,582 | |
USA | | | (115,834 | ) | | | (173,432 | ) |
Total Net Loss | | $ | (614 | ) | | $ | (165,850 | ) |
The geographical distribution of the Company’s financial information as of December 31, 2021 and 2020 were as follows:
| | For the Years ended December 31, | |
Geographic Areas | | 2021 | | | 2020 | |
Reportable Assets | | | | | | |
PRC | | | 323,893 | | | | 170,916 | |
USA | | | 44,498 | | | | 47,384 | |
Elimination | | | (148,187 | ) | | | (25,757 | ) |
Total Reportable Assets | | $ | 220,204 | | | $ | 192,543 | |
NOTE 12 – SUBSEQUENT EVENT
The Company has evaluated all subsequent events through the date the consolidated financial statements were issued and determine that there were no subsequent events or transactions that require recognition or disclosures in the consolidated financial statements.