NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
Organization and Nature of Operations
:
Business Description
–
Chineseinvestors.com, Inc. (the “Company”) was incorporated on June 15, 1999 in the State of California. The Company
is a provider of Chinese language web-based real-time financial information. The Company’s operations had been located in
California until September 2002 at which time the operations were relocated to Shanghai, in the People’s Republic of China
(PRC).
During May, 2000, the Company entered into
an agreement with MAS Financial Corp. (“MASF”) whereby MASF agreed to transfer control of a public shell corporation
to the Company and perform certain consulting services for a fee of $30,000.
During June, 2000, the Company completed reorganization
with MAS Acquisition LII Corp. (“MASA”) with no operations or significant assets. Pursuant to the terms of the agreement,
the Company acquired approximately 96% of the issued and outstanding common shares of MASA in exchange for all of its issued and
outstanding common stock. MASA issued 8,200,000 shares of its restricted common stock for all of the issued and outstanding common
shares of the Company. This reorganization was accounted for as though it were a recapitalization of the Company and sale by the
Company of 319,900 shares of common stock in exchange for the net assets of MASA. In conjunction with the reorganization MASA changed
its name to Chineseinvestors.com, Inc.
The Company is now incorporated as a C corporation in the State
of Indiana as of June 1, 1997.
Going Concern
- The accompanying
financial statements have been prepared assuming that the Company will continue as a going concern. There is potential that
the Company will not continue as a going concern. The recoverability of recorded property and equipment, intangible assets, and
other asset amounts shown in the accompanying financial statements is dependent upon the Company’s ability to continue as
a going concern and to achieve a level of profitability. The Company intends on financing its future activities and its working
capital needs largely from the sale of equity securities until such time that funds provided by operations are sufficient to fund
working capital requirements. However, there can be no assurance that the Company will be successful in its efforts.
The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a
going concern
1. Liquidity and Capital Resources:
Cash Flows
– During the
three months ending August 29, 2016, the Company primarily generated cash and cash equivalents, from the sale of its available
for sale securities and deferred revenue from membership subscriptions.
Cash flows provide by (used in) operations
for the three months ending August, 2016 and 2015 were $($720,074) and ($766,700), respectively. The decreased cash used in operations
were due to increased deferred revenue from membership subscriptions and revenue related to investor relationships
Capital Resources
– As
of August, 2016, the Company had cash and cash equivalents of $312,713 as compared to cash and cash equivalents of $197,231 as
of May 31, 2016.
Since inception in 1997, the Company has primarily
relied upon proceeds from private placements of its equity securities to fund its operations. The Company anticipates continuing
to rely on sales of our securities in order to continue to fund business operations. Issuances of additional shares will result
in dilution to its existing stockholders. There is no assurance that the Company will be able to complete any additional sales
of our equity securities or that it will be able arrange for other financing to fund our planned business activities.
2. Critical Accounting Policies and Estimates
:
Basis of Presentation
–
These accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United
States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission for
annual financial statements.
Investment in Affiliate
The Company
invested in an affiliate 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. As of May 31, 2016, the Company held 1,347,616 shares of the affiliates stock with a fair value
of $1.80 per share totaling $2,425,709 at that time. During the three months ended August 31, 2016, the Company sold 713,399 shares
of the stock in this company at $1.20 per share for total proceeds of $856,080. The remaining shares held were valued at the current
public market value resulting in a current asset of $1,008,405as of August 31, 2016. As there was a public market for MDCL stock
at August 31, 2016 and May 31, 2016 the Company recognized the stock as a Level 1 financial instrument.
Foreign Currency
– The
Company has operations in the People’s Republic of China (“PRC”), however the functional and reporting currency
is in U.S. dollars. To come to this conclusion, the Company considered the direction of ASC section 830-10-55.
Selling Price and Market
–
As a representative office is located in the PRC, the Company is not allowed to sell directly to PRC based customers. Over 90%
of its customers are in the United States and 100% of all sales are paid in U.S. dollars. This indicates the functional currency
is U.S. dollars.
Financing
– The Company’s
financing has been generated exclusively in U.S. dollars from the United States. This indicates the functional currency is U.S.
dollars.
Expenses
– The majority
of expense are paid in U.S. dollars. The expenses generated in PRC are paid by a monthly or weekly cash transfer from the U.S.
when the expenses are due, resulting in very little foreign currency exposure. This indicates the functional currency is U.S. dollars.
