During the three and nine months ended
February 28, 2019, the Company received one stock valued (FMV) at $116,250 and $379,050, respectively, for investor relations (“IR”)
services to be performed within one year.
During the three and nine months ended
February 28, 2018, the Company received various stocks valued (FMV) at $0 and $1,006,575
respectively,
for various IR service agreements with terms ranging from one to twelve months.
Notes to the Unaudited Condensed Consolidated
Financial Statements
1. Organization and Nature of Operations
:
Business Description
Chineseinvestors.com, Inc.
(the
“Company”) was incorporated on January 6, 1997 in the State of Indiana under the corporate name “MAS Acquisition
LII Corp.” Prior to June 12, 2000, the Company was a ‘blank check’ company seeking a business combination with
an unidentified business.
On June 12, 2000, the Company acquired
8,200,000 shares of common stock, representing 100% of the outstanding shares of Chineseinvestors.com, Inc., which was incorporated
in the State of California on June 15, 1999. In connection with this acquisition, Aaron Tsai, our former sole officer and director,
was replaced by Chineseinvestors.com, Inc.’s officers and directors.
The stockholders of Chineseinvestors.com,
Inc. were issued 8,200,000 shares of our common stock, or approximately 96% of our total outstanding common shares. After giving
effect to the acquisition, Chineseinvestors.com, Inc. became a wholly owned subsidiary and we changed our name to Chineseinvestors.com,
Inc. Immediately prior to the acquisition of Chineseinvestors.com, Inc., MAS Capital Inc. returned 8,200,000 shares of common stock
for cancellation without any consideration.
Chineseinvestors.com, Inc. was established
as an ‘in language’ (Chinese) financial information web portal, offering news and information relative to the US Equity
and Financial Markets, as well as certain other specific financial markets (including China A Shares, FOREX, etc.). Over the years,
various informational components have been added and the general content of the web portal has improved as the Company continues
to derive a material portion of its income from the various subscription services it offers to its customers, which provide investment
education, news and analysis on the US Equity and Financial Markets as well as news about particular stocks that we are following.
Nevertheless, we do not provide our subscribers with individualized investment advice and never have investment discretion over
any subscribers’ or site visitors’ funds. As described below, providing investor relations services for other companies,
especially those requiring Mandarin language support, now accounts for our most significant revenue source.
The registrant’s investor
relations agreements typically obligate the registrant to provide translations of the client’s releases into English
from Mandarin or from English into Mandarin, to feature advertisements about the client on the www.chinesefn.com website, and
otherwise to assist the client in achieving its goals, which may be to increase the client’s stock price, to increase
awareness of the clients and their stock or to help the client to move from pink sheets to an established public securities
market. Not all of those goals are shared by every client. Promotions geared to the Chinese American market is the underlying
common thread, generally in the form of advertisements on the chinesefn.com website. The registrant also provides other
services intended to increase awareness and knowledge of its clients’ businesses and stocks within the Chinese American
community.
The registrant generally receives a fee
consisting of cash, the client’s securities, or a combination of the two for the services. The securities offer success incentives
and align the interests of the registrant and the client.
Chineseinvestors.com, Inc. has been in
continuous operation since July 1999 using the web domains (uniform resource locators) of www.chineseinvestors.com and www.chinesefn.com.
We established a Representative Office
business presence in leased office space in Shanghai, China in late 2000 from which we fulfill most of our support services. We
also have a leased office presence in San Gabriel, California, New York City, NY and Flushing, NY and Richmond, British Columbia.
In 2010, the Company filed a Form 10 registration
statement to become a public reporting company under the Exchange Act of 1934 in order to facilitate the Company’s ability
to raise capital on the public market.
The Company selected Glendale Securities,
with offices in Sherman Oaks, California, as the market maker for our common stock, the price of which is quoted on the OTC:QB
marketplace.
As of February 28, 2019, the Company employed
twenty-six (26) people in its Shanghai Office in a variety of administrative and operational capacities. All are employed full
time. The Company also has approximately thirty-six (36) full-time employees and approximately eight (8) independent contractors
in the US.
XiBiDi (“CBD”) Biotechnology
Co., Ltd.
In March 2017, the Company established
and registered XiBiDi Biotechnology Co. Ltd. (“CBD Biotech”) in Pudong Free-Trade Area in Shanghai, PRC as a wholly
owned foreign enterprise (“WOFE”). CBD Biotech’s primary focus is online and retail sales of industrial hemp-infused
skincare products and other complimentary products in PRC. The initial focus of CBD Biotech was the launch of CBD Magic Hemp Series,
a hemp-infused skincare line.
CBD Biotech obtained Wholesale Alcohol
License in November 2017 from Shanghai Wine Monopoly Bureau, effective October 24, 2017 for a three-year term, which allows CBD
Biotech to act as a liquor distributor. CBD Biotech entered into a wholesale agreement with China GuiZhou HanTai Wine, Inc. to
distribute its liquor product -
Yantai 1985
. The Company announced its plans to spin off CBD Biotech in February 2018, which
was later postponed. In December 2018, the Company announced that it had retained Boustead Securities, LLC as underwriter for the
planned Initial Public Offering (“IPO”) of CBD Biotech concurrently with a listing on a national securities exchange.
As of February 28, 2019, CBD Biotech employed
twelve (12) people in its Shanghai Office in a variety of administrative and operational capacities. All are employed full time.
ChineseHempOil.com, Inc.
In April 2017, the Company established
ChineseHempOil.com, Inc. dba “Chinese Wellness Center,” a Delaware corporation, as a wholly owned subsidiary of the
Company. ChineseHempoil.com, Inc. is responsible for the development and operation of online and retail sales of industrial hemp-based
products in the United States. Chinese Wellness Center is the Company’s retail store located in the predominantly Chinese
community of San Gabriel, California, next to the Company’s headquarters. ChineseInvestors.com, Inc. announced the release
of its first industrial hemp oil product line, OptHemp, a premium, private label oil, made from full-spectrum, Colorado grown,
GMO-Free, hemp, manufactured using a CO2 Extraction process. In or about February 2018, the Company announced its plans to spin
off ChineseHempOil.com, Inc., which was later postponed. In December 2018, the Company announced that it had retained Boustead
Securities, LLC as underwriter for the planned Initial Public Offering (“IPO”) of CBD Biotech, concurrently with a
listing on a national securities exchange. ChineseHempOil.com, Inc. will no longer be part of this planned spin-off.
As of February 28, 2019, ChineseHempOil.com,
Inc. employed six (6) full time employees in the United States.
