NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
1. ORGANIZATION AND BUSINESS
Amanasu
Environment Corporation (the “Company”) is a Nevada
Corporation, formed on February 22, 1999. The Company’s
principal business, through its wholly owned subsidiary in Japan,
is to complete the development of environmental technologies to
improve the quality of life for the future of the planet. The
Company is involved in all aspects of environmental technology
development, research and development, marketing and sales. It also
produces and acquires environmental technology and related patents.
At this time, the Company is not engaged in the commercial sale of
any of its licensed technologies. Its operations to date have been
limited to acquiring the technologies, conducting limited product
marketing, and testing the technologies for commercial
sales.
2. GOING CONCERN
The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
shown in the consolidated financial statements, the Company had a
working capital deficiency of $628,502 and an accumulated deficit
of $5,456,421 at December 31, 2019, 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
consolidated financial statements do not include any adjustments
that might result from the outcome of this
uncertainty.
The
Company's present plans, the realization of which cannot be
assured, to overcome these difficulties include, but are not
limited to, a continuing effort to investigate business
acquisitions and joint ventures. The Company will also continue to
investigate and develop technologies, which the Company believes
have great market potential. As such, the Company may need to
pursue additional sources of financing. There can be no assurances
that the Company can secure additional financing.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States,
and include the Company and its wholly-owned subsidiary. All
significant inter-company accounts and transactions have been
eliminated.
Non-controlling Interest:
Non-controlling
interest represents third party ownership in the net assets of our
consolidated subsidiaries. For financial reporting purposes, the
assets and liabilities of our majority owned subsidiaries are
consolidated with those of our own, with any third party
investor’s interest shown as non-controlling
interest.
Cash and Cash Equivalents
For
purposes of the statements of cash flows, the Company considers all
short term debt securities purchased with a maturity of three
months or less to be cash equivalents.
Impairment of Long-Lived Assets
The
Company performs a review for potential impairment of long-lived
assets whenever an event or changes in circumstances indicate the
carrying value of an asset may not be recoverable.
AMANASU ENVIRONMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019 and 2018
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Use of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires that management make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Development Stage Company
The
Company is considered to be in the development stage as defined in
ASC 915 “Development Stage Entities.” The Company is
devoting substantially all of its efforts to the development of its
business plans. The Company has elected to adopt early application
of Accounting Standards Update No. 2014-10, Development Stage
Entities (Topic 915): Elimination of Certain Financial Reporting
Requirements; and does not present or disclose inception-to-date
information and other remaining disclosure requirements of Topic
915.
Foreign Currency Translation
The
Company’s subsidiary is located in Japan and use the currency
of Japan (Yen) as its functional currency. Assets and liabilities
are at the rate of exchange in effect at balance sheet dates.
108.61 Japanese Yen to $1.00 USD at December 31, 2019 and 109.69
Japanese Yen to $1.00 USD at December 31, 2018. Equity accounts are
translated at the exchange rates prevailing at the time of the
transactions that established the equity accounts; and income
statement items are translated at the average exchange rate for the
period. There were no revenues or expenses related to the
operations in Japan for the years ended December 31, 2019 and 2018.
The resulting translation adjustments are reported under other
comprehensive income in accordance with ASC Topic 220,
“Comprehensive Income.” Gains and losses resulting from
the foreign currency transactions are reflected in the consolidated
statements of comprehensive loss.
Accounting for Income Taxes
The
Company accounts for income taxes under the provisions of FASB ASC
Topic 740, “Income Tax,” which requires recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the consolidated
financial statements or tax returns. Deferred tax assets and
liabilities are recognized for the future tax consequence
attributable to the difference between the tax bases of assets and
liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are measured using the enacted
tax rate expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date. The Company establishes a valuation
when it is more likely than not that the assets will not be
recovered.
ASC
Topic 740.10.30 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements and
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. ASC Topic
740.10.40 provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure,
and transition. We have no material uncertain tax positions for any
of the reporting periods presented.
AMANASU ENVIRONMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019 and 2018
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Fair Value of Financial Instruments
The
Company has adopted the provisions of ASC Topic 820, Fair Value
Measurements and Disclosures”, which defines the fair value
as used in numerous pronouncements, establishes a framework for
measuring fair value and expands disclosure of fair value
measurements. ASC 820 defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820 also establishes a
fair value hierarchy, which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs
when measuring fair value. ASC 820 describes three levels of inputs
that may be used to measure fair value:
Level 1
– quoted prices in active markets for identical assets or
liabilities.
Level 2
– quoted prices for similar assets and liabilities in active
markets or inputs that are observable.
Level 3
– inputs that are unobservable (for example cash flow
modeling inputs based on assumptions).
The
estimated fair value of certain financial instruments, including
cash, accrued expenses and advances from stockholder and officers
are carried at historical cost basis, which approximates fair
values because of the short-term maturing of these instruments. We
have no financial assets or liabilities measured at fair value on a
recurring basis.
Net Income (Loss) Per Share
The
Company computes net income (loss) per common share in accordance
with pronouncements of the Financial Accounting Standards Board
(FASB) and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under
these pronouncements, basic and diluted net income (loss) per
common share are computed by dividing the net income (loss)
available to common shareholders for each period by the weighted
average number of shares of common stock outstanding during the
period. Accordingly, the number of weighted average shares
outstanding as well as the amount of net income (loss) per share
are presented for basic and diluted per share calculations for all
periods reflected in the accompanying consolidated financial
statements.
Recent Adopted Accounting Pronouncements
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.