Numerous Intercompany Transactions
– The Company has multiple transactions each month between the U.S. and Chinese representative office. This indicates the
functional currency is U.S. dollars.
Due to the functional and reporting currency
both being in U.S. dollars, ASC 830-10-45-17 states that a currency translation is not necessary.
Revenue recognition
– Revenue
was derived from four different sources:
The Company recognizes revenue pursuant to
revenue recognition principles presented in SAB Topic 13. First, persuasive evidence of an arrangement. Second, delivery has occurred
or services have been rendered, thirdly the seller’s price to the buyer is fixed or determinable and lastly collectability
is reasonably assured.
1. Fees from banner advertisement, webpage
hosting and maintenance, on-line promotion and translation services, advertising and promotion fees for customers in the Company’s
Chinese Investment Guides, sponsorship fees from investment seminars, road shows, and forums. The sales prices of these services
are fixed and determinable at the time the contracts are signed and there are no provisions for refunds contained in the contracts.
These revenues are recognized when all significant contractual obligations have been satisfied and collection of the resulting
receivable is reasonably assured.
2. Fees from membership subscriptions: these
revenues are recognized over the term of the subscription. Subscription terms are generally between 3 and 12 months but can occasionally
be as short as 1 month or as long as 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 august 31, 2016 and May 31, 2016 there were deposit
balances in a United States bank of $278,362 and $195,571 respectively. In addition, the Company maintains cash balance in The
Bank of China, which is a government owned bank. The full balance of the deposits in China is secured by the Chinese government.
At August 31, 2016 and May 31, 2016 there were deposits of $23,289 and $1,562, respectively, in The Bank of China.
Accounts Receivable and Concentration
of Credit Risk
– The Company extends unsecured credit to its customers in the ordinary course of business. Accounts
receivable related to subscription revenue is recorded at the time the credit card transaction is completed, and is completed when
the merchant bank deposits the cash to the Company bank account. Revenues related to advertising and Forex are regularly collected
within 30 days of the time of services being rendered. However, since these are ongoing contracts, there has been no instance of
failure to pay. As of August 31, 2016 and May 31, 2016, the Company had accounts receivable of $13,866 and $1,899, respectively.
The Company evaluates the need for an allowance
for doubtful accounts on a regular basis. As of August 31, 2016 and May 31, 2016, the Company determined that an allowance was
not needed.
The operations of the Company are located in
the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political,
economic, and legal environments in the PRC, as well as by the general state of the PRC economy.
Prepaid taxes
–A percentage of the Company’s
aggregate gross amount of reportable payment transactions settled through one of the Company’s merchant banks were withheld
and remitted to the Internal Revenue Service (IRS) under IRS regulation Section 6050W. The Company is filing the tax return to
refund the withholdings as management does not believe the Company’s revenue transactions fall within the rules of Section
605W. Management wrote off the balance receivable in the period ended May 31, 2016 due to difficulty and expected cost of securing
the refund.
Investments available for sale
Investments available
for sale is comprised of publicly traded stock received in return for providing investor relations services to client companies.
The investor relations services range from one month to a year, from the inception of the contract. The Company considers the securities
to be liquid and convertible to cash in under a year. The Company has the ability and intent to liquidate any security that the
Company holds to fund operations over the next twelve months, if necessary, and as such has classified all of its marketable securities
as short-term.
The Company followed the guidance of ASC 320-10-30 to determine
the initial measure of value based on the quoted price of an otherwise identical unrestricted security of the same issuer, adjusted
for the effect of the restriction, in accordance with the provisions of topic 820-10-15-5, which states that an equity security
has a readily determinable fair value if it meets the condition of having a “sales prices or bid-and-asked quotations which
are currently available on a securities exchange registered with the U.S. Securities and Exchange Commission (SEC) or in the over-the-counter
market, provided that those prices or quotations for the over-the-counter market are publicly reported by the National Association
of Securities Dealers Automated Quotation systems or by the OTC Markets Group Ins. Restricted stock meets that definition if the
restriction terminates within one year.” These shares were classified as available for sale securities in accordance with
ASC 948-310-40-1 as the Companies intention is to sell them in the near-term (less than one year). In compliance with ASC 320-10-35-1,
equity securities that have readily determinable fair values that are classified as available-for-sale shall be measured subsequently
at fair value in the statement of financial position. Unrealized holding gains and losses for Available-for-sale securities
(including those classified as current assets) shall be excluded from earnings and reported in other comprehensive income until
realized."
