NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
(Unaudited)
1. BASIS OF PRESENTATION
The
unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States for interim financial information and the rules and
regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of
management, the accompanying unaudited financial statements contain
all adjustments (consisting of normal recurring accruals) necessary
to present fairly the financial position of the Company as of March
31, 2020, the results of operations for the three months ended
March 31, 2020 and 2019, and cash flows for the three months ended
March 31, 2020 and 2019. These results are not necessarily
indicative of the results to be expected for the full year or any
other period. The December 31, 2019 balance sheet included
herein was derived from the audited financial statements included
in the Company’s Annual Report on Form 10-K as of that
date. Accordingly, the financial statements included
herein should be reviewed in conjunction with the financial
statements and notes thereto included in the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2019, as
filed with the Securities and Exchange Commission
(“SEC”) on March 30, 2020.
2. GOING CONCERN UNCERTAINTY
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As shown in the
financial statements, the Company had a working capital deficiency
of $654,795 and an accumulated deficit of $5,482,428 at March 31,
2020, and a record of continuing losses. These factors, among
others, raise substantial doubt about the ability of the Company to
continue as a going concern. The financial statements do not
include adjustments that might result from the outcome of this
uncertainty.
The
Company’s operations to date
have been limited to conducting various tests on its technologies
and seeking financing. The Company will continue to develop
and market its technologies, which the Company believes have great
market potential. As such, the Company continues to pursue
additional sources of financing. Currently the company is exploring various
potential investment partners in Japan, as well as China.
There can be no assurances that the Company can secure additional
financing. . The present plans,
the realization of which cannot be assured, to overcome these
difficulties also include, but are not limited to, a continuing
effort to investigate business acquisitions and joint
ventures.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In
February 2016, the FASB established Topic 842, Leases, by issuing
Accounting Standards Update (ASU) No. 2016-02, which requires
lessees to recognize leases on-balance sheet and disclose key
information about leasing arrangements. Topic 842 was subsequently
amended by ASU No. 2018-01, Land Easement Practical Expedient for
Transition to Topic 842; ASU No. 2018-10, Codification Improvements
to Topic 842, Leases; and ASU No. 2018-11, Targeted 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 will be classified as finance or operating, with
classification affecting the pattern and classification of expense
recognition in the income statement. The new standard is effective
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. If an entity chooses the second option, the transition
requirements for existing leases also apply to leases entered into
between the date of initial application and the effective date. The
entity must also recast its comparative period financial statements
and provide the disclosures required by the new standard for the
comparative periods. The Company adopted the new standard on
January 1, 2019 and use the effective date as the date of initial
application. Consequently, financial information will not be
updated and the disclosures required under the new standard will
not be provided for dates and periods before January 1, 2019. The
new standard provides a number of optional practical expedients in
transition. The Company elects the ‘package of practical
expedients’, which permits the Company not to reassess under
the new standard prior conclusions about lease identification,
lease classification and initial direct costs. The Company
determined that this standard will have a material effect on the
Company’s financial statements. While the Company continues
to assess all of the effects of adoption, the Company currently
believes the most significant effects relate to the recognition of
new ROU assets and lease liabilities on the Company’s balance
sheet for the Company’s real estate operating leases. On
adoption, the Company recognized additional an operating lease
liability of approximately $10,353 with corresponding ROU assets of
the same amount based on the present value of the remaining minimum
rental payments under current leasing standards for existing
operating leases.
AMANASU ENVIRONMENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
The Company’s operations may be affected by the recent and
ongoing outbreak of the coronavirus disease 2019 (COVID-19) which
in March 2020, was declared a pandemic by the World Health
Organization. The ultimate disruption which may be caused by the
outbreak is uncertain; however, it may result in a material adverse
impact on the Company’s financial position, operations and
cash flows. Possible areas that may be affected include, but are
not limited to, disruption to the Company’s ability to obtain
funding and performing further research on certain
projects.
During
the three months ended March 31, 2020, there have been no other
material changes in the Company’s significant accounting
policies to those previously disclosed in the Annual
Report.
No
recently issued accounting pronouncements had or are expected to
have a material impact on the Company’s consolidated
financial statements.
