NOTES TO THE FINANCIAL STATEMENTS
(AUDITED)
RESTATED
Organization and Nature of Operations
:
Business Description
– Chinseinvestors.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.
1.
|
Liquidity and Capital
Resources:
|
Cash Flows
– During the year ending May 31,
2015, the Company primarily utilized cash and cash equivalents and proceeds from issuances of its common and preferred stock to
fund its operations. The Company received $1,885,000 and $0 of proceeds from the sale of Class “B” preferred stock
during the years ended May 31, 2015 and May 31, 2014, respectively.
Cash flows used in operations for the years ended May 31, 2014 and
2013 were ($2,314,532) and ($749,252), respectively, which was an increase from prior years. The increase of cash used in operations
was primarily caused by the net loss offset by increase in cash raised through financing activities.
Capital Resources
– As of May 31, 2015, the
Company had cash and cash equivalents of $498,189 as compared to cash and cash equivalents of $429,199 as of May 31, 2014.
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 during April 2014, implementing the equity method of accounting. The Company received its ownership in return for
supporting the company during its formational stage and no cash, as such the stock received had a value of zero and the affiliate
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 the affiliate company 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 on the overall entity as of May 31, 2015 to be ($0.41*2,800,000 = $1,148,000 ). This value is
presented on the balance sheet as an asset and an unrealized gain for this amount is included in Unrealized gain/(loss) on trading
securities in the equity section of the balance sheet. The Company determined that this asset should be consider a level three
fair value instrument.
Foreign Currency
– The Company has operations
in the PRC, however the functional and reporting currency is in US 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 US dollars. This indicates the functional currency is US dollars.
Financing
– The Company’s financing
has been generated exclusively in US dollars from the United States. This indicates the functional currency is US dollars.
Expenses
– The majority of expense are paid
in US dollars. The expenses generated in PRC are paid by a monthly or weekly cash transfer from the US when the expenses are due,
resulting in very little foreign currency exposure. This indicates the functional currency is US dollars.
Numerous Intercompany Transactions
– The
Company has multiple transactions each month between the US and Chinese representative office. This indicates the functional currency
is US dollars
Due to the functional and reporting currency both being in US dollars,
ASC 830-10-45-17 states that a currency translation is not necessary.
Revenue recognition
— Revenue was derived from
six different sources:
The Company recognizes revenue pursuant to revenue recognition principles
presented in SAB Topic 13. First, persuasive evidence of an arrangement. Second, deliver 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.
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 24 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 Sold
– 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, 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 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 May 31, 2015 and 2014 there were deposit balances in a United States
bank of $496,828 and $427,190 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 May 31, 2015 and 2014 there were
deposits of $1,361 and $2,009, 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.
As of May 31, 2015 and May 31, 2014, the Company had accounts receivable of $101,918 and $17,442, respectively. Of the total accounts
receivable balance, values due in stock were $93,750 and $0 in May 31, 2015 and 2014 respectively. Accounts receivable due
in cash were $8,168 and $17,442 at May 31, 2015 and 2014 respectively.
The Company evaluates the need for an allowance for doubtful accounts
on a regular basis. As of May 31, 2015 and 2014, the Company determined that an allowance was not needed.
The operations of the Company are located in the People’s
Republic of China (“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.
Note receivable – affiliate
– The note
receivable – affiliate is related to expenses covered on Medicine Man Technologies behalf as the company was being established.
As of May 31, 2015 and May 31, 2014 the total outstanding was $0 and $17,648, respectively. The entire balance was repaid
in the first quarter of 2015.
Investments, available for sale, in affiliate
–
The Company invested in an affiliate during April 2014, implementing the equity method of accounting. The Company received its
ownership in return for supporting the company during its formational stage and no cash, as such the stock received had a value
of zero and the affiliate 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 the affiliate company 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 on the overall entity as of May 31, 2015 to be ($0.41*2,800,000) $1,148,000.
This value is presented on the balance sheet as an asset and an unrealized gain for this amount is included in unrealized gain/(loss)
on trading securities in the equity section of the balance sheet. The Company determined that this asset should be consider
a level three fair value instrument.
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".