AMANASU ENVIRONMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019 and 2018
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Recent Adopted Accounting Pronouncements (continued)
The Company adopted the new standard on January 1, 2019 and used
the effective date as the date of initial application.
Consequently, financial information was not updated and the
disclosures required under the new standard was not 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 has 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 an operating lease liability of
$38,845 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 (see Note
6).
The Company does not expect any other recently issued
pronouncements to have a significant effect on the Company’s
results of operations, financial position or cash
flows.
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%, due
on demand and no repayment terms have been established. As a
result, the amount is classified as a current liability. During the
years ended December 31, 2019 and 2018, the Company borrowed
$33,850 and $78,465, respectively, from a stockholder. The balances
due as of December 31, 2019 and 2018 were $390,570 and $356,720,
respectively. Interest expense associated with these loans were
$17,110 and $15,076 for the years ended December 31, 2019 and 2018,
respectively. Accrued interest on these loans were $61,547 and
$44,437 at December 31, 2019 and 2018, 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 December 31, 2019 and 2018 amounts due to
the stockholder were $30,000 and $20,000, 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
accompanying balance sheets.
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 from a
stockholder at a monthly rate of $2,500 under a lease agreement
which expired October 1, 2019.
The Company entered a new lease agreement with the stockholder at a
monthly rate of $2,500 which expires October 1, 2021. At
December 31, 2019 and 2018, amounts due to the stockholder were
$87,933 and $56,433, 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
December 31, 2019 and 2018 were $67,822 and $55,785,
respectively.
AMANASU ENVIRONMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019 and 2018
4. RELATED PARTY TRANSACTIONS (continued)
Amanasu
Corp. is the principle shareholder of the Company. The balance due
to Amanasu Corp. was $50,000 and $50,000 at December 31, 2019 and
2018, respectively. No terms of payment have been established and,
as a result, the amount is classified as a current liability. The
amounts bear interest of 4.45% annually. Interest expenses
associated with this loan were $2,256 and $2,256 for the years
ended December 31, 2019 and 2018, respectively. Accrued interest on
this loan was $11,218 and $8,962 at December 31, 2019 and 2018,
respectively.
5. 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 ATH, a reporting company under the
Securities Exchange Act of 1934. Our major shareholder and officer
own approximately 86% of ATH’s outstanding shares of common
stock. ATH is responsible for 50% of the rent or $1,250 each month.
The office in New York is rented at the rate of $92 each year and
shares with ATH. 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 operating
leases 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% as of January 1, 2019 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 October 1,
2019 to December 31, 2019, the Company amortized $3,408 of
right-of-use assets.
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 December 31, 2019:
|
2020
|
$15,000
|
|
2021
|
11,250
|
|
Total
undiscounted future minimum lease payments
|
26,250
|
|
Less:
Difference between undiscounted lease payments and discounted lease
liabilities
|
(1,163)
|
|
Total
operating lease liabilities
|
25,084
|
|
Less
current portion
|
(14,065)
|
|
Long-term
lease liabilities
|
$11,019
|
Total
rent expense under operating leases for the year ended December 31,
2019 was $15,946 as compared to $16,034 for the year ended December
31, 2018.
AMANASU ENVIRONMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019 and 2018
6. INCOME TAXES
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. The Company has experienced losses since its
inception. As a result, it has incurred no Federal income
tax.
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 nine years in
Japan.
On
December 22, 2017, legislation commonly known as the Tax Cuts and
Jobs Act, or the Tax Act, was signed in to law. The Tax Act, among
other changes, reduces the U.S. federal corporate tax rate from 35%
to 21%, requires taxpayers to pay a one-time transition tax on
earnings of certain foreign subsidiaries that were previously tax
deferred and creates new taxes on certain foreign sourced earnings.
The Company did not have any earnings from foreign subsidiaries,
and, as such, the international aspects of the Tax Act are not
applicable.
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.
The
Company had NOL carryforwards of approximately $3.8 million in the
U.S. and $6,200 in Japan at December 31, 2019. Approximately $3.65
million in the U.S. and $6,200 in Japan will expire in the years
2020 through 2037, and $0.17 million can be carried forward
indefinitely.
The tax
returns for the years 2016, 2017, and 2018 are subject to audit by
the Internal Revenue Service.
The
reconciliation of income tax at the U.S. statutory rate of 21% to
the Company’s effective tax rate is as follows:
|
|
|
|
|
Income tax expense
at statutory rate
|
21%
|
21%
|
|
Change in valuation
allowance
|
(21%)
|
(21%)
|
|
Income tax
expense
|
-
|
-
|
The tax
effects of temporary differences that give rise to the
Company’s net deferred tax assets as of December 31, 2019 are
as follows:
|
|
|
|
|
Net Operating Loss
Carryforwards
|
$803,070
|
$1,991
|
|
Valuation
Allowance
|
(803,070)
|
(1,991)
|
|
Deferred Tax
Assets
|
$-0-
|
$-0-
|
The tax
effects of temporary differences that give rise to the
Company’s net deferred tax assets as of December 31, 2018 are
as follows:
|
|
|
|
|
Net Operating Loss
Carryforwards
|
$785,875
|
$3,039
|
|
Valuation
Allowance
|
(785,875)
|
(3,039)
|
|
Deferred Tax
Assets
|
$-0-
|
$-0-
|
AMANASU ENVIRONMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019 and 2018
7. SUBSEQUENT EVENT
The Company evaluated all events
subsequent to December 31, 2019 through the date of issuance of the
financial statements and concluded the following subsequent event
need to be disclosed.
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 potential
customers, unavailability of products and supplies used in
operations, and the unavailability of capital.