4. RELATED PARTY TRANSACTIONS
The
Company receives periodic advances from its principal stockholders
and officers based upon the Company’s cash flow needs. There
is no written loan agreement between the Company and the
stockholders and officers. All advances bear interest at 4.45% and
no repayment terms have been established. As a result, the amount
is classified as a current liability. During the three months ended
March 31, 2020, the Company did not borrow from a stockholder. The
balances due as of March 31, 2020 and December 31, 2019 were
$390,570 and $390,750, respectively. Interest expense associated
with these loans were $4,392 and $4,025 for the three months ended
March 31, 2020 and 2019, respectively. Accrued interest on these
loans were $65,939 and $61,547 at March 31, 2020 and December 31,
2019, respectively.
The
Company has an arrangement with Lina Maki, a stockholder of the
Company, for her management consulting time. The agreement is not
written and no payment terms have been established. The fee is
$10,000 annually. As of March 31, 2020 and December 31, 2019
amounts due to the stockholder were $32,500 and $30,000,
respectively. For the most part, these payments are made by the
Company’s affiliate. As such, when the payments are made by
the Company’s affiliate or the lease payments are made by the
Company on behalf of the affiliate, such amounts are shown as a
reduction in or addition to the amount due from affiliate in the
accompany balance sheets.
The
Company leases its office space in Vancouver from a stockholder of
the Company at a monthly rate of $2,500 under a lease agreement
which expires October 1, 2021. At March 31, 2020 and December
31, amounts due to the stockholder were $95,808 and $$87,933,
respectively. The Company shares the space with Amanasu Techno
Holdings Corp, a reporting company under the Securities Exchange
Act of 1934. Amanasu Techno Holdings Corp is responsible for 50% of
the rent. As such, when the lease payments are made by the
Company’s affiliate or the lease payments are made by the
Company on behalf of the affiliate, such amounts are shown as a
reduction in or addition to the amount due to affiliate in the
accompanying balance sheets amounts due to related parties. The
office in New York is rented at the rate of $392 each year and is
also shared with Amanasu Techno Holdings Corp. In addition, the
Company maintains an office at Suite 905, 1-6-1 Senzoku Taito-Ku
Tokyo Japan. The net balances due from Amanasu Techno Holdings at
March 31, 2020 and December 31, 2019 were $67,852 and $67,822,
respectively.
Amanasu
Corp. is the principal stockholder of the Company. The balance
due to Amanasu Corp. was $50,000 and $50,000 at March 31, 2020 and
December 31, 2019, respectively. Interest expense associated with
this loan were $563 and $556 for the three months ended March 31,
2020 and 2019, respectively. No terms for repayment have been
established. As a result, the amount is classified as a current
liability in accrued expenses. Accrued interest on this loan were
$11,780 and $11,218 at March 31, 2020 and December 31, 2019,
respectively.
5. INCOME TAXES
In
accordance with the current tax laws in the U.S., the Company is
subject to a corporate tax rate of 21% on its taxable income. No
provision for taxes is made for U.S. income tax for the three
months ended March 31, 2020 and 2019 as it has no taxable income in
the U.S.
The Company can carry forward net operating losses (NOL's) to be
applied against future profits for a period of twenty years in the
U.S. and 80% of the NOL can be carried forward for three years in
Japan.
The Company had NOL carryforwards of approximately $3.85 million in
the U.S. and $6,200 in Japan at March 31, 2020. Approximately $3.65
million in the U.S. and $6,200 in Japan will expire in the years
2020 through 2037, and $0.2 million can be carried forward
indefinitely.
Deferred
income taxes are recorded to reflect the tax consequences or
benefits to future years of any temporary differences between the
tax basis of assets and liabilities, and of net operating loss
carryforwards. In assessing the
realization of deferred tax assets, management considers whether it
is more likely than not that some portion or all of the deferred
tax assets will be realized. The ultimate realization of deferred
tax assets us dependent upon the generation of future taxable
income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. Based on the
assessment, management has established a full valuation allowance
against all of the deferred tax assets relating to the NOL’s
for every period because it is more likely than not that all of the
deferred tax assets will not be realized.
AMANASU
ENVIRONMENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
5. INCOME TAXES
(continued)
On
December 22, 2017, the “Tax Cuts and Jobs Act”
(“The 2017 Tax Act”) was enacted in the United States.
Under the provisions of the Act, the U.S. corporate tax rate
decreased from 34% to 21%. Accordingly, the Company has re-measured
its deferred tax assets on net operating loss carry forwards in the
U.S at the lower enacted cooperated tax rate of 21%. However, this
re-measurement has no effect on the Company’s income tax
expenses as the Company has provided a 100% valuation allowance on
its deferred tax assets previously.