CBD Biotechnology, Inc.
In June 2017, the Company formed CBD Biotechnology,
Inc. (“CBD Canada”), incorporated in the Province of British Columbia, as a WOFE, which is intended to focus on the
sales of industrial hemp consumer products similar to those marketed by the Company’s other subsidiaries via online and other
distribution channels.
Newcoins168.com Ltd
In April 2018, the Company established
NewCoins168.com Digital Media Technology Ltd. (Shanghai) as a WOFE registered in China Free Trade Zone, with registered capital
of 10 million RMB.
As of February 28, 2019, NewCoins168 employed
one (1) person in its Shanghai Office in a variety of administrative and operational capacities.
Bitcoin Trading Academy LLC
In or about March 2018, the Company established
Bitcoin Trading Academy, LLC, a California limited liability company, formerly known as Stock Surge Momentum. LLC, a California
limited liability company, with Warren (Wei) Wang, the Company’s CEO, as its sole managing member. Mr. Wang has transferred
all of his interest in Bitcoin Trading Academy, LLC to the Company for $1 consideration. Bitcoin Trading Academy LLC began offering
in person and on-line courses on cryptocurrency investment and trading education in July 2018.
CIIX Online LTD
In August 2018, the Company formed CIIX
Online Ltd. (“CIIX Online”), a corporation incorporated in the Province of British Columbia, which is anticipated to
focus on the sales of the Company’s subscription service to consumers.
As of February 28, 2019, CIIX Online employed
one (1) person in its Canada Office in a variety of administrative and operational capacities.
Blue Ocean Capital Holding LLC
On November 11, 2018, the Company established
Blue Ocean Capital Holding LLC (“Blue Ocean”), a Delaware limited liability company, as a 90% owned subsidiary of
the Company. Blue Ocean is in the process of acquiring AMC International Securities LLC, a registered broker-dealer that is to
be a wholly owned subsidiary of Blue Ocean, which is intended operate as a security business as a member of the Financial Industry
Regulatory Authority (“FINRA”), a self-regulatory organization under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). In that regard, the Company deposited $75,000 into William W. Uchimoto Law’s escrow account
as of February 28, 2019.
2. Liquidity and Capital Resources:
Cash Flows
– During
the nine months ended February 28, 2019, the Company primarily generated cash and cash equivalents, from issuances of its common
and preferred stock to fund its operations. The Company received total proceeds of $10,371,050 of proceeds from the issuance of
Series “D-2017” convertible preferred stock as of February 28, 2019, $6,793,050 of which was received for the
year ended May 31, 2018 and $3,578,000 of which was received for the nine months ended February 28, 2019.
Cash flows used in operations for the
nine months ended February 28, 2019 and 2018 were $8,398,744 and $5,164,107, respectively. The increased cash used in operations
was due to increased general and administrative expenses used in operations.
Capital Resources
–
As of February 28, 2019, the Company had cash and cash equivalents of $2,287,965 as compared to cash and cash equivalents of $1,390,258
as of May 31, 2018.
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 be able arrange for other financing to fund our planned business activities.
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.
3. Critical Accounting Policies and
Estimates
:
Basis of Presentation
–
The accompanying condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America for interim financial information and in accordance
with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and
note disclosures required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete audited consolidated
financial statement
s. The accompanying unaudited financial information
should be read in conjunction with the audited consolidated financial statements, including the notes thereto, as of and for the
year ended May 31, 2018, included in our 2018 Annual Report on Form 10-K filed with the SEC. The information furnished in this
report reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary
for a fair presentation of our financial position, results of operations and cash flows for each period presented. The results
of operations for the nine months ended February 28, 2019 are not necessarily indicative of the results for the year ending May
31, 2019 or for any future period.
The consolidated financial statements include
the accounts of Chineseinvestors.com Inc. and its subsidiaries (collectively the “Company”). The Company’s subsidiaries
include 100% of ChineseHempOil.com Inc., XiBiDi Biotechnology Co, Ltd., Hemp Logic, Inc., CIIX Online, Inc., NewCoins168.com Digital
Media Technology Ltd. (Shanghai), Bitcoin Trading Academy LLC and CIIX Online Ltd.
Intercompany accounts
and transactions have been eliminated upon consolidation.
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.
Recently Adopted Accounting Pronouncements:
Revenue from Contracts with Customers
On June 1, 2018, the Company adopted Financial
Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2014-09, with regard to FASB
ASC 606
Revenue from Contracts with Customers
, and have revised certain related accounting policies in connection with revenue
recognition and deferred costs, as follows:
The Company’s
revenue was mainly derived from four sources:
|
1.
|
Investor-relations service
income
|
Investor-relations service income is earned by the Company in
return for delivering current, publicly available information related to our clients.
|
a.
|
Identify contracts with clients. The Company enters into service agreements with clients. The Company always discloses the nature of the contract including the contact price.
|
|
b.
|
Identify performance obligations in the contract. Many of our investor-relations service contracts contain multiple performance obligations, including presentation of clients’ information on Chinesefn.com, translation of client all materials to be released, and monthly presentation in the newsletter the Company sends to its registered members. We account for individual performance obligations separately if they are distinct. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.
|
|
c.
|
Determine the transaction price. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. Judgment is required to determine the standalone selling price for each distinct performance obligation. We typically have more than one standalone selling price for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we determine the standalone selling price based on our overall pricing objectives, taking into consideration contract term, industry relevance and other factors. Fees are fixed based on rates specified in the service provided agreements, which do not provide for any refunds or adjustments. In determining the transaction price, the effects of the time value of money is not accounted as the normal term of our service provider agreements are one year or less.
|
|
d.
|
The service contract amount is valued based upon the fair market value of the clients’ stock closing
price at the contract date multiplied by the numbers of shares earned when the service is paid by clients’ common stocks
other than cash. For the performance obligations, such as the availability of our clients’ information in our website, the
revenue is recognized over the term of the services period while the services are being provided,
|
|
e.
|
For the performance obligations will be surrendered at a point of time, the revenue is recognized after the service is provided. In addition, the Company is 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.
|
There is no significant adjustment from the implementation
of ASU 2014-09.
|
2.
|
Subscription income is recognized over the term of the subscription membership. Subscription fees for our registered members are charged on a per-month basis. Our customers do not have rights to the underlying software code of our solutions, and accordingly, we recognize subscription revenue over time on a straight-line basis over the contract term beginning on the date that our service is made available to the customer. Subscription terms are generally between one to three years but can occasionally be as short as one month or as long as 60 months. Long term deferred revenues are recognized from subscriptions over twelve months.