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 has filed the tax returns to
request a refund the withholdings as management does not believe the Company’s revenue transactions fall within the rules
of Section 605W. Management expects to receive a full refund of the entire $33,165 as of May 31, 2015 ($58,963 as of May 31, 2014)
withheld.
Other Current Assets
– Other current assets
is comprised of deposits in Chinese Renminbi on building space under an operating lease and are stated at the current exchange
rate at year end.
Other current assets were $91,634 and $26,404 for the years ended
May 31, 2015 and May 31, 2014, respectively.
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. Depreciation and
amortization expense was $24,264 and $32,043 for the years ended May 31, 2015 and 2014, respectively.
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 May 31, 2015 and May 31, 2014
.
Commissions
payable
– In the 2014
year the Company agreed to pay one of its sales consultants a percentage of the total value of stock received, as measured when
the revenue transaction took place, as compensation for IR work, the balance May 31, 2014 was $99,702. During the year ended May
31, 2015 the Company determined that it no longer had a legal obligation to pay this commission due to a breach of contract
by him. Therefore, the company wrote off the liability of $99,702 and recorded a gain on extinguishment of debt on the income statement.
In 2015 the Company agreed to pay one of its executive a
commission based upon his work related to Medicine Man Technologies, of 10% of the value of the stock the Company received
in the affiliate. The Company received 2,800,000 shares of stock during the transaction and agreed to pay the executive a value
equal to 10% of the share price received as of May 31, 2015. The Company determined the value of the investment in affiliate (Medicine
Man Technologies, Inc.) and the related accounts payable was $.41 per share according to the independent valuation at May 31, 2015.
Based upon this valuation the Company recorded a liability of commissions payable of $114,800 (2,800,000 X 10% = 280,000 X $.41
= 114,800) on its currently balance sheet. This liability will be repaid on a prorate basis as the stock is sold. This executive
was and is due a fixed cash payment of $.41 per share for 10% of the shares received by the Company.
Unearned revenue, revenue paid in cash
– The
Company received cash, in advance as payment for investor relations work that the Company will be providing through May 2016. The
amount unearned was $0 at May 31, 2015 as compared to $120,208 at May 31, 2014. As the Company earns the fee for this work, this
balance will be reduced to reflect the portion still to be earned.
Unearned revenue, revenue paid in stock
– During
fiscal year 2014, the Company received shares of stock and warrants as payment for investor relations work that the Company will
be providing through May 2016. The stock that had not been earned was valued at $173,611 at May 31, 2015 and $545,491 at
May 31, 2014. As the Company earns the fee for this work, this balance will be reduced to reflect the portion still to be
earned.
Accrued interest
– The accrued interest balance
represents interest payable for short term debt outstanding. Accrued interest was $0 and $11,068 for the period ending May 31,
2015 and May 31, 2014.
Accrued dividend
– The accrued dividend balance
represents dividend payable related to the Class “B” preferred stock. Accrued dividends were $34,947 and $0 for the
period ending May 31, 2015 and May 31, 2014.
Accrued Liabilities
– Accrued liabilities are
comprised of the following:
|
|
May 31,
|
|
May 31,
|
|
|
2014
|
|
2013
|
China Employees Salaries and Commissions Accrual
|
|
$
|
50,779
|
|
|
$
|
60,908
|
|
Representative Office Tax Accrual
|
|
|
3,835
|
|
|
|
10,524
|
|
Other Accruals
|
|
|
11,230
|
|
|
|
7,113
|
|
|
|
$
|
65,844
|
|
|
$
|
78,545
|
|
Short-term Debt
- During 2014, the Company obtained
short term debt of $440,000 from various individuals, secured by 100,000 shares of the Company owned stock in Nova Lifestyles,
Inc. These notes were repaid during the quarter ending February 28, 2014. The Company then obtained an additional $440,000 in short
term debt from various individuals, secured by 50,000 shares of common stock of NVFY and 40,000 shares of DHRM. The lender received
an incentive of 25% appreciation of the stock value for NVFY and DHRM at the maturity of the short-term notes, 15 months after
inception. All notes were repaid with interest in the quarter ending February 28, 2015. There was no balance outstanding as of
May 31, 2015.
