During the nine-month ended February 28, 2017, the company received various stock
valued (FMV) at $305,000 for investor relations(“IR”) services performed. $50,000 of such stock received in July
2016 from ACUG was returned in November 2016 due to cancellation of contract. During the nine-month ended February 29, 2016,
the Company received stock valued at $115,200 for such IR services.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
Organization and Nature of Operations
:
Business Description
–
Chineseinvestors.com, Inc. (the “Company”) was incorporated on June 15, 1999 in the State of California. The Company
is a provider of Chinese language web-based real-time financial information. The Company’s operations had been located in
California until September 2002 at which time the operations were relocated to Shanghai, in the People’s Republic of China
(PRC).
During May 2000, the Company entered into an
agreement with MAS Financial Corp. (“MASF”) whereby MASF agreed to transfer control of a public shell corporation to
the Company and perform certain consulting services for a fee of $30,000.
During June 2000, the Company completed reorganization
with MAS Acquisition LII Corp. (“MASA”) with no operations or significant assets. Pursuant to the terms of the agreement,
the Company acquired approximately 96% of the issued and outstanding common shares of MASA in exchange for all of its issued and
outstanding common stock. MASA issued 8,200,000 shares of its restricted common stock for all of the issued and outstanding common
shares of the Company. This reorganization was accounted for as though it were a recapitalization of the Company and sale by the
Company of 319,900 shares of common stock in exchange for the net assets of MASA. In conjunction with the reorganization MASA changed
its name to Chineseinvestors.com, Inc.
The Company is now incorporated as a C corporation in the State
of Indiana as of June 1, 1997.
Going Concern
– The accompanying
financial statements have been prepared assuming that the Company will continue as a going concern. There is potential that the
Company will not continue as a going concern. The recoverability of recorded property and equipment, intangible assets, and other
asset amounts shown in the accompanying financial statements is dependent upon the Company’s ability to continue as a going
concern and to achieve a level of profitability. The Company intends on financing its future activities and its working capital
needs largely from the sale of equity securities until such time that funds provided by operations are sufficient to fund working
capital requirements. However, there can be no assurance that the Company will be successful in its efforts. The financial
statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets,
or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
1. Liquidity and Capital Resources:
Cash Flows
– During the
nine months ending February 28, 2017, the Company primarily generated cash and cash equivalents from the sale of its available
for sale securities, issuance of debt and issuance of preferred stocks.
Cash flows used in operations for the nine
months ending February 28, 2017 and February 29, 2016 were ($2,966,815) and ($2,101,591), respectively. The increased cash used
in operations were due to increased operating expenses related to employee payroll, professional fees and marketing expenses.
Capital Resources
– As
of February 28, 2017, the Company had cash and cash equivalents of $3,680,067 as compared to cash and cash equivalents of $197,231
as of May 31, 2016.
Since inception in 1997, the Company has primarily
relied upon proceeds from private placements of its equity securities to fund its operations. The Company anticipates continuing
to rely on sales of our securities in order to continue to fund business operations. Issuances of additional shares will result
in dilution to its existing stockholders. There is no assurance that the Company will be able to complete any additional sales
of our equity securities or that it will be able arrange for other financing to fund our planned business activities.
2. Critical Accounting Policies and Estimates
:
Basis of Presentation
–
These accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United
States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission for
annual financial statements.
Investment in Affiliate
– The Company invested in an affiliate, Medicine Man Technologies, Inc. (“MDCL”), in April 2014,
implementing the equity method of accounting. The Company received its ownership in return for supporting MDCL during its
formational stage at a time that MDCL had little or no cash, as such the MDL stock that the Company received had a value of
zero and MDCL generated a loss through May 31, 2014. The Company has no further commitment to fund
losses; therefore, management has deemed it proper to discontinue applying the equity method for the investment as defined by
Accounting Standards Codification (“ASC”) 323-10-35-20 for the year ended May 31, 2014. In 2015 MDCL issued additional stock, diluting the Company’s position and restructured the management of the entity causing
the Company to determine that it no longer had “significant influence” over its operations. The Company then
started accounting for the stock owned as an available for sale security. The Company’s basis in the stock was $0. The
fair value of the Company’s holdings was determined by an independent valuation report. As there was a public market
for MDCL stock at February 28, 2017 and May 31, 2016, the Company recognized the stock as a Level 1 financial instrument.
Foreign Currency
– The
Company has operations in the People’s Republic of China (“PRC”), however the functional and reporting currency
is in U.S. dollars. To come to this conclusion, the Company considered the direction of ASC section 830-10-55.