|
|
3.
|
The Company recognizes revenue of product sales of hemp-related products and liquor distribution upon transfer of title to the customer. Customer purchase orders and/or contracts are generally used to determine the existence of contract. Shipping documents and terms and the completion of any customer acceptance requirements, when applicable, are used to verify product delivery, or to satisfy the performance obligation. The Company determines and allocates the transaction price based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. The Company has no product returns or sales discounts and allowances because goods delivered and accepted by customers are normally not returnable.
|
|
4.
|
Other revenues include various fee-based income earned through banner advertisements, webpage hosting and maintenance,
on-line promotion and translation services, advertising and promotion fees on the Company’s website, sponsorship fees from
investment seminars, road shows, forums on the Company’s website, and referral fees from cryptocurrency referrals. 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 these contracts. These revenues are recognized when all significant performance obligations have been satisfied
and collection of the resulting receivable is reasonably assured.
|
The Company recognized revenue pursuant
to revenue recognition principles presented in SAB Topic 13 prior to May 31, 2018. First, persuasive evidence of an arrangement.
Second, delivery has occurred, or services have been rendered. Third the seller’s price to the buyer is fixed or determinable.
And last collectability is reasonably assured. We adopted ASU 2014-09, or ASC 606, on June 1, 2018 and it did not have a material
impact on our financial position or results of operations. The guidance requires an entity to recognize revenue when it transfers
promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services.
Financial Instruments – Recognition
and Measurement
Recognition
and measurement of financial assets and financial liabilities- In January 2016, the FASB issued ASU 2016-01 amending
various aspects of the recognition, measurement, presentation, and disclosure requirements for financial instruments. The
changes mainly relate to the requirement to measure equity investments in unconsolidated subsidiaries, other than those
accounted for under the equity method of accounting, at fair value with changes in fair value recognized in earnings.
However, this ASU permits entities to elect to measure equity investments that do not have readily determinable fair values
at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for
the identical or a similar investment of the same issuer. This ASU is effective for the Company as of June 1, 2018.
As a result of
the adoption of this ASU, the Company reclassified $486,789 in the net unrealized losses, net of tax, on equity securities previously
classified as available-for-sale, from accumulated other comprehensive loss to accumulated deficit. In addition, changes in value
due to the revaluation of equity securities are recorded in unrealized gain on equity securities, net in the consolidated statement
of comprehensive (loss) and income.
The equity investment
without readily determinable fair value held by the Company is the long-term investment at Breakwater MB, LLC. The Company elects
to measure the equity investment using measurement alternative and records the investment at cost minus impairment, if any, plus
or minus changes resulting from qualifying observable prices changes. In addition, the existing impairment model has been replaced
with a new one-step qualitative impairment model. No initial adoption adjustment was recorded for these instruments since the guidance
is required to be applied prospectively for securities measured using the measurement alternative. There is no adjustment to the
cost of the equity investment in Breakwater MB, LLC for the nine months ended February 28, 2019 as no impairment indicator observed
by management.
Cash and Cash Equivalents
– The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents.
There were no cash equivalents as of February 28, 2019 and May 31, 2018.
Accounts Receivable, Net
– The Company extends unsecured credit to its customers in the ordinary course of business. Accounts receivable are reported
at their outstanding unpaid principal balances net of allowances for uncollectible accounts. The Company provides for allowances
for uncollectible receivables based on management’s estimate of uncollectible amounts considering age, collection history,
and any other factors considered appropriate. The Company writes off accounts receivable against the allowance for doubtful accounts
when a balance is determined to be uncollectible.
As of February 28, 2019 and May 31, 2018,
the Company determined that an allowance was not needed.
Concentration
of Credit Risk
– The Company maintains cash at banks in the United States and People’s Republic of China (“PRC”).
Should any bank holding cash become insolvent, or if the Company is otherwise unable to withdraw funds, the Company would lose
the cash deposited with that bank; however, the Company has not experienced any losses in such accounts and believes it is not
exposed to any significant risks on its cash in bank accounts. In the PRC, a depositor has up to RMB 500,000 insured by the People’s
Bank of China Financial Stability Bureau (“FSD”), whereas the standard insurance amount is $250,000 per depositor in
a bank insured by the Federal Deposit Insurance Corporation (“FDIC”) in the United States. As of February 28, 2019
and May 31, 2018, the Company had $306,429 and $780,726 cash balances uninsured, respectively.
Major customers
and vendors
- For the nine-month period ended February 28, 2019, two customers accounted for 26% of total service revenue
of the Company with no accounts receivable outstanding as of February 28, 2019. One customer accounted for 34% of the total service
revenue of the Company for the nine months ended February 28, 2018 without accounts receivable outstanding as of February 28, 2018.
There was no vendor
concentration for the Company as of and for the nine months period ended February 28, 2019 and February 28, 2018.
The Company has
operations 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.
Marketable
equity securities
– Marketable equity securities is comprised of publicly traded stocks received in return for providing
investor relations services to the Company’s clients. The service terms range from one month to a year. 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.
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 marketable securities in accordance with ASC 320-10-25-1 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 marketable securities shall be measured subsequently at fair value in the statement
of financial position. The Company has adopted ASU 2016-01 from June 1, 2018, and as a result, unrealized holding gains and losses
for marketable equity securities (including those classified as current assets) shall be reported as unrealized gain (loss) in
the consolidated statement of operation and comprehensive income (loss) under loss before income taxes.
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.
Inventories
– Inventories
include hemp-related finished products and liquor, stated at the lower of cost or net realizable value using the weighted
average cost method. Management reviews inventories for obsolescence and cost in excess of net realizable value at least annually
and records a reserve against the inventory and additional cost of goods sold when the carrying value exceeds net realizable value.
There was no reserve needed for inventory obsolescence and slow-moving as of February 28, 2019 and May 31, 2018.
Equity Method Investment
–
Under equity method, the Company records its proportionate share of the investee’s profit or loss based on the specified
profit and loss percentage. Distributions received from equity method investees are accounted for as returns on investment and
classified as cash inflows from operating activities, unless the Company’s cumulative distributions received less distributions
received in prior periods that were determined to be returns of investment exceed cumulative equity in earnings recognized by the
Company. When such an excess occurs, the current year distribution up to this excess would be considered a return of investment
and classified as cash inflows from investing activities.
In September 2017, the Company entered
a letter of intent to invest $60,000 (44.45% of ownership) to jointly operate Beijing New Sino-North America Financial Information
Co., Ltd and its subsidiaries (“Sino-U.S. Finance”) with three Chinese individuals to operate a mobile application
under the name of “Sino-U.S. Finance” slated to provide a platform of information and analysis for Chinese-speaking
investors in the PRC and US.
