BRLL Barrel Energy Inc (PK)

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

BARREL ENERGY INC. is a Nevada corporation, incorporated January 17, 2014, which was engaged historically in the oil and gas sector of the energy industry. In January 2019, the Company terminated the agreement. The Company entered into an agreement in the lithium exploration business but terminated the contract. The Company has leased land in central California to grow hemp for extracting CBD and the use of fiber in clothing and other materials. The Company has reengaged in the lithium battery business under new agreement subsequent to the filing of this report.

On April 11, 2019, the Company amended its articles of incorporation to increase its number of authorized shares of common stock from 75,000,000 to 450,000,000.

CORRECTION OF ERRORS IN PREVIOUSLY REPORTED UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS

The Company has identified errors in financial statements issued for the interim periods December 31, 2019 and March 31, 2020. We are in the process of assessing the materiality of these errors in accordance with the U.S. Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 99, Materiality and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), using both the rollover method and the iron curtain method, as defined in SAB 108. When the assessment is completed, we will take any necessary steps as soon as practicable.

The occurrence of an uncontrollable event such as the COVID-19 pandemic may negatively affect our operations. A pandemic typically results in social distancing, travel bans, and quarantine. This may limit access to our, suppliers, management, support staff and professional advisors. Although the Company’s operations are virtual, we depend on numerous third party consultants and contract suppliers so we cannot measure the impact on our operations or financial condition at this point in time.

BASIS OF PRESENTATION

The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information required to be included in a complete set of financial statements in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2020. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted. The accompanying unaudited financial statements should be read in conjunction with the audited September 30, 2019 financial statements and related notes included in the Company’s form 10-K filed with the SEC.

Basic and diluted net income per share

Basic loss per share is calculated as net loss to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted loss per share for the period equals basic loss per share as the effect of any stock based compensation awards or stock warrants would be antidilutive. As of June 30, 2020 the potential shares at conversion outstanding was 91,892,145 consisting of conversion of debt to common stock of approximately 90,289,859 and conversion warrants to common stock of 1,602,286 compared to a total of 4,795,199 for the nine months ended June 30, 2019.

Estimates and Assumptions

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. The Company’s significant estimates include the fair value of common stock issued for services, fair value of derivative liability, deemed dividend down round, the valuation of right to use asset and lease liability and valuation allowance for deferred tax assets. Actual results could differ from those estimates.

Gain (Loss) on Modification/Extinguishment of Debt

In accordance with ASC 470, a modification or an exchange of debt instruments that adds or eliminates a conversion option that was substantive at the date of the modification or exchange is considered a substantive change and is measured and accounted for as extinguishment of the original instrument along with the recognition of a gain or loss. Additionally, under ASC 470, a substantive modification of a debt instrument is deemed to have been accomplished with debt instruments that are substantially different if the present value of the cash flows under the terms of the new debt instrument is at least 10 percent different from the present value of the remaining cash flows under the terms of the original instrument. A substantive modification is accounted for as an extinguishment of the original instrument along with the recognition of a gain or loss.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02 Leases which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases with terms greater than 12 months. In July 2018, the FASB issued ASU 2018-10 Leases, Codification Improvements and ASU 2018-11 Leases, Targeted Improvements, to provide additional guidance for the adoption of ASU 2016-02. ASU 2018-10 clarifies certain provisions and corrects unintended applications of the guidance such as the application of implicit rate, lessee reassessment of lease classification, and certain transition adjustments that should be recognized to earnings rather than to stockholders’ (deficit) equity. ASU 2018-11 provides an alternative transition method and practical expedient for separating contract components for the adoption of ASU 2016-02. ASU 2016-02, ASU 2018-10, ASU 2018-11, (collectively, “Topic 842”) are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. In December 2019, the Company adopted Topic 842 and made the following elections:

On October 1, 2019, the Company recorded a Right of Use Asset of $4,104,985, a corresponding Lease Liability of $4,330,735 in accordance with Topic 842.

The FASB recently issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to reduce complexity in applying GAAP to certain financial instruments with characteristics of liabilities and equity. The guidance in ASU 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. The guidance in ASC 470-20 applies to convertible instruments for which the embedded conversion features are not required to be bifurcated from the host contract and accounted for as derivatives. These amendments are expected to result in more freestanding financial instruments qualifying for equity classification (and, therefore, not accounted for as derivatives), as well as fewer embedded features requiring separate accounting from the host contract. The amendments in ASU 2020-06 further revise the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. The amendments in ASU 2020-06 are effective for public entities for fiscal years beginning after December 15, 2021 with early adoption permitted (for “emerging growth company” beginning after December 15, 2023). The Company will be evaluating the impact this standard will have on the Company’s consolidated financial statements.