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:
|
|
May 31, 2015
|
|
|
May 31, 2014
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
Cash
|
|
|
498,189
|
|
|
|
–
|
|
|
|
–
|
|
|
|
429,199
|
|
|
|
–
|
|
Investments
|
|
|
233,991
|
|
|
|
67,500
|
|
|
|
1,148,000
|
|
|
|
2,263,639
|
|
|
|
67,500
|
|
Total Financial Instruments
|
|
|
732,180
|
|
|
|
67,500
|
|
|
|
1,148,000
|
|
|
|
2,629,838
|
|
|
|
60,000
|
|
As of May 31, 2014 the Company had a zero balance of level
three financial instruments. Due to a change in control of stock owned by the Company 2,800,000 shares of stock held in a private
company that had been acquired with a zero basis were valued at market value of $0.41 per share resulting in a gain of $1,148,000
which represents the value recorded as a level three financial instrument at May 31, 2015.
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.
Advertising Costs
– Advertising costs are expensed
when incurred. Advertising costs totaled $359,538 and $195,131 in the years ended May 31, 2015 and 2014, respectively.
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”.
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 and EITF 96-18 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 96-18 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.
Share based expense paid to through direct stock grants is expensed
as occurred. Since the Company’s stock is publicly traded, the value is determined based on the number of shares issued and
the trading value of the stock on the date of the transaction. The company recognized $25,000 in expenses for stock based compensation
to the Company Chief Financial Officer through direct stock grants of 50,000 shares.
Stock option activity was as follows (converted post reverse split):
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price ($)
|
Balance at May 31, 2013
|
|
|
389,039
|
|
|
|
0.48
|
|
Granted
|
|
|
–
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
–
|
|
|
|
–
|
|
Balance at May 31, 2014
|
|
|
389,035
|
|
|
$
|
0.48
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Forfeited or expired
|
|
|
–
|
|
|
|
–
|
|
Balance at May 31, 2015
|
|
|
389,035
|
|
|
$
|
0.48
|
|
The following table presents information regarding options outstanding
and exercisable as of May 31, 2015:
Weighted average contractual remaining term – options outstanding
|
|
|
0 years
|
|
Aggregate intrinsic value – options outstanding
|
|
$
|
155,614
|
|
Options exercisable
|
|
|
389,035
|
|
Weighted average exercise price – options exercisable
|
|
$
|
.48
|
|
Aggregate intrinsic value – options exercisable
|
|
$
|
7,781
|
|
Weighted average contractual remaining term – options exercisable
|
|
|
0 years
|
|
As of May 31, 2015, future compensation costs related to options
issued was $0.
The fair value of each option granted is estimated on the date of
the grant using the Black-Scholes option pricing model with weighted average assumptions for grants as follows:
Risk-free interest rate
|
|
|
1.44%
|
|
Expected life of options
|
|
|
4-5 years
|
|
Annualized volatility
|
|
|
90.6%
|
|
Dividend rate
|
|
|
0%
|
|
New Accounting Pronouncements
– Upon issuance
of final pronouncements, we review the new accounting literature to determine its relevance, if any, to our business. The following
final pronouncements will impact our financial statements.
ASU 2015-01 “Income Statement – Extraordinary and Unusual
Items” (ASU 2015-01)
In January 2015, the FASB issued ASU 2015-01 eliminating the concept
of extraordinary items for presentation on the face of the income statement. Under the new standard, a material event or transaction
that is unusual in nature, infrequent or both shall be reported as a separate component of income from continuing operations. Alternatively,
it may be disclosed in the notes to financial statements.
The new accounting guidance is required for interim and annual periods
beginning after December 15, 2015. Early adoption is permitted if applied from the beginning of a fiscal year. As applicable, this
standard may change the presentation of amounts in the income statements. We elected to adopt ASU 2015-01 effective January 1,
2016. Adopting this policy as of June 1, 2014 affected the Company recognizing $99,702 as a gain from debt forgiveness in the year
ending May 31, 2015 as the Company determined that the amount was no longer legally due to a contractor. The Company recognized
the $99,702 as income in the other incomes section of the income statement.
As of May 31, 2015 and 2014, 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.
During the year ended May 31, 2015, the Company converted
380,000 shares of preferred stock for 475,000 of common stock shares at a conversion rate of 1.25 per share of preferred
stock.