The Company started to account the investment
under equity method in the year ended May 31, 2018 and the proportional operation losses picked up for the year ended of May 31,
2018 was $93,562, higher than the $60,000 investment amount. According to ASC 323-10-35-19, if the carrying amount of the investment
is reduced to zero, and there are no other investments in the investee, the equity method normally is discounted, and investee
losses are no longer reported on the income statement. Thus, the Company recorded $60,000 investment loss for Sino-U.S. Finance
for the year ended May 31, 2018 and with $0 balance under long-term investment as of February 28, 2019 and May 31, 2018.
Property and Equipment, net
– 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.
Depreciation on equipment is provided on
a straight-line basis over their expected useful lives at the following annual rates.
Computer equipment
|
|
3 years
|
Furniture & fixtures
|
|
3 years
|
Leasehold improvements
|
|
Term of the lease
|
Website Development, Net
–
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, and 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 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.
Impairment of Long-life Assets
– In accordance with ASC 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 for the periods ended February
28, 2019 and May 31, 2018
.
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 delivered. 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.
The
Company also receives shares of stocks and warrants as means of payments for IR services provided. The
fair market value of the stocks and warrants on the contract date are amortized and recognized as IR revenue over term of the
contracts. When these services are prepaid by clients, the amount of the prepayment is initially recorded as an asset with an
offsetting unearned revenue liability.
As of February 28, 2019 and May 31, 2018, the deferred
revenue compromised as following:
|
|
February 28,
2019
|
|
|
May 31,
2018
|
|
Deferred subscriptions
|
|
$
|
610,493
|
|
|
$
|
587,194
|
|
Unearned IR revenues
|
|
|
269,536
|
|
|
|
315,238
|
|
Total
|
|
|
880,029
|
|
|
|
902,432
|
|
Current
|
|
|
(746,811
|
)
|
|
|
(787,557
|
)
|
Noncurrent
|
|
$
|
133,218
|
|
|
$
|
114,875
|
|
Fair Value of Financial Instruments
– Fair value accounting establishes a framework for measuring fair value and expands disclosure about fair value measurements.
Fair value, which is defined as an exit price or the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. This framework provides a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
|
·
|
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.
|
The carrying amount
of cash and cash equivalents, marketable equity securities, accounts receivable, due from related party, other current assets,
accounts payable, and short-term notes approximates fair value because of the short-term nature of these instruments and the fair
values close to its carrying value for the non-current deferred revenue.
The following
table summarizes the fair value and carrying value of the Company’s financial instruments as of February 28, 2019:
|
|
Fair Value
|
|
|
Carrying
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Value
|
|
Assets -
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalent
|
|
$
|
2,287,965
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
2,287,965
|
|
Marketable equity securities
|
|
|
927,443
|
|
|
|
–
|
|
|
|
–
|
|
|
|
927,443
|
|
Cryptocurrency
|
|
|
47,027
|
|
|
|
–
|
|
|
|
–
|
|
|
|
47,027
|
|
Liability -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term notes
|
|
$
|
–
|
|
|
$
|
4,311,114
|
|
|
$
|
–
|
|
|
$
|
3,944,563
|
|
The following table summarizes the
fair value and carrying value of the Company’s financial instruments as of May 31, 2018:
|
|
Fair Value
|
|
|
Carrying
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Value
|
Assets -
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalent
|
|
|
|
|
|
$
|
1,390,258
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$1,390,258
|
Marketable equity securities
|
|
|
|
|
|
|
1,230,754
|
|
|
|
–
|
|
|
|
–
|
|
|
1,230,754
|
Cryptocurrency
|
|
|
|
|
|
|
31,479
|
|
|
|
–
|
|
|
|
–
|
|
|
31,479
|
Liability -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term notes
|
|
|
|
|
|
$
|
–
|
|
|
$
|
998,192
|
|
|
$
|
–
|
|
|
$1,058,084
|
Short-term notes
– The fair value of such notes payable had been determined based on 10% and 6% annual interest rates and the proximity to
the issuance date as of February 28, 2019 and May 31, 2018, respectively.
The Company uses
Level 1 of the fair value hierarchy to measure the fair value of digital currencies and revalues its digital currencies at every
reporting period and recognizes gains or losses in the consolidated statements of operations that are attributable to the change
in the fair value of the cryptocurrencies.
Other Revenue
–
Other revenue is comprised of revenue related to Forex service fees, referral fees and other miscellaneous service
revenues generated which are recognized over the term the services are to be provided. For the three-month periods ended
February 28, 2019 and 2018 details as below:
|
|
February 28,
2019
|
|
|
February 28,
2018
|
|
Misc. service revenues
|
|
$
|
6,620
|
|
|
$
|
–
|
|
Bitcoin trading class revenues
|
|
|
–
|
|
|
|
–
|
|
Referral fees
|
|
|
–
|
|
|
|
201,986
|
|
Total
|
|
$
|
6,620
|
|
|
$
|
201,986
|
|
For the nine-month periods ended
February 28, 2019 and 2018 details as below:
|
|
February 28,
2019
|
|
|
February 28,
2018
|
|
Misc. service revenues
|
|
$
|
64,549
|
|
|
$
|
4,755
|
|
Bitcoin trading class revenues
|
|
|
32,898
|
|
|
|
–
|
|
Referral fees
|
|
|
–
|
|
|
|
201,986
|
|
Total
|
|
$
|
97,447
|
|
|
$
|
206,741
|
|
Costs of
Services/Products Sold
– Costs of services provided are the total direct cost of the Company’s operations
in Shanghai and the US. Cost of products sold includes cost of inventory sold during the period, net of discounts and inventory
allowances, freight and shipping costs, warranty and rework costs.
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.
On December 22,
2017, the Tax Cuts and Jobs Act (the “TCJA”) passed that significantly reforms the Internal Revenue Code of 1986, as
amended (the “Internal Revenue Code”). The TCJA, among other things, contains significant changes to corporate taxation,
including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, effective as of January 1,
2018; limitation of the tax deduction for interest expense; limitation of the deduction for net operating losses to 80% of current
year taxable income and elimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning
after December 31, 2017 (though any such tax losses may be carried forward indefinitely); and repeal of the federal corporate Alternative
Minimum Tax (“AMT”).
In connection
with the analysis of the impact of the TCJA, the Company determined that it does not have any impact on the financial statements.