As these shares will be earned over the term of the contracts, the
Company will defer the recognition of the earnings of the revenue over the period the services are performed. The value recorded
will be determined by multiplying the average of the closing price on the last day of the month for the period being reported based
on closing market price per share.
Upon receipt, these shares were recorded as an asset on the Companies
financials as "Investments, available for sale". The Company will also record a corresponding contra-asset account titled
"Unearned Revenue paid in stock".
Other Current Assets
–
Other current assets are comprised of various deposits on building space under an operating lease and are stated at the current
exchange rate at year end.
Other current assets were $39,276 and $55,780
at August 31, 2016 and May 31, 2016, 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 $3,370 and $5,906 for the three months ended August 31, 2016 and 2015, 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 August 31. 2016 and May 31,
2016
.
Accrued dividend
– The
accrued dividend balance represents dividend payable related to the Class “B” preferred stock. Accrued dividends were
$33,935 and $23,954 for the periods ending August 31, 2016 and May 31, 2016.
Accrued Liabilities
– Accrued liabilities are
comprised of the following:
|
|
August 31, 2016
|
|
May 31, 2016
|
China Employees' Salaries and Commissions Accrual
|
|
$
|
58,971
|
|
|
$
|
30,598
|
|
Accrued Payroll
|
|
|
46,450
|
|
|
|
6,799
|
|
Accrued Expenses
|
|
|
4,488
|
|
|
|
1,756
|
|
|
|
|
$109, 909
|
|
|
$
|
39,153
|
|
Unearned revenue, revenue paid in stock
– For the three months ended August 31, 2016 and during fiscal year ended May 31, 2016, the Company received shares
of stock and warrants, as payment for investor relations work that the Company will be providing through July 2017. The stock that
had not been earned was valued at $189,995 at August 31, 2016 as compared to $90,278 at May 31, 2016. As the Company earns the
fee for this work, this balance will be reduced to reflect the portion still to be earned.
Deferred revenue
– The
company receives payment for subscription revenues in advance before the subscription service is granted. The company recognizes
the revenue as being earned as the services are deliver. The amount paid for which services have not yet been delivered related
to subscription revenues is recorded as a liability in the current or long-term portion of the liabilities section of the balance
sheet. The deferred revenue balance that will be earned in the next twelve months was $415,391 at August 31, 2016 as compared to
$321,416 at May 310, 2016. The long-term deferred revenue balance was $84,805 on August 31, 2016 as compared to $37,642 May 31,
2016.
Short-term debt, secured by stock
– During 2016,
the Company obtained short term debt of $660,000 from various individuals, secured by 660,000 shares of the Company owned stock
in Medicine Man Technologies, Inc. These notes are due to be repaid during the quarter ending February 28, 2017. The lender received
an incentive of 30% appreciation of the stock value for MDCL at the maturity of the short-term notes, 15 months after inception.
We may issue debt that is collateralized by common stock we own
in a third party. Additionally, this debt is intended to be settled using the proceeds when that common stock is sold. If the proceeds
from the sale of the common stock are more than the estimated value of the common stock when we entered into the debt agreements,
the debt holder receives 30% of the deemed increase in value of the common stock (“Incentive Feature”). We estimate
the value of the Incentive Feature using the expected liquidation value of the common stock collateralizing the debt based on recent
sales of the common stock. We record the estimated value of the Incentive Feature as an increase to the debt liability and as interest
expense. We recorded a liability and interest expense as of May 31, 2016, for the Incentive Feature of $39,600. We estimated the
expected liquidation value of the underlying common stock at $1.20 per share, based on recent sales of shares.
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:
|
|
August 31, 2016
|
|
|
May 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash
|
|
|
312,713
|
|
|
|
–
|
|
|
|
–
|
|
|
|
197,231
|
|
|
|
–
|
|
|
|
–
|
|
Investments
|
|
|
1,181,289
|
|
|
|
67,500
|
|
|
|
–
|
|
|
|
2,469,225
|
|
|
|
67,500
|
|
|
|
–
|
|
Total Financial Instruments
|
|
|
1,494,002
|
|
|
|
67,500
|
|
|
|
–
|
|
|
|
2,666,456
|
|
|
|
67,500
|
|
|
|
–
|
|
Income Taxes
– Income taxes are accounted for
under the asset and liability method of ASC 740. Deferred tax assets and liabilities are recognized for net operating loss and
other credit carry forwards and the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which the tax effect of transactions are expected to be realized.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the
year that includes the enactment date.