During the year ended May 31, 2015, the Company granted 50,000 shares
of common stock for compensation. The stock was valued at $0.50 per share. The compensation and consulting expense was recorded
as general and administrative expenses for the year ended May 31, 2015.
During the year ended May 31, 2014, the Company converted 728,776
shares of preferred stock for 910,970 shares at a conversion rate of 1.25 shares of common stock per share of preferred
stock.
During March 2014, the Company granted 300,000 shares of common
stock for compensation. Half the shares were valued at $0.90 per share and the remaining 150,000 shares were valued at $0.77 per
share. The Company also issued 18,750 shares for services valued at $0.89 per share. The compensation and consulting expense was
recorded as general and administrative expenses for the year ended May 31, 2014.
Series A Convertible Preferred Stock:
During the third quarter, effective February 29, 2012, the Company
issued 2,003,776 shares of preferred stock as Series A 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.
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 will record the intrinsic value of this beneficial
conversion feature which we calculated to be $520,982 ($1.06 common stock price February 29th, 2012 compared to $0.80 effective
conversion rate of $0.26 per share. $0.26 times 2,003,776 = $520,982), as a deemed dividend recognizable in the current year. This
deemed dividend was calculated based upon a closing price on February 29, 2012 (the date the shares were formally accepted by the
Company) of $1.06 per share and an effective sale price (with conversion) per the preferred share agreement of $0.80 per share
of common stock
.
Series B Convertible Preferred Stock
The Company issued 1,885,000 shares of preferred stock as Series
B convertible preferred stock for total proceeds of $1,885,000. 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 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.
No dividends have been declared as of August 28, 2015. However,
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 will record the intrinsic value of this beneficial conversion feature which we calculated to be $1,475,700 as a deemed
dividend on the Company’s income statement. This deemed dividend was calculated based upon a trading price ranging from $0.45
to $0.76 per share closing price of trading on the OTCBB exchange where are stock is traded and effective sale price (with conversion)
of $1.13 to $1.90 per share of common stock. The company has accrued the expense associated with delivering this dividend of 6%
resulting in current accrued expense of $34,947 of accrued liability in the period ending May 31, 2015.
4.
|
Property and Equipment:
|
Property and equipment are recorded at cost, net of accumulated
depreciation and are comprised of the following:
|
|
May 31,
|
|
May 31,
|
|
|
2014
|
|
2014
|
Furniture & fixtures
|
|
$
|
75,526
|
|
|
$
|
72,530
|
|
Leasehold improvements
|
|
|
23,417
|
|
|
|
23,417
|
|
|
|
|
98,943
|
|
|
|
95,947
|
|
Less accumulated depreciation
|
|
|
(89,161
|
)
|
|
|
(72,987
|
)
|
|
|
$
|
9,783
|
|
|
$
|
22,960
|
|
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 years ended May 31, 2015 and 2014 was
$16,174 and $21,576, respectively.
Intangible assets are comprised of the following:
|
|
May 31,
|
|
May 31,
|
|
|
2015
|
|
2014
|
Website development costs
|
|
$
|
165,374
|
|
|
$
|
171,918
|
|
Less: accumulated amortization
|
|
|
(85,730
|
)
|
|
|
(77,640
|
)
|
|
|
$
|
79,644
|
|
|
$
|
94,278
|
|
Amortization is calculated over a straight-line basis using the
economic life of the asset. Amortization expense for the twelve months ended May 31, 2014 and 2013 was $8,090 and $10,467 respectively.
6.
|
Commitments and Concentrations:
|
The Company reimburses its Chief Executive Officer (CEO) for an
apartment pursuant to a month-to-month lease for the use of the CEO and his family in PRC for a monthly expense of approximately
$900. This lease could be terminated at any time with no additional payments required.