Selling Price and Market
–
As a representative office is located in the PRC, the Company is not allowed to sell directly to PRC based customers. Over 90%
of its customers are in the United States and 100% of all sales are paid in U.S. dollars. This indicates the functional currency
is U.S. dollars.
Financing
– The Company’s
financing has been generated exclusively in U.S. dollars from the United States. This indicates the functional currency is U.S.
dollars.
Expenses
– The majority
of expense are paid in U.S. dollars. The expenses generated in PRC are paid by a monthly or weekly cash transfer from the U.S.
when the expenses are due, resulting in very little foreign currency exposure. This indicates the functional currency is U.S. dollars.
Numerous Intercompany Transactions
– The Company has multiple transactions each month between the U.S. and Chinese representative office. This indicates the
functional currency is U.S. dollars.
Due to the functional and reporting currency
both being in U.S. dollars, ASC 830-10-45-17 states that re-measurement of the books of record is not necessary.
Revenue recognition
– Revenue
was derived from four different sources:
The Company recognizes revenue pursuant to
revenue recognition principles presented in SAB Topic 13. First, persuasive evidence of an arrangement. Second, delivery has occurred
or services have been rendered, thirdly the seller’s price to the buyer is fixed or determinable and lastly collectability
is reasonably assured.
1. Fees from banner advertisement, webpage
hosting and maintenance, on-line promotion and translation services, advertising and promotion fees for customers in the Company’s
Chinese Investment Guides, sponsorship fees from investment seminars, road shows, and forums. The sales prices of these services
are fixed and determinable at the time the contracts are signed and there are no provisions for refunds contained in the contracts.
These revenues are recognized when all significant contractual obligations have been satisfied and collection of the resulting
receivable is reasonably assured.
2. Fees from membership subscriptions: these
revenues are recognized over the term of the subscription. Subscription terms are generally between 3 and 12 months but can occasionally
be as short as 1 month or as long as 60 months. Long term deferred revenues are recognized from subscriptions over 12 months.
3. Fees related to setting up and providing
ongoing administrative and translation support for currency trading accounts are in association with Forex. These fees are recognized
when earned.
4. Investor relations income is earned by the
Company in return for delivering current, publicly available information related to our client companies. These revenues are prepaid
by the client company and as such are initially recorded as an asset with an offsetting unearned revenue liability. This revenue
is recognized over the term of the services period while the services are being provided. The value of the revenue earned is recognized
every quarter based upon the client company’s stock closing price multiplied by the numbers of shares earned within that
specific accounting period. By recognizing the revenue incrementally, we are following the guidelines of SAB Topic 13, in that
we are only recognizing revenue once the value of the revenue received is fixed and determinable. In addition, we are applying
the definition of readily determinable fair value presented at Accounting Standards Codification 820-10-15-5 in assessing the amount
to recognize in each accounting period. The number of shares earned is a function of the time period for which services are provided
over the contract period in relation to the price of the shares at the time of the services being delivered, added to the value
of cash received if any, then recognized as revenue in the period the services were delivered.
Costs of Services
– Costs
of services sold are the total direct cost of the Company’s operations in Shanghai.
Website Development Costs
–
The Company accounts for its development costs in accordance with ASC 350-50, “Accounting for Website Development Costs.”
The Company’s website comprises multiple features and offerings that are currently developed with ongoing refinements. In
connection with the development of its products, the Company has incurred external costs for hardware, software, consulting services,
and internal costs for payroll and related expenses of its technology employees directly involved in the development. All hardware
costs are capitalized as fixed assets. Purchased software costs are capitalized in accordance with ASC codification 350-50-25 related
to accounting for the costs of computer software developed or obtained for internal use. All other costs are reviewed to determine
whether they should be capitalized or expensed.
Cash and Cash Equivalents
–
The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. At
certain times, cash in bank may exceed the amount covered by FDIC insurance. At February 28, 2017 and May 31, 2016 there were deposit
balances in a United States bank of $3,658,203 and $195,571 respectively. In addition, the Company maintains cash balance in The
Bank of China, which is a government owned bank. The full balance of the deposits in China is secured by the Chinese government.
At February 28, 2017 and May 31, 2016 there were deposits of $20,505 and $1,562, respectively, in The Bank of China.