Derivative Instruments

Derivative financial instruments are recorded in the accompanying consolidated balance sheets at fair value in accordance with ASC 815. When the Company enters into a financial instrument such as a debt or equity agreement (the “host contract”), the Company assesses whether the economic characteristics of any embedded features are clearly and closely related to the primary economic characteristics of the remainder of the host contract. When it is determined that (i) an embedded feature possesses economic characteristics that are not clearly and closely related to the primary economic characteristics of the host contract, and (ii) a separate, stand-alone instrument with the same terms would meet the definition of a financial derivative instrument, then the embedded feature is bifurcated from the host contract and accounted for as a derivative instrument. The estimated fair value of the derivative feature is recorded in the accompanying balance sheets separately from the carrying value of the host contract. Subsequent changes in the estimated fair value of derivatives are recorded as a gain or loss in the Company’s statements of operations.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts payable and accrued expenses and shareholder loans. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these financial statements.

Financial assets and liabilities recorded at fair value in our condensed consolidated balance sheets are categorized based upon a fair value hierarchy established by GAAP, which prioritizes the inputs used to measure fair value into the following levels:

Level 1— Quoted market prices in active markets for identical assets or liabilities at the measurement date.

Level 2— quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable and can be corroborated by observable market data.

Level 3— Inputs reflecting management’s best estimates and assumptions of what market participants would use in pricing assets or liabilities at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments.

A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Deemed Dividend

The Company issues instruments which contain a provision for the change in conversion price should a new instrument issued hold a conversion price lower than the conversion price of the instrument issued earlier. The provision lowers the conversion price to the new instrument triggering the down round feature and creates a deemed dividend. The deemed dividend is added to the net income or loss for the period and used in calculating the earnings per share for the period.

NOTE 2 - GOING CONCERN

The Company’s unaudited condensed financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern that contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company, as shown in the accompanying balance sheets, has negative working capital of $2,213,311 and an accumulated deficit of $20,739,693 as of June 30, 2020. The Company has not established any source of revenue to cover its operating costs. These factors raise substantial doubt about the company’s ability to continue as a going concern for at least one year from the issuance of these unaudited condensed financial statements. The Company will engage in very limited activities that must be satisfied in cash until a source of funding is secured. The Company will offer noncash consideration and seek equity lines as a means of financing its operations. If the Company is unable to obtain revenue producing contracts or financing or if the revenue or financing it does obtain is insufficient to cover any operating losses it may incur, it may substantially curtail or terminate its operations or seek other business opportunities through strategic alliances, acquisitions or other arrangements that may dilute the interests of existing stockholders. There can be no assurance however that the Company will be able to raise additional capital when needed, or at terms deemed acceptable, if at all. The unaudited condensed financial statements do not include any adjustments that might result from the outcome of this uncertainty.

NOTE 3 – CONVERTIBLE NOTE

On July 1, 2014, the Company issued a USD $67,215 (CAD $75,000) convertible note for cash. The note bears an interest rate of 9.5% and matured on December 31, 2015. The note, plus accrued interest, is convertible by the holder, as, in part or whole, until the date of maturity into common stock of the Company at CAD $0.00275 per share. The Company by resolution has elected to allow conversion of any and all the notes outstanding principal and interest until the note is fully paid. On September 30, 2017, the Company issued 700,000 shares of common stock with a value of $5,612 (CDN $7,000) for partial conversion of the convertible note. The note was amended through amendment #1 to establish the note’s principal and interest in US dollars from Canadian dollars at $82,496. The change from Canadian to US dollars on the rewritten note effectively eliminated the currency adjustments going forward. The note was further amended extending the closing date to June 30, 2020 and the conversion price to $0.00275, The Note was further amended with Amendment #2 adding $30,000 of principal to the note and extending the note till December 31, 2021. Various parts of the note were assigned to other individuals for partial payment of the note and their portions converted to common stock. As part of the amendments, the note holder receiving 10,000,000 shares of the Company’s stock with a value of $40,000. As of June 30, 2020, the principal balance was USD $33,764 plus accrued interest of USD $29,378 for a total liability of USD $63,142.