The Company considers
the earnings of the non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that
future domestic cash generation will be sufficient to meet future domestic cash needs.
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 “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
and restricted stock awards 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 when stock or options are awarded for
previous or current service without further recourse.
We periodically issue shares of our common
stock to non-employees in non-capital raising transactions for fees and services. We account for stock issued to non-employees
in accordance with ASC 505-50,
Equity-Based Payments to Non-Employees
, whereas the value of the stock compensation
is based upon the measurement date as determined at either (a) the date at which a performance commitment is reached, or (b) at
the date at which the necessary performance to earn the equity instruments is complete.
Preferred
Stock Beneficial Convertible Feature
– 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, we have recorded the intrinsic value of this beneficial conversion feature (“BCF”).
According to ASC
470-20-30-6 intrinsic value shall be calculated at the commitment date as the difference between the conversion price and the fair
value of the common stock or other securities into which the security is convertible, multiplied by the number of shares into which
the security is convertible. In according to ASC 470-20-30-8, if the intrinsic value of the beneficial conversion feature is greater
than the proceeds allocated to the convertible instrument, the amount of the discount assigned to the beneficial conversion feature
shall be limited to the amount of the proceeds allocated to the convertible instrument. Since all the preferred stocks have been
issued on different dates, we calculate the intrinsic value for each individual preferred stock issuance based on stock issuance
date. If the intrinsic value exceeds actual proceeds we received, actual proceeds will be BCF, otherwise, the intrinsic value is
the BCF.
Foreign Currency
–
The Company has operations in the PRC as a representative office in the PRC, the functional and reporting currency is in U.S. dollars.
The functional
currency of the two subsidiaries operated in PRC, CBD Biotech and Newcoins168, is the Chinese Renminbi (“RMB”). The
functional currency of the subsidiary operated in Canada, CIIX Online Ltd. is the Canadian Dollar (“CAD”). Assets and
liabilities are translated at the exchange rates as of the balance sheet date. Shareholders’ contribution is translated at
historical rate. Income and expenditures are translated at the average exchange rate of the period. The RMB is not freely convertible
into foreign currency and all foreign currency exchange transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US dollar at the rates used in translation.
The exchange rates
used were as follows:
February 28, 2019
|
|
|
Spot rate
|
|
RMB 6.69 to US $1.00
|
Average rate for the three months ended February 28, 2019
|
|
RMB 6.85 to US $1.00
|
Average rate for the nine months ended February 28, 2019
|
|
RMB 6.81 to US $1.00
|
|
|
|
Spot rate
|
|
CAD 1.32 to US $1.00
|
Average rate for the three months ended February 28, 2019
|
|
CAD 1.32 to US $1.00
|
Average rate for the nine months ended February 28, 2019
|
|
CAD 1.32 to US $1.00
|
|
|
|
May 31, 2018
|
|
|
Spot rate
|
|
RMB 6.32 to US $1.00
|
Average rate for the three months ended February 28, 2018
|
|
RMB 6.40 to US $1.00
|
Average rate for the nine months ended February 28, 2018
|
|
RMB 6.58 to US $1.00
|
New Accounting Pronouncements
– Upon issuance of final pronouncements, we review the new accounting literature to determine its relevance, if any, to our
business. The Company is in the progress of evaluating the following accounting updates:
In February 2016,
the FASB issued ASU 2016-02,
Leases (Topic 842)
, to increase transparency and comparability among organizations by recognizing
a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be
classified as either operating or financing, with such classification affecting the pattern of expense recognition in the income
statement. ASU 2016-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2018,
and early adoption is permitted. The Company is currently evaluating the impact ASU 2016-02 will have on its consolidated financial
statements and associated disclosures.
In June 2016,
the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,
for public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this Update are effective
for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently
evaluating the impact will have on its consolidated financial statements and associated disclosures.
In June 2018,
the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
Accounting, Effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods
within that fiscal year. The Company is currently evaluating the impact will have on its consolidated financial statements and
associated disclosures.
In August 2018,
the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements
for Fair Value Measurement. Effective for all entities for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant
unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should
be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All
other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted
upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update
and delay adoption of the additional disclosures until their effective date
.
The Company is currently evaluating the impact will have on its consolidated financial statements and associated disclosures.
Except for the
above-mentioned pronouncements, there are no new recent issued accounting standards that will have material impact on the unaudited
condensed consolidated financial position, statements of operations and cash flows.
4. Stockholders’ Equity:
As of February 28, 2019 and May 31, 2018,
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 $0.001 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 2012 Convertible Preferred Stock
During the third quarter of fiscal year
2013, effective February 29, 2012, the Company issued 2,003,776 shares of preferred stock as Series 2012 convertible preferred
stock for total proceeds of $2,003,776. 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.
During the nine months period ended February
28, 2019, the shareholders of preferred stock series-2012 converted 0 shares of preferred stock.
During
the nine months period ended February 28, 201
8, the shareholders of preferred
stock Series 2012 converted 150,000 shares of preferred stock for 187,500 shares of common stock shares at a conversion rate of
1 share of Series 2012 preferred stock for 1.25 shares of common stock.
Series A-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 A-2014 convertible preferred stock for total proceeds
of $2,605,000. 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 nine 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.
During the nine months period ended February
28, 2019, the shareholders of preferred stock series A-2014 converted 250,000 shares of preferred stock for 625,000 of common stock
shares at a conversion rate of 1 share of preferred stock series A-2014 for 2.50 shares of common stock.
During
the nine months period ended February 28, 2018 the shareholders of preferred stock Series A-2014 converted 1,064,000 shares of
preferred stock for 2,660,000 of common stock shares at a conversion rate of 1 share of Series A-2014 preferred stock for 2.50
shares 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 Series C-2016 preferred stock allow the holder to convert each share of preferred stock into 3 shares of common
stock at any time after nine 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.
We calculated the BCF of the Series C-2016
Preferred Stock as $4,930,143. The BCF would be recorded as paid-in capital with an offsetting debit to convertible preferred stock.
The discount attributable to the BCF, however, is amortized as a deemed dividend over the period from issuance to the date
the convertible preferred stock becomes convertible. In our case, preferred stock-series C-2016 is convertible from the date of
issuance. We then amortize the BCF over six months period and recorded $1,244,622 and $3,685,520 as deemed dividend that increased
accumulated deficit for the periods ended May 31, 2018 and 2017, respectively.
During the nine
months period ended February 28, 2019, the shareholders of preferred stock series C-2016 converted 259,958 shares of preferred
stock for 779,874 of common stock shares at a conversion rate of 1 share of preferred stock series C-2016 for 3.00 shares of common
stock.