Accounts Receivable and Concentration
of Credit Risk
– The Company extends unsecured credit to its customers in the ordinary course of business. Accounts
receivable related to subscription revenue is recorded at the time the credit card transaction is completed, and is completed when
the merchant bank deposits the cash to the Company bank account. Revenues related to advertising and Forex are regularly collected
within 30 days of the time of services being rendered. However, since these are ongoing contracts, there has been no instance of
failure to pay.
The Company evaluates the need for an allowance
for doubtful accounts on a regular basis. As of February 28, 2017, and May 31, 2016, the Company determined that an allowance was
not needed.
The operations of the Company are located in
the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political,
economic, and legal environments in the PRC, as well as by the general state of the PRC economy.
Prepaid taxes
– A percentage
of the Company’s aggregate gross amount of reportable payment transactions settled through one of the Company’s merchant
banks were withheld and remitted to the Internal Revenue Service (IRS) under IRS regulation Section 6050W. The Company is filing
the tax return to refund the withholdings as management does not believe the Company’s revenue transactions fall within the
rules of Section 6050W. Management wrote off the balance receivable in the period ended May 31, 2016 due to difficulty and expected
cost of securing the refund.
Investments available for sale
– Investments available for sale is comprised of publicly traded stock received in return for providing investor relations
services to client companies. The investor relations services range from one month to a year, from the inception of the contract.
The Company considers the securities to be liquid and convertible to cash in under a year. The Company has the ability and intent
to liquidate any security that the Company holds to fund operations over the next twelve months, if necessary, and as such has
classified all of its marketable securities as short-term.
The Company followed the guidance of ASC 320-10-30
to determine the initial measure of value based on the quoted price of an otherwise identical unrestricted security of the same
issuer, adjusted for the effect of the restriction, in accordance with the provisions of topic 820-10-15-5, which states that an
equity security has a readily determinable fair value if it meets the condition of having a “sales prices or bid-and-asked
quotations which are currently available on a securities exchange registered with the U.S. Securities and Exchange Commission (SEC)
or in the over-the-counter market, provided that those prices or quotations for the over-the-counter market are publicly reported
by the National Association of Securities Dealers Automated Quotation systems or by the OTC Markets Group Ins. Restricted stock
meets that definition if the restriction terminates within one year.” These shares were classified as available for sale
securities in accordance with ASC 948-310-40-1 as the Companies intention is to sell them in the near-term (less than one year).
In compliance with ASC 320-10-35-1, equity securities that have readily determinable fair values that are classified as available-for-sale
shall be measured subsequently at fair value in the statement of financial position. “Unrealized holding gains and losses
for available-for-sale securities (including those classified as current assets) shall be excluded from earnings and reported in
other comprehensive income until realized.”
As these shares, will be earned over the term
of the contracts, the Company will defer the recognition of the earnings of the revenue over the period the services are performed.
The value recorded will be determined by multiplying the average of the closing price on the last day of the month for the period
being reported based on closing market price per share.
Upon receipt, these shares were recorded as
an asset on the Companies financials as "Investments, available for sale". The Company will also record a corresponding
contra-asset account titled "Unearned Revenue paid in stock".
Other Current Assets
–
Other current assets are comprised of various deposits on building space under an operating lease and are stated at the current
exchange rate at year end.
Property and Equipment
– Property and equipment are stated at cost. Depreciation and amortization of property and equipment is provided using the
straight-line method over estimated useful lives ranging from three to five years. Leasehold improvements are amortized over the
life of the lease.
Expenditures for major renewals and betterments
that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to
expense as incurred. Gains and losses from retirement or replacement are included in operations.
Impairment of Long-life Assets
– In accordance with ASC Topic 360, the Company reviews its long-lived assets, including property and equipment, for impairment
whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. If the
total of the expected undiscounted future net cash flows is less than the carrying amount of the asset, a loss is recognized for
the difference between the fair value and carrying amount of the asset. There was no impairment as of February 28, 2017 and May
31, 2016
.
Accrued dividend
–
The accrued dividend balance represents dividend payable related to the Series B-2014 preferred stock and
Series C-2016 preferred stock.
Accrued Liabilities
– Accrued liabilities are
comprised of the following:
|
|
February 28, 2017
|
|
|
May 31, 2016
|
|
China Employees' Salaries and Commissions Accrual
|
|
$
|
78,742
|
|
|
$
|
30,598
|
|
Accrued Payroll
|
|
|
60,496
|
|
|
|
6,799
|
|
Accrued Expenses
|
|
|
6,799
|
|
|
|
1,756
|
|
|
|
$
|
146,037
|
|
|
$
|
39,153
|
|
Unearned revenue, revenue paid in stock
– For the nine months ended February 28, 2017 and fiscal year ended May 31, 2016, the Company received shares of stock and
warrants, as payment for investor relations work that the Company will be providing through July 2017. As the Company earns the
fees for the works, this balance will be reduced to reflect the portion still to be earned.