Additionally,
the 2017 Tax Act implemented a modified territorial tax system and
imposing a tax on previously untaxed accumulated earnings and
profits (“E&P”) of foreign subsidiaries (the
“Toll Charge”). The Toll Charge is based in part on the
amount of E&P held in cash and other specific assets as of
December 31, 2017. The Toll Charge can be paid over an eight-year
period, starting in 2018, and will not accrue interest. The 2017
Tax Act also imposed a global intangible low-taxed income tax
(“GILTI”), which is a new tax on certain off-shore
earnings at an effective rate of 10.5% for tax years beginning
after December 31, 2017 (increasing to 13.125% for tax years
beginning after December 31, 2025) with a partial offset for
foreign tax credits. The Company has determined that this one-time
Toll Charge has no effect on the Company’s income tax
expenses as the Company has no undistributed foreign earnings at
either of the two testing dates of November 2, 2017 and December
31, 2017. For purposes of the inclusion of GILTI, the Company has
determined that the Company has no taxable off-shore earnings as of
March 31, 2020 and 2019, respectively. Therefore, this is no
accrual of US income tax for GILTI as of March 31,
2020.
The
extent of the Company’s operations involves dealing with
uncertainties and judgments in the application of complex tax
regulations in a multitude of jurisdictions. The final taxes paid
are dependent upon many factors, including negotiations with taxing
authorities in various jurisdictions and resolution of disputes
arising from federal, state and international tax audits. The
Company recognizes potential liabilities and records tax
liabilities for anticipated tax audit issues in the United States
and other tax jurisdictions based on its estimate of whether, and
the extent to which, additional taxes will be due.
6. OPERATING LEASE LIABILITY
The
Company's executive offices are located at 244 Fifth Avenue 2nd
Floor New York, NY 10001 and Vancouver, British Columbia. The total
premises in Vancouver are 2,000 square feet and are leased at a
monthly rate of $2,500 under a lease agreement between the Company
and the Secretary of the Company which expired October 1, 2019. The
Company entered into a new lease with the Secretary of the Company
at a monthly rate of $2,500, which expires October 1, 2021. The
Company shares the space with AEC, a reporting company under the
Securities Exchange Act of 1934. Our major shareholder and officer
own approximately 81% of AEC’s outstanding shares of common
stock. AEC is responsible for 50% of the rent or $1,250 each month.
The office in New York is rented at the rate of $392 each year and
shares with AEC. In addition, the Company maintains an office at
Suite 905, 1-6-1 Senzoku Taito-Ku Tokyo Japan, and the Company pays
no rent.
Upon
adoption of ASC 842, Leases, on January 1, 2019, the Company
recorded $10,353 of right-of-use assets and related liabilities.
This asset was fully amortized as of September 30,
2019.
The Company's lease does not
provide an implicit rate, and therefore the Company uses an
estimated incremental borrowing rate as the discount rate when
measuring operating lease liabilities. The incremental borrowing
rate represents an estimate of the interest rate the Company would
incur at lease commencement to borrow an amount equal to the lease
payments on a collateralized basis over the term of a lease. The
Company used incremental borrowing rate of 5% for operating
leases that commenced prior to that date.
On
October 1, 2019, the Company commenced a new lease with its
shareholder from October 1, 2019 to September 30, 2021 with a
monthly payment of approximately $1,250. As such, the Company
recorded $28,492 of right-of-use assets and related operating
leases liabilities. For the three months from January 1, 2020
through March 31, 2020, the Company amortized $3,450 of
right-of-use assets.
AMANASU
ENVIRONMENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
6. OPERATING LEASE LIABILITY (continued)
The
following table reconciles the undiscounted future minimum lease
under the non-cancelable operating leases with terms of more than
one year to the total lease liabilities recognized on the
consolidated balance sheet as of March 31, 2020:
|
2020
– nine months
|
$11,250
|
|
2021
|
11,250
|
|
Total
undiscounted future minimum lease payments
|
22,500
|
|
Less:
Difference between undiscounted lease payments and discounted lease
liabilities
|
(866)
|
|
Total
operating lease liabilities
|
21,634
|
|
Less
current portion
|
(14,242)
|
|
Long-term
lease liabilities
|
$7,392
|
Total
rent expense under operating leases for the three months ended
March 31, 2020 and 2019 was $3,750 and $3,750,
respectively
7. SUBSEQUENT EVENTS
The
Company evaluated subsequent events, which are events or
transactions that occurred after March 31, 2020 through the
issuance of the accompanying financial statements and determined
that no significant subsequent event need to be recognized or
disclosed.