Office Lease – Shanghai
– The Company
entered into a lease for new office space in Shanghai, China. The lease period started October 1, 2013 and will terminate September
31, 2016, resulting in the following future commitments, based on the exchange rate at May 31, 2015 of the following:
2016 fiscal year
|
|
$
|
62,356
|
|
2017 fiscal year
|
|
|
20,596
|
|
Office Lease – Denver, Colorado
– The
Company entered into a lease for office space in Denver, Colorado. The lease period started June 1, 2015 and will terminate May
31, 2018, resulting in the following future commitments:
2016 fiscal year
|
|
$
|
16,000
|
|
2017 fiscal year
|
|
|
18,687
|
|
2018 fiscal year
|
|
|
19,355
|
|
The company had a lease for executive office space in Denver, Colorado
that was prepaid for six months in the third quarter of 2015 and expired July 31, 2015. However, the company moved into new office
space June 1, 2015 and abandoned that location at May 31, 2015. The company expensed the remaining outstanding prepaid rent of
$3,308 at that time.
Office Lease – New York
– The Company entered
into a lease for executive office space in New York, NY. The Lease period started April 21, 2015 and will terminate July 31, 2016
resulting in the following future commitments:
2016 fiscal year
|
|
$
|
28,521
|
|
Office Lease – San Gabriel, California
– The
Company entered into a lease for executive office space in San Gabriel, California. The Lease period started April 30, 2015 and
will terminate August 1, 2016 resulting in the following future commitments:
2016 fiscal year
|
|
$
|
55,880
|
|
2017 fiscal year
|
|
|
9,313
|
|
Concentrations
– During the periods ending May
31, 2015 and 2014, 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
an investigation which, in the opinion of management, upon consideration of corporate council advice, it believes it is reasonably
likely to not have an adverse effect on the financial condition, results of operation or cash flow of the Company in the future.
The Company recorded no income tax provision or benefit for the
years ended May 31, 2015 and 2014, because the Company believes it is more likely than not that these will not be utilized in the
near future due to net losses. The Company generated no taxable income. The income tax provision (benefit) differs from the amount
computed by applying the U.S. Federal income tax rate of 34% plus applicable state rates to the loss before income taxes due to
the unrecognized benefit resulting from the Company’s valuation allowance, as well as due to nondeductible expenses.
For income tax reporting purposes, the Company has approximately
$5
.1 million of net operating loss carry forwards that expire at various dates through
2035. The Tax Reform Act of 1986 contains provisions that may limit the net operating loss carry forwards and tax credits available
to be used in any given year if certain events occur, including significant changes in ownership interests. Realization of net
operating loss and tax credit carry forwards is dependent on generating sufficient taxable income prior to their expiration dates.
As of May 31, 2015 and 2014, the Company had approximately $1,606,000
and $704,000, respectively, of net deferred tax assets, comprised primarily of the potential future tax benefits from net operating
loss carry forwards. Based upon the level of historical taxable income and projections for future taxable income over the period
in which the deferred tax assets are deductible, management could not conclude that realization of the deferred tax assets as of
May 31, 2015 and 2014, was more likely than not, and therefore, the Company has recorded a valuation allowance to reduce the net
deferred tax assets to zero. The valuation allowance increased approximately $902,000 during the year ended May 31, 2015 and decreased
approximately $753,000 during the year ended May 31, 2014, respectively. The amount of deferred tax assets considered realizable
could be adjusted in the near term if future taxable income is generated.
The Company’s effective tax rate differs from the statutory
rate due to the following (expressed as a percentage of pre-tax income):
Description
|
|
2015
|
|
|
2014
|
|
Federal Statutory Rate
|
|
|
35%
|
|
|
|
35%
|
|
State Statutory Rate
|
|
|
5%
|
|
|
|
9%
|
|
Change in Rate / Other
|
|
|
2%
|
|
|
|
8%
|
|
Permanent Tax Differences
|
|
|
(1%
|
)
|
|
|
(1%
|
)
|
Calculated Rate
|
|
|
41%
|
|
|
|
51%
|
|
Actual Calculated Rate
|
|
|
(41%
|
)
|
|
|
(51%
|
)
|
Difference
|
|
|
0%
|
|
|
|
0%
|
|
Management has evaluated all events subsequent to year end through
the date of this filing, noting that none materially impacted the financial statements.
9.
|
Restatement of financial statements:
|
The audited financial statements as of and for the year ended May
31, 2014, filed with the SEC on August 31, 2015 and amended and refiled on February 9, 2016 , have been restated. The previously
filed financial statements did not properly present several items on the Statement of Comprehensive (Loss) and Income and the Statement
of Cashflows. The adjustment was primarily related to presentation and information grouping. In addition, there was a typographical
error in the May 31, 2014 Other comprehensive income/(loss) section where the incorrect number was used for net unrealized gain/(loss)
on available for sale securities.