Deferred revenue
– The
company receives payment for subscription revenues in advance before the subscription service is granted. The company recognizes
the revenue as being earned as the services are deliver. The amount paid for which services have not yet been delivered related
to subscription revenues is recorded as a liability in the current or long-term portion of the liabilities section of the balance
sheet.
Short-term debt, secured by
stock
– During 2016, the Company obtained short term debt of $660,000 from various individuals, secured by
660,000 shares of the Company owned stock in MDCL. The lender received an incentive of 30% appreciation of the stock value
for MDCL at the maturity of the short-term notes, 15 months after inception or the date when the Company liquidates its MDCL
stock, whichever is earlier. Short-term debt secured 660,000 shares of MDCL common stock were sold at $1.2 per share, the
incentive feature was $39,600. In January 2017, the Company paid off the principal of the loan of $660,000 plus interest
and incentives.
In September 2016, the Company obtained short-term
debt of $410,000 from various individuals. Based on the original lending agreements, the loan is secured by shares of the stocks
in the following companies.
Company name
|
Shares Secured for Loan
|
Sino-Global Shipping America LTD (SINO)
|
80,000.00
|
Recon Technology LTD (RCON)
|
60,000.00
|
Nengfa Weiye Energy (NFEC)
|
185,000.00
|
SGOCO Group LTD (SGOC)
|
18,333.33
|
When entering the loan agreement,
the Company believed that the contract would be executed and SINO shares would be delivered upon signing the contract.
However, such IR service agreement was not executed due to the disagreement among SINO’s management. As a result, the
Company did not obtain the SINO shares. For NFEC, the Company obtained 100,000 shares at the time of entering the contract,
and the remaining shares were fully received by the end of year 2016. For RCON, the Company obtained 50,000 shares at the
time entering the contract, so the RCON shares are short by 10,000. The loan agreements are still valid after renegotiating the
terms with the private lenders. These notes are due on September 2017. The lenders received a 20% of the deemed increase in
value of these secured shares (“Incentive Feature”). We estimate the value of the Incentive Feature of the common
stock collateralizing the debt using the fair market value as of February 28, 2017. We recorded the estimated value of
the Incentive Feature as and increase to the debt liability and interest expense. As of February 28, 2017, the Incentive
Feature of $16,503 was recorded.
Use of Estimates
– The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The financial statements include some amounts
that are based on management's best estimates and judgments. The most significant estimates relate to depreciation and useful lives,
and contingencies. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant.
Fair Value of Financial Instruments
– The Company has adopted the provisions of ASC Topic 820, Fair Value Measurements, which defines fair value, establishes
a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. ASC 820 does not require any
new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify
the source of the information. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs)
and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
•
|
|
Level one – Quoted market prices in active markets for identical assets or liabilities;
|
•
|
|
Level two – Inputs other than level one inputs that are either directly or indirectly observable; and
|
•
|
|
Level three – Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
|
Much of the Company’s financial instruments
are level one and are carried at market value, requiring no adjustment to book value. The financial instruments classified as level
one were deemed to qualify as that classification because their value was determined by the price of identical instruments traded
on an active exchange. It should be noted that 60,000 shares of the stock earned for consulting work, currently being held qualifies
as a Level two instrument and has a book value of $67,500. The Company determined that the instrument was Level two because the
market for this instrument was less active, as it was currently being distributed through a private placement memorandum, and was
not a freely trading public stock. The value of the stock has been monitored on an ongoing basis and verified to be consistent
with the carrying value and, therefore, not requiring an adjustment.
Level one instruments were based upon stated
balance of financial institution or calculated based upon stock trading in the public market. Level two instruments were calculated
based upon the sale of stock through a private placement at arms-length where our shares were an insignificant amount of the total
volume of stock sold in the issuer. Level three financial instruments were valued by a professional independent appraiser hired
by the Company to determine the valuation. The level three valuation calculation included discounted cash flow models and market
based models as appropriately utilized by a professional valuation firm. The inputs they used included the entities past financial
performance, projected budgets, prior private stock sale history and comparable company valuations.