On November 12, 2018, the Company issued a $36,000 convertible note to Crown Partners, LLC. The note bears an original discount of $10,000, matures in 12 months from the origination date and bears interest at 5% per annuum. The note is convertible at any time, in part or whole, at $0.50 per share until the 180^th date of the note at which time it is convertible at 55% of the market price which is defined as the lowest trading price 25 days prior to conversion. An interest amount of $2,184 has been accrued along with a principal balance of $4,922 as of June 30, 2020. As of June 30, 2020 the note is in default and no litigation pending.

On May 15, 2019, the Company issued a $100,000 convertible note plus 500,000 warrants to Auctus Funding, LLC. The note bears an original discount of $3,500, matures February 17, 2020 and bears interest at 12% per annuum. The note is convertible at any time, at 55% of the market price which is defined as the lowest trading price 25 days prior to conversion. Interest of $15,151 has been accrued along with principal of $82,703 as of June 30, 2020. The warrants are convertible at $0.20 per share or if the price of the company’s common stock is greater than the exercise price of the warrant, the warrant may be converted by the holder as a cashless warrant in lieu of a cash warrant. As of June 30, 2020 the note is in default and no litigation pending. (See Note 6: Warrants)

On May 16, 2019, the Company issued a $125,000 convertible note and 625,000 warrants to Firstfire Global Opportunity Fund, LLC. The note bears an original discount of $12,500, matures in 12 months from the origination date and bears interest at 7% per annuum. The note is convertible in part or whole, at $0.25 per share for the first 180 days or 60% of the market price which is defined as the lowest trading price 20 days prior to conversion. Interest of $9,861 has been accrued along with a principal balance of $90,307 as of June 30, 2020. The warrants are convertible at $0.20 per share or if the price of the company’s common stock is greater than the exercise price of the warrant, the warrant may be converted by the holder as a cashless warrant in lieu of a cash warrant. As of June 30, 2020 the note is in default and no litigation pending. (See Note 6: Warrants)

On June 26, 2020 the Company issued a convertible note to Harp Sangha, Chairman and CFO of the Company for $19,000 which matures one year from date of issuance. The note bears interest of 8% per annum and is convertible into common stock of the Company at $0.10 per share. As of June 30, 2020 the outstanding balances included principal of $19,000 plus interest of $19.

As of June 30, 2020 the Company calculated the derivative liability of $485,529 using a closing price of $0.007 volatility of 310%, conversion prices of $0.00175 to $0.10, dividend of 0.00 and discount rate of 1.8% and expensed $64,056 in debt discount. (See Note 8 Derivative)

During the nine months ended June 30, 2020 the Company issued 129,558,878 shares of common stock with a value of $294,335 for the reduction of convertible notes. The Company further determined the difference between the value of the issuance at date of issuance and the conversion price of the shares.

NOTE 4 – RELATED PARTY

During the period ended December 31, 2018 Harpreet Sangha, the Company’s Chairman and Chief Financial Officer, entered into an agreement and purchased 10,000,000 shares of the Company’s common stock for $10,000 and Craig Alford, the Company’s President, who entered into an agreement and purchased 4,000,000 shares of the Company’s common stock for $4,000. On June 24, 2020 Harpreet Sangha returned the 10,000,000 shares to the Company.

During the year ended September 30, 2019, the Company signed a land lease agreement for the production of hemp. The lease is a 10 year lease with annual payments of $602,000 and was modified for the initial payments of $301,000 each in May and June 2020. A director of the Company is related to the owner of the land leased. (See Note 7: Operating Lease)

On June 26, 2020 the Company issued a convertible note to Harp Sangha, Chairman and CFO of the Company for $19,000 which matures one year from date of issuance. The note bears interest of 8% per annum and is convertible into common stock of the Company at $0.10 per share. As of June 30, 2020 the outstanding balances included principal of $19,000 plus accrued interest of $19.

During the nine months ended June 30, 2020 the Company accrued $333,000 and paid $42,521 in consulting fees for three officers resulting in a balance of $411,905 due the related parties.

From  time to time during the duration of the Company, related parties have advanced the Company funds to continue operations. As of June 30, 2020 $13,202 was owed to a former officer and director of the Company.