During the nine months period ended February 28, 2018, the shareholders of preferred
stock C-2016 converted 3,977,085 shares of preferred stock for 11,931,255 of common stock shares at a conversion rate of 1 Series
C-2016 share of preferred stock for 3.00 shares of common stock.
Series D-2017 Convertible Preferred Stock
For the year ended
May 31, 2018, the Company issued 6,793,050 shares of its Series D-2017 Convertible Preferred Stock at a price of $1.00 per share
for total proceeds of $6,793,050. The terms of the preferred stock allow the holder to convert each share of preferred stock into
2 shares of common stock at any time 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 two years from the issuance, 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.
We calculated the BCF of the preferred
shares as $3,933,443. The BCF would be recorded as paid-in capital with an offsetting debit to convertible preferred stock. The
discount attributable to the BCF, however, is amortized as a deemed dividend over the period from issuance to the date the convertible
preferred stock becomes convertible. In our case, preferred stock-series D-2017 is convertible at any time from the date of issuance.
We recorded $3,933,443 as deemed dividend that increases accumulated deficit as of May 31, 2018.
During
the year ended May 31, 2018, 150,000 shares of Series D-2017 Convertible Preferred Stock were converted into common stocks.
For the nine months
ended February 28, 2019, the Company issued shares of its Series D-2017 Preferred Stock at a price of $1.00 per share for total
proceeds of $3,578,000. The terms of the Series D-2017 preferred stock allow the holder to convert each share of preferred stock
into 2 shares of common stock at any time 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 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.
We calculated the BCF of the preferred
shares issued during the nine-month ended February 28, 2019 as $992,700. The BCF would be recorded as paid-in capital with an offsetting
debit to convertible preferred stock. The discount attributable to the BCF, however, is amortized as a deemed dividend over the
period from issuance to the date the convertible preferred stock becomes convertible. In our case, preferred stock-series D-2017
is convertible at any time from the date of issuance. We recorded $992,700 as deemed dividend that increased accumulated
deficit as of February 28, 2019.
During the nine
months period ended February 28, 2019, the shareholders of preferred stock series D-2017 converted 3,649,000 shares of preferred
stock for 7,298,000 of common stock shares at a conversion rate of 1 share of preferred stock series D-2017 for 2 shares of common
stock.
Common stock
In October 2018,
the Company issued 1,109,818 shares of the Company’s common stock at $0.55 per share to accredited investors for total proceeds
of $610,450.
Stock compensation
and stock payable
On July 26, 2018,
the Company entered into a Consulting Agreement with Regal Consulting, LLC (“Regal”). The agreement had a five-month
term ending January 2, 2019, pursuant to which Regal received 20,000 shares of the Company’s common stock per month for the
term of the Agreement for a total of 100,000 shares, in addition to other compensation. $67,000 in share-based compensation
expense has been recorded associated with the award for the nine months ended February 28, 2019.
On August 9, 2018, the Company
entered into a Services Agreement with IRTH Communications LLC (“IRTH”) for a one-year term, pursuant to which
ITRH was to receive $100,000 worth of shares of the Company’s common stock in addition to other compensation. On August
22, 2018, the Company adopted a resolution authorizing the issuance of 226,245 shares of the Company’s common stock to
IRTH for its professional services to be provided during the term of the agreement. $58,333 in share-based compensation
expense has been recorded associated with the award for the nine months ended February 28, 2019.
On August 9, 2018, the Company entered
into a Consulting Agreement with Axis Partners, Inc. (“Axis”). The agreement was for a six-month term, pursuant to
which Axis received 150,000 shares of the Company’s common stock for the term of the agreement. On August 22, 2018, the
Company adopted a resolution authorizing the issuance of 150,000 shares of the Company’s common stock to Axis for its professional
services to be provided during the term of the agreement. $100,500 share-based compensation expense has been recorded associated
with the award for the nine months ended February 28, 2019.
On August 24, 2018, the Board adopted a
resolution ratifying the award to Melissa Armstrong of an additional 50,000 shares of common stock, for a total award of 100,000
shares, effective October 26, 2016. All services to be performed in conjunction with this award have been fully performed and the
shares were fully vested as of the effective date of the award. $33,500 share-based compensation expense was recorded associated
with the award for the nine months ended February 28, 2019.
On September 11, 2018, the Company issued
stock certificates in a total amount of 526,245 shares for the stock compensation granted to service providers in August 2018.
On December 19, 2018, the Company awarded
various employees stock compensation total 1,147,000 shares of common stock. All services to be performed in conjunction with this
award have been fully performed and the shares were fully vested as of the effective date of the award. $619,440 share-based compensation
expense was recorded associated with the award for the nine months ended February 28, 2019.
There is no stock compensation payable
as of February 28, 2019 and May 31, 2018.
5. Other Current Assets
:
Other current assets consist of deposits
in Chinese Renminbi on building space under an operating lease and are stated at the current exchange rate at period end. Security
deposits of office rent in United States, purchase deposits to vendors for the CBD product purchase, prepaid expenses in both United
States and Shanghai, details as below:
|
|
February 28,
|
|
|
May 31,
|
|
|
|
2019
|
|
|
2018
|
|
Prepaid expenses
|
|
$
|
378,340
|
|
|
$
|
79,822
|
|
Purchase deposits
|
|
|
560,438
|
|
|
|
145,376
|
|
Cryptocurrency on hands
|
|
|
47,027
|
|
|
|
31,479
|
|
Other current assets
|
|
|
106,378
|
|
|
|
74,951
|
|
|
|
$
|
1,092,183
|
|
|
$
|
331,628
|
|
6. Long-term investments
Long-term investments include: 1)
investment at Breakwater MB, LLC accounted as equity investment without readily available fair value since the Company does not
have the significant influence on management, and 2) investment at Sino-U.S. Finance accounted for on the equity method (see Note
3).
In March 2017, the Company made a $250,000
investment in Breakwater MB, LLC, a cannabis-focused investment and consulting company, formed by Paul Dickman, the Company’s
former CFO and a former board member of ChineseInvestors.com, Inc., as a means to invest capital in and provide consulting
services to private, cannabis-focused companies as they transition into the public market. The invested capital was to be primarily
be used to cover the costs of becoming a publicly traded company, a strategy the Company expects will provide significant investment
appreciation and opportunity for liquidity. All opportunities will be evaluated by the investment committee comprised of ChineseInvestors.com,
Inc.’s CEO Warren Wang, Medicine Man Technologies CEO Andy Williams, and Paul Dickman. Mr. Dickman is the managing member
of Breakwater MB, LLC and Warren Wang serves as an advisor receiving no compensation for his services.