The following table summarizes the assets we are carrying and the
fair value category in which they are currently classified:
|
|
February 28, 2017
|
|
|
May 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash
|
|
$
|
3,680,067
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
197,231
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Investments
|
|
|
763,163
|
|
|
|
67,500
|
|
|
|
–
|
|
|
|
2,640,825
|
|
|
|
67,500
|
|
|
|
–
|
|
Total Financial Instruments
|
|
$
|
4,443,230
|
|
|
$
|
67,500
|
|
|
$
|
–
|
|
|
$
|
2,838,056
|
|
|
$
|
67,500
|
|
|
$
|
–
|
|
Income Taxes
– Income taxes
are accounted for under the asset and liability method of ASC 740. Deferred tax assets and liabilities are recognized for net operating
loss and other credit carry forwards and the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which the tax effect of transactions are expected to
be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations
in the year that includes the enactment date.
Deferred tax assets are reduced by a full valuation
allowance since it is more likely than not that the amount will not be realized. Deferred tax assets and liabilities are classified
as current or noncurrent based on the classification of the underlying asset or liability giving rise to the temporary difference
or the expected date of utilization of the carry forwards.
Other Revenue
– Other revenue
is comprised of revenue related to Forex service fees and rent generated through office space sublease revenue which is recognized
over the period the term of the lease, the sublease ended as of May 31, 2016.
Advertising Costs
– Advertising
costs are expensed when incurred.
Earnings (Loss) Per Share
–
Earnings (loss) per share is computed using the weighted average number of common shares outstanding during the period. The Company
has adopted ASC 260 (formerly SFAS128), “Earnings Per Share”. Fully diluted loss per share are not calculated and presented
on the financial statements as the calculation would be antidilutive.
Stock Based Compensation
–
The Company accounts for share-based payments pursuant to ASC 718, “Stock Compensation” and, accordingly, the Company
records compensation expense for share-based awards based upon an assessment of the grant date fair value, for stock options using
the Black-Scholes option pricing model.
Stock compensation expense for stock options is recognized over
the vesting period of the award or expensed immediately under ASC 718 and EITF 9618 when stock or options are awarded for previous
or current service without further recourse. The Company issued stock options to contractors and external companies that had been
providing services to the Company upon their termination of services. Under ASC 718 and EITF 9618 these options were recognized
as expense in the period issued because they were given as a form of payment for services already rendered with no recourse.
On October 2016, the Company declared restricted
stock award to its eligible employees and contractors. Total shares awarded were 1,035,000, and the fair market price at grant
date was $0.37 per share. All these shares were fully vested at grant date, total stock compensation expense totaling $382,950
were recorded. All the 1,035,000 shares were issued on February 28, 2017.
On December 15, 2016, the Company declared
restricted stock award to corporate counsel and former COO and secretary 100,000 shares in total, and the fair market price at
the grant date was $0.44 per share. All these shares were fully vested at grant date, total stock compensation expense totaling
$44,000 were recorded. 100,000 shares were issued on December 15, 2016.
Stock award activity was as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
Balance at May 31, 2015
|
|
|
389,035
|
|
|
$
|
0.48
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Forfeited or expired
|
|
|
(389,035
|
)
|
|
|
–
|
|
Balance at May 31, 2016
|
|
|
–
|
|
|
$
|
–
|
|
Granted
|
|
|
1,135,000
|
|
|
|
0.38
|
|
Exercised
|
|
|
(1,135,000
|
)
|
|
|
0.38
|
|
Forfeited or expired
|
|
|
–
|
|
|
|
–
|
|
Balance at February 29, 2017
|
|
|
–
|
|
|
$
|
–
|
|
3. Stockholders’ Equity:
As of February 28, 2017 and May 31, 2016, the
Company was authorized to issue 80,000,000 shares of common stock, $0.001 par value per share. In addition, 20,000,000 shares of
$.001 par value preferred stock were authorized. All common stock shares have full dividend rights. However, it is not anticipated
that the Company will be declaring distributions in the foreseeable future.
Series A-2012 Convertible Preferred Stock:
The Company has 20,000,000 shares of preferred
stock authorized. In February 2017, 240,000 preferred shares are converted to 300,000 shares of common stock. As of February 28,
2017 and May 31, 2016, the Company has 665,000 and 905,000 preferred stock Series A-2012 issued and outstanding. The terms of the preferred
stock allow the holder to convert each share of preferred stock into 1.25 shares of common stock at any time after nine months
from the date of issuance. The holders of shares of preferred stock were entitled to receive a dividend of $0.06 per share per
annum for the first two years from the issuance of the instruments. The Company maintained the right to suspend the dividend at
its discretion if it is deemed necessary.