NOTE 5 – EQUITY

During the period from September 30, 2018 to March 31, 2019, the Company entered into separate Subscription Agreements with 17 persons under which 25,000,000 shares of the Company’s common stock were sold for $0.001 per share. In addition, twenty individuals were sold 442,286 units, consisting of one share of common stock at $0.50 per share one warrant to purchase one share of common stock shares at $0.50 per share within three years. This included Harpreet Sangha, the Company’s Chairman, who entered into an agreement to purchase 10,000,000 shares of the Company’s common stock and Craig Alford, the Company’s President, who entered into an agreement to purchase 4,000,000 shares of the Company’s common stock. Three individuals purchasing a total of 3,250,000 shares of common stock with a value $3,250 are relatives of the company Chairman and CFO. The subscription agreements dated September 30, 2018 for 11,500,000 shares of common stock with a value of $11,500 were treated as stock subscriptions receivable and funds were received in the period ending March 31, 2019. Subscription Agreements were approved by the Company’s Board of Directors. The sales were made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 and, with respect to a majority of the purchasers, Regulation S.

On November 13, 2018, the Company entered into a $3,000,000 equity purchase agreement with Crown Bridge Partners. Under the terms of the agreement, the Company may put to the investor shares of the Company common stock in minimums of $10,000 to maximums of either $100,000 or 200% of the average trading volume, whichever is less. The agreement may be terminated at any time by the Company or when the total commitment of shares are sold by the Company to the investor. As part of the agreement, the Company issued 175,000 shares of its common stock at $0.75 per share as a commitment fee. The value of the transaction of $131,250 was expensed as a financing cost.

During the year ended September 30, 2019 the Company with the note holder agreed to convert a note in Canadian dollars to US dollars. Based on the conversion during the year ended September 30, 2019, the Company did not incur a foreign currency translation adjustment during the period ended June 30, 2020.

During the nine months ended June 30, 2020 the Company issued 10,000,000 shares of common stock with a value of $40,000 to a note holder to induce the amendment of the note.

During the nine months ended June 30, 2020 the Company issued 129,558,878 shares of common stock with a value of $294,335 for the reduction of the convertible notes. The conversion created an increase to paid in capital of $1,070,184 offset by reduction in derivative liability. The Company further determined the difference between the value of the issuance at date of issuance and the conversion price of the shares which reduced the paid in capital by $30,922 with offset to debt extinguishment and interest.

During the nine months period ended June 30, 2020, the Company issued 2,000,000 shares of common stock to a related party with a value of $40,000 for cash.

On June 24, 2020, a related party returned 10,000,000 shares to the Company treasury at par value.

NOTE 6 – WARRANTS

During the year ended September 30, 2019 the Company issued 477,286 warrants to twenty individuals as part of their purchase of 477,286 shares of common stock. The warrants mature in three years and are convertible into one share of common stock for each warrant at $0.50 per share.

During the year ended September 30, 2019 the Company issued 1,125,000 warrants to 2 convertible debt entities as part of the note issued. The warrants were issued as an inducement of the issuance of the two notes for an aggregate of $225,000. The warrants are convertible at $0.20 per share or if the price of the company’s common stock is greater than the exercise price of the warrant, the warrant may be converted by the holder as a cashless warrant in lieu of a cash warrant. The warrants also contain an antidilution clause allowing the holder to adjust the number of warrants and or price should the Company issue any convertible instrument at a lower value or conversion price than the warrants issue.

The Company used the Black Scholes Pricing model to estimate the fair value of the warrants as of grant date, using the following key inputs: market prices of the Company’s common stock at dates of grant of $0.11 - $0.50 per share, exercise price of $0.20 per share, volatility of 272.63% and discount rate of 2.40%. The fair value of the warrants was determined to be $314,365 as of September 30, 2019.

The 1,125,000 warrants provided a provision that adjusted the conversion price if any other convertible instrument provides for a lower conversion price. As the Company agreed to the conversion price on a convertible note at $0.00275 during the quarter ended December 31, 2019, the warrants became eligible for that conversion price and triggered a down round and deemed dividend of $16,363,600.

The outstanding warrants are set out as follow:

NOTE 7 – NOTES PAYABLE

On November 15, 2018, the Company received an advance from one non-related party for $65,000. On December 3, 2018, the Company received an additional advance of $35,000 from the same individual for a total of $100,000. Both advances are unsecured, on demand and bear no interest. The Company has calculated an imputed interest of $2,500 as of September 30, 2019. During the quarter ended December 31, 2019 the Company issued 800,000 shares of common stock with a value of $100,000 for the payment of the note and implied interest.