Breakwater MB, LLC completed its planned
raise of $1,000,000 for 50% of Breakwater MB, LLC’s equity by December 2017. The Company’s equity position in Breakwater
MB, LLC stands at 8.75% and 12.5% as of February 28, 2019 and May 31, 2018, respectively. ChineseInvestors.com, Inc.’s board
reviewed and approved the investment with Mr. Dickman abstaining from voting. Mr. Dickman held 30% of the equity of Breakwater
MB LLC as of May 31, 2018 after a $5,000 cash investment in equity in addition to the services that Mr. Dickman renders to Breakwater
MB, LLC.
Subsequently in August 23, 2018, the Company
entered into a Redemption Agreement and Mutual Release with Mr. Dickman to liquidate 40% of the Company’s investment in Breakwater
MB, LLC. Mr. Dickman agreed to pay an aggregate purchase price of $100,000 ($75,000 at the closing and $25,000 no later than September
15, 2018) to redeem the portion of equity (the “Redemption Agreement”). The Redemption Agreement provided for a mutual
release and waiver with regard to any claims the parties to the Redemption Agreement ever had, owned or held, or now have, own
or hold, as against one another resulting from, arising out of or in any manner relating to or based on the Company’s investment
in Breakwater MB LLC, the redemption, or otherwise relating to CIIX’s relationship with Breakwater MB LLC. As of February
28, 2019, the Company had received the $75,000 payment but not the $25,000 payment due September 15, 2018. The redemption agreement
will be amended to reflect the payment by Breakwater MB, LLC in the amount of $75,000 only. The Company’s equity position
in Breakwater MB, LLC currently stands at 8.75% as of February 28, 2019.
7. Property and Equipment
:
Property and equipment are recorded at cost, net of accumulated
depreciation and are comprised of the following:
|
|
February 28,
2019
|
|
|
May 31,
2018
|
|
Furniture & Fixtures
|
|
$
|
177,574
|
|
|
$
|
154,748
|
|
Leasehold Improvements
|
|
|
98,663
|
|
|
|
35,176
|
|
|
|
|
276,237
|
|
|
|
189,924
|
|
Less: Accumulated Depreciation
|
|
|
(163,119
|
)
|
|
|
(124,674
|
)
|
|
|
$
|
113,118
|
|
|
$
|
65,250
|
|
Depreciation expense for the nine months
ended February 28, 2019 and 2018 was $38,445 and $26,296, respectively.
8. Website development, net
:
Website development is comprised of the following:
|
|
February 28,
2019
|
|
|
May 31,
2018
|
|
Website development
|
|
$
|
290,823
|
|
|
$
|
220,598
|
|
Less: Accumulated Amortization
|
|
|
(124,668
|
)
|
|
|
(116,320
|
)
|
|
|
$
|
166,155
|
|
|
$
|
104,278
|
|
Amortization is calculated over a straight-line
basis using the economic life of the asset. Amortization expense for the nine months ended February 28, 2019 and 2018 was $8,348
and $7,728 respectively.
9. Short-term notes:
On October
2017, the Company issued one-year promissory notes (the “2017 Notes”) totaling of $995,140 to various individual lenders.
The interest rate for the 2017 Notes was 6% annum. Of the $995,140 noted above, $116,669 was rolled over from the 2016 Notes with
renegotiated terms. The 2017 Notes were to be secured by the stocks of the following companies held by the Company:
Company name
|
|
Shares Secured for Loan
|
Nemaura Medical, Inc. (NMRD)
|
|
100,000
|
Recon Technology LTD (RCON)
|
|
49,999
|
Solbright Group Inc. (SBRT)
|
|
195,122
|
Nengfa Weiye Energy (NFEC)
|
|
218,779
|
SGOCO Group LTD (SGOC)
|
|
29,412
|
As of February 28, 2019, the Company transferred
NMRD shares held to the Collateral Agent. It was determined that with the exception of 2017 Notes secured by NMRD shares, the remaining
2017 Notes were not properly secured. The Company offered the lenders of the unsecured 2017 Notes the option to either rescind
the notes or allow the notes to remain in place as unsecured notes in April 2018. $360,000 out of the total $620,000 unsecured
2017 Notes were rescinded. The $995,140 in short term 2017 Notes were repaid, including all principal and interest pursuant
to the note terms. As of February 28, 2019, the Company paid $995,140 loan principle and interest.
Pursuant to the 2017 Notes, the Company/Borrower,
at its sole discretion, could at any time during the term of the 2017 Notes, sell the above referenced stocks, or in the case of
the 2017 Notes properly secured by shares in NMRD, instruct the Collateral Agent to sell the above reference stocks, at which time
the principal and accrued interest under the 2017 Notes would be accelerated and would become due and owing, and in addition, an
incentive would be due and owing to the lenders collectively secured by NMRD in the total amount equal to 20% of the appreciation,
if any, of the pledged collateral/stocks sold. None of the respective stocks/pledged collateral was sold during the term of the
2017 Notes, and as noted above, the 2017 Notes were paid full according to their terms and the 2017 Notes were effectively cancelled;
therefore, no incentives are due and owing to any of these Lenders. As of February 28, 2019, the Company paid $995,140 of the total
$995,140 short term 2017 Notes.
On August 2018, the board of directors
of the Company approved the Company to offer unsecured one-year term notes (the “2018 Notes-10%”) to individual lenders
for a maximum $3,000,000 with 10% annual interest rate. As of February 28, 2019, the Company has issued 2018 Notes-10% in the total
amount of $3,030,000 from various individual lenders.
On October 2018, the board of directors
of the Company approved the Company to offer unsecured one-year term notes (the “2018 Notes-8%”) to individual lenders
for a maximum $3,000,000 with 8% annual interest rate. At the time the Notes were executed, the Company held 220,000 shares of
NF Energy Savings Corporation (“NFEC”) (the “Securities”). As of February 28, 2019, the Company had issued
2018 Notes-8% in the total amount of $1,154,800 to various individual lenders. The 2018 Notes – 8% included an incentive
based on the NFEC share value of $10.38 per share (the “Base Value”). As provided for in the 2018 Notes – 8%,
the Company/ Borrower agreed that if Borrower, at its sole discretion, sold any of the Securities, all of the Lenders in the Class
would be entitled to receive in the aggregate, twenty percent (20%) of the excess of the sales proceeds of such Securities over
the Base Value(the “Incentive Payment”). The Lender’s share of the Incentive Payment would be determined by the
fraction of the total loan to all loans in the class, not exceed $3,000,000. As of February 28, 2019, the Company sold all holdings
in NEFC and accrued incentives totaling $51,314 incentive payable to the lenders.