Series B-2014 Convertible Preferred Stock
In the years ended May 31, 2016 and 2015
the Company issued 720,000 and 1,885,000 shares of preferred stock as Series B-2014 convertible preferred stock for total
proceeds of $2,605,000. In February 2017, 80,000 Series B-2012 shares converted to 200,000 shares of common
stock. As of February 28, 2017 and May 31, 2016, the Company has 2,525,000 and 2,605,000 Series B-2014 preferred stock issued
and outstanding. The terms of the preferred stock allow the holder to convert each share of preferred stock into 2.5 shares
of common stock at any time after six months from the date of issuance. The holders of shares of preferred stock shall have
the right to one vote for each share of common stock into which such preferred stock could convert. The holders of shares
of preferred stock are entitled to receive a dividend of $0.06 per share per annum for the first two years from the issuance
of the instruments, which has been recorded as an accrued dividend on the liabilities section of the balance sheet. The
Company maintained the right to suspend the dividend at its discretion if it is deemed necessary.
Upon issuance of preferred stock convertible
in shares of common stock at a price lower than the fair market value of common stock on the date of issuance, in accordance with
the guidance provided in ASC 505-10-50 and Emerging Issues Task Force (“EITF”) No. 00-27, we have recorded the intrinsic
value of this beneficial conversion feature which we calculated to be $51,625 as a deemed dividend on the Company’s income
statement for the six-month ended November 30, 2015. This deemed dividend was calculated based upon a trading closing price of
trading on the OTC Market exchange where our stock is traded and effective sale price (with conversion) of common stock.
Series C-2016 Convertible Preferred Stock
In December 2016, the Company issued 5,000,043
shares of its Series C-2016 Preferred Stock at a price of $1.00 per share for total proceeds of $5,000,043. The terms of the preferred
stock allow the holder to convert each share of preferred stock into 3 shares of common stock at any time after six months from
the date of issuance. The holders of shares of preferred stock are entitled to receive a dividend of $0.06 per share per annum
for the first year from the issuance of the instruments, which has been recorded as an accrued dividend on the liabilities section
of the balance sheet. The Company maintained the right to suspend the dividend at its discretion if it is deemed necessary.
Upon issuance of preferred stock convertible
in shares of common stock at a price lower than the fair market value of common stock on the date of issuance, in accordance with
the guidance provided in ASC 505-10-50 and Emerging Issues Task Force (“EITF”) No. 00-27, we have recorded the intrinsic
value of this beneficial conversion feature which we calculated to be $15,149,126 as a deemed dividend on the Company’s income
statement for the nine-month ended February 28, 2017. This deemed dividend was calculated based upon a trading closing price of
trading on the OTC Market exchange where our stock is traded and effective sale price (with conversion) of common stock.
4. Property and Equipment
:
Property and equipment are recorded at cost, net of accumulated
depreciation and are comprised of the following:
|
|
February 28, 2017
|
|
|
May 31, 2016
|
|
Furniture & Fixtures
|
|
$
|
91,715
|
|
|
$
|
87,413
|
|
Leasehold Improvements
|
|
|
32,961
|
|
|
|
23,417
|
|
|
|
$
|
124,676
|
|
|
$
|
110,830
|
|
Less: Accumulated Depreciation
|
|
|
(102,159
|
)
|
|
|
(99,062
|
)
|
|
|
$
|
22,517
|
|
|
$
|
11,768
|
|
Depreciation on equipment is provided on a straight-line basis over
its expected useful lives at the following annual rates.
Computer equipment
|
|
3 years
|
Furniture & fixtures
|
|
3 years
|
Leasehold improvements
|
|
Term of the lease
|
Depreciation expense for the nine months ended February 28, 2017
and February 29, 2016 was $3,097 and $7,924, respectively.
5. Intangible Assets
:
Intangible assets are comprised of the following:
|
|
February 28, 2017
|
|
|
May 31, 2016
|
|
Website development
|
|
$
|
184,169
|
|
|
$
|
174,046
|
|
Less: Accumulated Depreciation
|
|
|
(103,317
|
)
|
|
|
(95,899
|
)
|
|
|
$
|
80,852
|
|
|
$
|
78,147
|
|
Amortization is calculated over a straight-line
basis using the economic life of the asset. Amortization expense for the nine months ended February 28, 2017 and February 29, 2016
was $7,418 and $7,306 respectively.