During the nine months period ending June 30, 2020 the Company issued 3 notes totaling $33,125. The notes all mature in two years of issuance with one note for $10,000 bearing 20% interest and the balance bearing 10% interest per annum.

NOTE 8- DERIVATIVE LIABILITIES

On November 12, 2018, the Company issued a $36,000 convertible note to Crown Partners, LLC. The note bears an original discount of $3,500, matures in 12 months from the origination date and bears interest at 5% per annuum. The note is convertible at any time, in part or whole, at $0.50 per share until the 180^th date of the note at which time it is convertible at 55% of the market price which is defined as the lowest trading price 25 days prior to conversion. The Company used the Black Scholes model to estimate the fair value of the derivative liability as of the date of issuance. As of June 30, 2020, using the following key inputs: market price of the Company’s common stock $0.007 per share, conversion rate of 0.00195, volatility of 310% and discount rate of 1.80%. The fair value of the derivative liability was determined to be $18,197 as of June 30, 2020.

On May 15, 2019, the Company issued a $100,000 convertible note to Auctus Funding, LLC. The note bears an original discount of $3,500, matures February 17, 2020 and bears interest at 5% per annuum. The note is convertible at any time, at 5% of the market price which is defined as the lowest trading price 25 days prior to conversion. The Company used the Black Scholes model to estimate the fair value of the derivative liability as of the date of issuance. As of June 30, 2020, using the following key inputs: market price of the Company’s common stock $0.007 per share, conversion rate of 0.00175, volatility of 310% and discount rate of 1.80%. The fair value of the derivative liability was determined to $223,518 as of June 30, 2020.

On May 16, 2019, the Company issued a $125,000 convertible note to FirstFire Global Opportunity Fund, LLC. The note bears an original discount of $12,500, matures in 12 months from the origination date and bears interest at 7% per annuum. The note is convertible at any time, in part or whole, at $0.25 per share or 60% of the market price which is defined as the lowest trading price 20 days prior to conversion. The Company used the Black Scholes model to estimate the fair value of the derivative liability as of the date of issuance. As of June 30, 2020, using the following key inputs: market price of the Company’s common stock $0.0071 per share, conversion price of 0.00216 volatility of 310% and discount rate of 1.80%. The fair value of the derivative liability was determined to $243,814 as of June 30, 2020.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts payable and accrued expenses and shareholder loans. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these financial statements.

Financial assets and liabilities recorded at fair value in our condensed consolidated balance sheets are categorized based upon a fair value hierarchy established by GAAP, which prioritizes the inputs used to measure fair value into the following levels:

Level 1— Quoted market prices in active markets for identical assets or liabilities at the measurement date.

Level 2— quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable and can be corroborated by observable market data.

Level 3— Inputs reflecting management’s best estimates and assumptions of what market participants would use in pricing assets or liabilities at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments.

A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Financial assets and liabilities measured at fair value on a recurring basis are summarized below as of September 30, 2019 and June 30, 2020:

The following table summarizes the change in the fair value of the derivative liability during the nine months ended June 30, 2020:

NOTE 9 – OPERATING LEASE

On May 14, 2019, the Company signed a land lease in central California for 602 acres at $1,000 per acre to grow hemp for fiber usage. The lease is for 10 years with annual costs of $602,000 with the initial payment of $301,000 on March 30, 2020 and second payment of $301,000 on June 30, 2020 with the balance of the annual payments being made on April 1 of each subsequent year. The lease holder is a related party to one of the directors of the Company. As of June 30, 2020 the Company has accrued $667,170 of unpaid lease payments as accounts payable. The lease terminates in May 2029. As of June 30, 2020 the Company recorded a right of use asset of $3,877,385 and operating lease liability of $3,952,635 with a lease expense for the three and nine months of $150,580 and $451,500, respectively.

The yearly rental obligations including the lease agreements are as follows:

As noted in the recent accounting pronouncements the Company adapted ASC 842 on October 1, 2019 using the modified retrospective approach and has elected the practical expedient package by allowing for historical lease classification for this lease as the date of transition. The present value calculation discount rate used is the rate of 7% at which the Company can borrow funds.