On February 2019, the board of directors
of the Company approved the Company offering unsecured one-year term notes (the “2019 Notes-10%”) to individual lenders
for a maximum $5,000,000 with 10% annual interest rate. As of February 28, 2019, the Company has issued 2019 Notes-10% in the total
amount of $75,000 from various individual lenders.
As of February 28, 2019 and May 31, 2018,
the short-term notes are compromised as follows:
|
|
February 28,
2019
|
|
|
May 31,
2018
|
|
Short-term 2017 notes
|
|
|
|
|
|
|
|
|
Secured short term notes, due on October 2018, 6% annual interest rate
|
|
$
|
–
|
|
|
$
|
635,140
|
|
Debt incentive to the secured short-term notes above
|
|
|
–
|
|
|
|
41,539
|
|
Short term notes, due on April and May 2018, 6% annual interest rate
|
|
|
–
|
|
|
|
360,000
|
|
Debt incentive related to the short-term notes above
|
|
|
–
|
|
|
|
21,405
|
|
Total short-term 2017 notes
|
|
$
|
–
|
|
|
$
|
1,058,084
|
|
|
|
|
|
|
|
|
|
|
Short-term 2018 notes-annual interest rate 10% due August to
October 2019
|
|
$
|
3,030,000
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Short-term 2018 notes-annual interest rate 8% due December 2019
|
|
$
|
1,154,800
|
|
|
$
|
–
|
|
Debt incentive related to the short-term notes above
|
|
|
51,314
|
|
|
|
–
|
|
Total short-term 2018 notes-annual interest rate 8%
|
|
$
|
1,206,114
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Short-term 2019 notes-annual interest rate 10% due February 2020
|
|
$
|
75,000
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Total Short-term notes
|
|
$
|
4,311,114
|
|
|
$
|
1,058,084
|
|
10. Other Current Liabilities:
Other current
liabilities compromise as following:
|
|
February
28, 2019
|
|
|
May 31,
2018
|
|
Accrued dividends
|
|
$
|
98,170
|
|
|
$
|
179,218
|
|
Accrued interests and others
|
|
|
181,777
|
|
|
|
32,721
|
|
Accrued payroll and taxes
|
|
|
215,479
|
|
|
|
218,599
|
|
Total
|
|
$
|
495,426
|
|
|
$
|
430,538
|
|
Accrued dividends
as of February 28, 2019 are comprised of dividends payable to the preferred stock holders, Series D-2017 in the amount of $98,170.
Accrued dividends as of May 31, 2018 are comprised of dividends payable to the preferred stock holders, Series C-2016 and Series
D-2017, in the amount of $14,981 and $164,237, respectively.
Accrued interest as of February 28, 2019
represents interest payable for the 2018 Notes and 2019 Notes. Accrued interest as of May 31, 2018 represents interest payable
on the 2017 Notes.
11. Commitments and Contingencies:
Operating Leases
The Company
currently maintains leased space in Shanghai, China San Gabriel, California, New York City, NY, Flushing, NY and Richmond British
Columbia Canada. It also maintains a correspondence address in Arcadia, California on a month to month basis.
On September 4,
2018, the Company entered into a lease agreement in New York at 40 Wall St., Room 2877, New York, NY 10005 as a support office.
The lease term is 24 months and monthly rent is $7,500.
Future minimum
lease commitments for office facilities as of February 28, 2019 are as follows:
For the fiscal years ending May 31,
|
|
|
|
2019 (3 months)
|
|
$
|
129,101
|
|
2020
|
|
|
360,966
|
|
2021
|
|
|
176,989
|
|
2022
|
|
|
–
|
|
|
|
$
|
667,056
|
|
Litigation
– The Company
is involved in legal proceedings from time to time in the ordinary course of its business.
On September 1,
2016, the Company entered into a Service Provider Agreement with SINO-GLOBAL SHIPPING AMERICA LTD (“SINO”) to perform
investor relations services for SINO in exchange for 60,000 shares of SINO Rule of 144 restricted stock. When entering the 2016
Note Agreements, the Company believed that the SINO shares would be delivered as provided for in the agreement. However, the shares
were not delivered purportedly due to a disagreement among SINO’s management, and as a result, the Company has not obtained
the SINO shares as of February 28, 2019. On January 9, 2018, the Company filed a lawsuit in the Los Angeles County Superior Court,
Case No. EC067692 for breach of contract and common counts against SINO-GLOBAL SHIPPING AMERICA LTD. Currently the case is pending
with arbitration to commence in the coming months.
12. Related Party Transactions:
The Company made
a long-term investment of $250,000 to Breakwater MB LLC in March 2017 formed by the Company’s former board member and former
CFO, Paul Dickman. In September 2018, Breakwater MB LLC returned $75,000 of investment to the Company. The Company’s equity
position in Breakwater MB, LLC stands at 8.75% as of February 28, 2019. Refer to Note 6 for investment details.
Mrs.
Lan Jiang is the spouse of the Company’s CEO, Mr. Warren Wang. During the three months ended February 28, 2019 and 2018,
she received salary compensation of $45,000 and $92,000, respectively. During the nine months ended February 28, 2019 and 2018,
she received salary compensation of $135,000 and $220,000, respectively.
The Company purchased the shares of Medicine
Man Technologies, Inc. (“MDCL”) in April 2014 using the equity method of accounting initially and accounted for the
ownership as an investment available for sale as of May 31, 2015 as the Company no longer had “significant influence”
over MDCL as a result of shares issuance. The Company liquidated 1,306,378 shares of MDCL for $1,996,939 cash during the year ended
May 31, 2017. The Company received 31,250 shares of MDCL stock for IR services which will be provided for a period
of six months starting January 15, 2019. As of February 28, 2019 and May 31, 2018, the Company still held 72,488 shares of MDCL
stock representing $139,902 and $76,496, respectively, of value based upon the closing market price of $1.93 and $1.86, respectively.
13. Subsequent event
:
On February
2019, the board of directors of the Company approved the Company offering unsecured one-year term notes (the “2019 Notes-10%”)
to individual lenders for a maximum $5,000,000 with 10% annual interest rate. As of March 31, 2019, the Company has received 2019
Notes-10% in the total amount of $250,000 from various individual lenders.
There is no other subsequent event
after February 28, 2019 through the date of issuance of these unaudited consolidated financial statements.