6. Commitments and Concentrations:
Office Lease – Shanghai
– The Company entered a lease for new office space in Shanghai, China. The lease period started October 1, 2013 and expired
on September 30, 2016. On August 2016, the Company renewed this lease at $5,400 per month to September 30, 2019, resulting in the
following future commitments, based on the exchange rate at February 28, 2017:
2017 fiscal year
|
|
$
|
16,200
|
|
2018 fiscal year
|
|
$
|
64,800
|
|
2019 fiscal year
|
|
$
|
64,800
|
|
2020 fiscal year
|
|
$
|
21,600
|
|
Office Lease – Denver,
Colorado
– The Company entered a lease for office space in Denver, Colorado. The original lease period started
June 1, 2015 and was to terminate May 31, 2018. The monthly lease payment was $3,333. On June 2016, the Company and landlord
mutually agreed to terminate this contract on August 15, 2016 and the security deposit was converted to two months of rent at
that time.
Office Lease – New York
–
The Company entered a lease for executive office space in New York, NY. The original lease period started April 21, 2015 and was
terminated on July 31, 2016. On January 2016, the Company renewed the lease at $2,167 per month to February 28, 2017. The lease
agreement was terminated on February 28, 2017.
Office Lease – San Gabriel, California
– The Company entered a lease for executive office space in San Gabriel, California. The Lease period started April 30, 2015
and was terminated on August 1, 2016. On June 2016, the Company renewed the contract for another 3 years to July 31, 2019, the
current monthly rent is $4,242, resulting in the following future commitments:
2017 fiscal year
|
|
$
|
12,725
|
|
2018 fiscal year
|
|
$
|
52,173
|
|
2019 fiscal year
|
|
$
|
53,783
|
|
2020 fiscal year
|
|
$
|
9,000
|
|
The Company entered another lease for retail
store in San Gabriel, California. The lease period started February 1, 2017 to July 31, 2019, the current monthly rent is $2,625,
resulting in the following future commitments:
2017 fiscal year
|
|
$
|
7,875
|
|
2018 fiscal year
|
|
$
|
31,501
|
|
2019 fiscal year
|
|
$
|
31,501
|
|
2020 fiscal year
|
|
$
|
5,250
|
|
Office Lease – Irwindale, California
– On October, 2015, the Company entered a lease for executive office space in Irwindale, California. The Lease is one-year
lease at $5,000 per month and that terminates on November 10, 2016. On November 11, 2016, the company renewed the lease at $4,000
per month to February 10, 2017. The Company is on month to month rent at this location, and the rent is $4,000 per month.
Concentrations
– During
the periods ended February 28, 2017 and February 29, 2016, the majority of the Company’s revenue was derived from its operations
in PRC from individuals, primarily in the United States and Canada.
Litigation
– The Company
is involved in legal proceedings from time to time in the ordinary course of its business. As of the date of this filing, the Company
is a party to two lawsuits which, in the opinion of management, upon consideration of corporate council advice, it believes it
is reasonably likely to not have a material adverse effect on the financial condition, results of operation or cash flow of the
Company in the future.
7. Related party:
Mrs. Lan Jiang is the spouse of the Company’s
CEO, Mr. Warren Wang. During the quarter ended November 30, 2016, she received 200,000 shares of the Company’s stock compensation
with the fair market value $74,000 as of grant date. Those 200,000 shares of the Company’s stock was issued and delivery
on February 28, 2017.
8. Correction of immaterial error
Subsequent to
November 30, 2016, the Company discovered a couple of prior period accounting transactions and one preferred stock sale that
were not properly recorded. These were comprised of two transactions related to service revenue paid in stocks which were not
reported to the accounting department, Second, when the Company raised $70,000 from selling 70,000 shares of Series B-2014
preferred stock was inadvertently recorded as IR-revenue. Due to these errors, the Company’s revenue was understated
by $45,200 for the year ended May 31, 2016. On balance sheet as of May 31, 2016, total assets were understated by $171,600,
total liabilities was understated by $2,575 and total shareholders’ equity were understated by $169,025.
The Company
assessed the materiality of the errors considering both quantitatively and qualitatively effect in accordance with Staff Accounting
Bulletin No. 99, Materiality and determined that the errors are not material to the decision making to a reasonable investor.