The effects of the restatement on our previously issued financial
statements as of and for the year ended May 31, 2014 and 2015, are as follows:
Statement of Comprehensive
(Loss) and Income
Period ended May
31, 2015
|
|
Previously Reported
|
|
|
Adjustment
|
|
|
Restated
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
|
1,588,883
|
|
|
|
(34,947
|
)
|
|
|
1,553,936
|
|
Total operating expenses
|
|
|
1,948,421
|
|
|
|
(34,947
|
)
|
|
|
1,913,474
|
|
Net (loss) from operations
|
|
|
(518,098
|
)
|
|
|
34,947
|
|
|
|
(483,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend for beneficial conversion of convertible preferred stock
|
|
|
(1,475,700
|
)
|
|
|
1,475,700
|
|
|
|
–
|
|
Total other expense
|
|
|
(3,319,418
|
)
|
|
|
1,475,700
|
|
|
|
(1,843,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) available to common shareholders
|
|
|
(3,837,516
|
)
|
|
|
1,510,647
|
|
|
|
(2,326,869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend
|
|
|
–
|
|
|
|
(34,947
|
)
|
|
|
(34,947
|
)
|
P
referred deemed dividend
|
|
|
–
|
|
|
|
(1,475,700
|
)
|
|
|
(1,475,700
|
)
|
Statement of Comprehensive (Loss)
and Income
Period ended May 31. 2014
Other comprehensive income/(loss)
|
|
|
|
|
|
|
|
|
|
Net unrealized gain/(loss) on available for sale securities
|
|
|
474,075
|
|
|
|
(841,225
|
)
|
|
|
(367,150
|
)
|
Statement of Cash Flows
For the Years Ended May 31, 2015
Net Income (loss) for the twelve month period
|
|
|
(3,837,516
|
)
|
|
|
1,510,647
|
|
|
|
(2,326,869
|
)
|
Non-cash revenues held as available for sale securities
|
|
|
(1,389,113
|
)
|
|
|
(96,583
|
)
|
|
|
(1,485,696
|
)
|
Net unrealized gain (loss) on investment
|
|
|
2,159,402
|
|
|
|
(2,159,402
|
)
|
|
|
–
|
|
Expenses paid with stock
|
|
|
114,800
|
|
|
|
(114,800
|
)
|
|
|
–
|
|
Deemed dividend for beneficial conversion of convertible preferred stock
|
|
|
1,475,700
|
|
|
|
(1,475,700
|
)
|
|
|
–
|
|
Realized gain (loss) on investment
|
|
|
–
|
|
|
|
1,884,104
|
|
|
|
1,884,104
|
|
Gain on extinguishment of debt
|
|
|
–
|
|
|
|
(99,702
|
)
|
|
|
(99,702
|
)
|
Deposits and other
|
|
|
(21,784
|
)
|
|
|
21,784
|
|
|
|
–
|
|
Deposits
|
|
|
–
|
|
|
|
(65,230
|
)
|
|
|
(65,230
|
)
|
Prepaid taxes
|
|
|
–
|
|
|
|
25,798
|
|
|
|
25,798
|
|
Notes payable related party
|
|
|
–
|
|
|
|
17,648
|
|
|
|
17,648
|
|
Accounts payable
|
|
|
(156,871
|
)
|
|
|
125,696
|
|
|
|
(31,175
|
)
|
Commissions payable
|
|
|
–
|
|
|
|
114,800
|
|
|
|
114,800
|
|
Accrued interest expense
|
|
|
–
|
|
|
|
(11,068
|
)
|
|
|
(11,068
|
)
|
Other accrued liabilities
|
|
|
37,688
|
|
|
|
(51,203
|
)
|
|
|
(13,515
|
)
|
Deferred revenue
|
|
|
(661,606
|
)
|
|
|
493,419
|
|
|
|
(168,187
|
)
|
Unearned revenue paid in cash
|
|
|
–
|
|
|
|
(120,208
|
)
|
|
|
(120,208
|
)
|