Accordingly, the Company has revised its balance sheet as of May 31, 2016, and statement of comprehensive loss for three and six
months ended November 30, 2015. The Company intends to revise its financial statements for certain quarterly periods through subsequent
periodic filings. The effect of recording this immaterial correction in the statements of comprehensive loss for the 3 months
and 6 months periods ended November 30, 2015, balance sheet as of May 31, 2016, and for financial statements in subsequent periods
filings are as follows:
Accounts
|
For the
Quarter Ended
November 30, 2015
|
|
For the
Quarter Ended
February 29, 2016
|
|
For the
Year Ended
May 31, 2016
|
|
For
the
Quarter Ended
August 31, 2016
|
|
|
As
Reported
|
|
As
Revised
|
|
As
Reported
|
|
As
Revised
|
|
As
Reported
|
|
As
Revised
|
|
As
Reported
|
|
As
Revised
|
|
Total Revenue
|
$
|
289,263
|
|
$
|
219,263
|
|
$
|
191,952
|
|
$
|
255,990
|
|
$
|
903,185
|
|
$
|
948,385
|
|
$
|
|
|
$
|
|
|
Operating Loss
|
|
(671,248
|
)
|
|
(741,717
|
)
|
|
(768,794
|
)
|
|
(704,756
|
)
|
|
(2,922,756
|
)
|
|
(2,877,556
|
)
|
|
|
|
|
|
|
Net Loss
|
|
(684,608
|
)
|
|
(752,827
|
)
|
|
(714,647
|
)
|
|
(650,609
|
)
|
|
(2,026,206
|
)
|
|
(1,981,006
|
)
|
|
|
|
|
|
|
Net Loss Attributable to Common Shareholders
|
|
(684,608
|
)
|
|
(755,452
|
)
|
|
(752,987
|
)
|
|
(689,997
|
)
|
|
(2,223,182
|
)
|
|
(2,180,932
|
)
|
|
(210,410
|
)
|
|
(211,468
|
)
|
Investment, Available for Sale
|
|
122,646
|
|
|
192,646
|
|
|
126,240
|
|
|
287,840
|
|
|
111,016
|
|
|
282,616
|
|
|
84,384
|
|
|
235,084
|
|
Unearned Revenue Paid in Stock
|
|
131,944
|
|
|
185,944
|
|
|
111,111
|
|
|
162,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Dividend & Interest
|
|
66,022
|
|
|
66,491
|
|
|
48,854
|
|
|
50,371
|
|
|
23,954
|
|
|
26,529
|
|
|
71,864
|
|
|
75,497
|
|
Preferred Stock Series B-2014
|
|
2,535
|
|
|
2,605
|
|
|
2,535
|
|
|
2,605
|
|
|
2,535
|
|
|
2,605
|
|
|
2,535
|
|
|
2,605
|
|
Additional Paid in Capital
|
|
14,671,770
|
|
|
14,742,075
|
|
|
14,671,770
|
|
|
14,742,075
|
|
|
14,665,583
|
|
|
14,735,888
|
|
|
14,665,583
|
|
|
14,735,888
|
|
Unrealized Gain on Investments Available for Sale
|
|
364,195
|
|
|
380,195
|
|
|
1,703,406
|
|
|
1,749,806
|
|
|
2,057,770
|
|
|
2,114,170
|
|
|
749,814
|
|
|
785,314
|
|
Accumulated Deficit
|
|
(14,350,783
|
)
|
|
(14,421,627
|
)
|
|
(15,103,771
|
)
|
|
(15,111,625
|
)
|
|
(15,140,555
|
)
|
|
(15,098,305
|
)
|
|
(15,350,965
|
)
|
|
(15,309,773
|
)
|
Note: If blank, means no change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Subsequent event
:
The Company made an initial investment of
$249,500 in Breakwater MB LLC’s membership interests. The transaction was completed on March 13, 2017. Breakwater MB,
LLC, is a company providing consulting services to private, cannabis-focused companies as they transition into the public
market. The invested capital will primarily be used to cover the costs of its becoming a publicly traded company.
The Company has established and registered
XiBiDi Biotechnology Co., Ltd. in the Pudong Free-Trade Area in Shanghai, with registered capital requirements of $1.45 million
USD over the next 10 years. XiBiDi Biotechnology will focus on the online and offline sales of health products including hemp-derived
CBD (cannabidiol) oil, as well as hemp-based food and beverages. XiBiDi Biotechnology is registered as a wholly foreign enterprise.
The Company took in $5,350,150
in subscriptions on its $5,000,000 Series C-2016 placement. The investors of the final $350,150 agreed to keep their funds on
deposit with the Company pending the Company’s next securities placement. As of February 28, 2017, total
oversold amount of $350,150 was recorded on balance sheet as investor deposit. The Company has paid back $110,050 to
investors as of April 14, 2017.