Deferred tax assets are reduced by a full valuation allowance since
it is more likely than not that the amount will not be realized. Deferred tax assets and liabilities are classified as current
or noncurrent based on the classification of the underlying asset or liability giving rise to the temporary difference or the expected
date of utilization of the carry forwards.
Other Revenue
– Other revenue is comprised of
revenue related to Forex service fees and rent generated through office space sublease revenue which is recognized over the period
the term of the lease. Other revenue was $1,783 and $12,624 for the three months ended August 31, 2016 and 2015, respectively.
Advertising Costs
– Advertising
costs are expensed when incurred. Advertising costs totaled $180,724 and $106,378 in the three months ended August 31, 2016 and
2015, respectively.
Earnings (Loss) Per Share
–
Earnings (loss) per share is computed using the weighted average number of common shares outstanding during the period. The Company
has adopted ASC 260 (formerly SFAS128), “Earnings Per Share”. Fully diluted loss per share are not calculated and presented
on the financial statements as the calculation would be antidilutive.
Stock Based Compensation
–
The Company accounts for share-based payments pursuant to ASC 718, “Stock Compensation” and, accordingly, the Company
records compensation expense for share-based awards based upon an assessment of the grant date fair value for stock options and
restricted stock awards using the Black-Scholes option pricing model.
Stock compensation expense for stock options
is recognized over the vesting period of the award or expensed immediately under ASC 718 and EITF 96-18 when stock or options are
awarded for previous or current service without further recourse. The Company issued stock options to contractors and external
companies that had been providing services to the Company upon their termination of services. Under ASC 718 and EITF 96-18 these
options were recognized as expense in the period issued because they were given as a form of payment for services already rendered
with no recourse.
Stock option activity was as follows (converted post reverse split):
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price ($)
|
Balance at May 31, 2014
|
|
|
389,035
|
|
|
$
|
0.48
|
|
Granted
|
|
|
–
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
–
|
|
|
|
–
|
|
Balance at May 31, 2015
|
|
|
389,035
|
|
|
$
|
0.48
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Forfeited or expired
|
|
|
389,035
|
|
|
|
–
|
|
Balance at May 31, 2016
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
As of the date of this filing all outstanding
stock options have expired. Future compensation cost related to stock options is zero dollars.
3. Stockholders’ Equity:
As of August 31, 2016 and May 31, 2016, the
Company was authorized to issue 80,000,000 shares of common stock, $0.001 par value per share. In addition, 20,000,000 shares of
$.001 par value preferred stock were authorized. All common stock shares have full dividend rights. However, it is not anticipated
that the Company will be declaring distributions in the foreseeable future.
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:
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
In the years ended May 31, 2016 and 2015 the
Company issued 650,000 and 1,885,000 shares of preferred stock as Series B convertible preferred stock for total proceeds of $2,535,000.
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.
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 in 2015 and $51,250 in the period ending May 31, 2016. This deemed dividend was calculated based upon a trading price
ranging from $0.35 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 $0.88 to $1.90 per share of common stock.
4. Property and Equipment
:
Property and equipment are recorded at cost, net of accumulated
depreciation and are comprised of the following:
|
|
August 31, 2016
|
|
May 31, 2016
|
Furniture & Fixtures
|
|
$
|
87,413
|
|
|
$
|
87,413
|
|
Leasehold Improvements
|
|
|
23,417
|
|
|
|
23,417
|
|
|
|
$
|
110,830
|
|
|
$
|
110,830
|
|
Less: Accumulated Depreciation
|
|
|
(99,953
|
)
|
|
|
(99,062
|
)
|
|
|
$
|
10,877
|
|
|
$
|
11,768
|
|
Depreciation on equipment is provided on a straight line basis over
its expected useful lives at the following annual rates.
Computer equipment
|
|
3 years
|
Furniture & fixtures
|
|
3 years
|
Leasehold improvements
|
|
Term of the lease
|
Depreciation expense for the three months ending August 31, 2016
and 2015 was $889 and $3,474, respectively.
5. Intangible Assets
:
Intangible assets are comprised of the following:
|
|
August, 2016
|
|
May 31, 2016
|
Website development
|
|
$
|
177,421
|
|
|
$
|
174,046
|
|
Less: Accumulated Depreciation
|
|
|
(98,380
|
)
|
|
|
(95,899
|
)
|
|
|
$
|
79,041
|
|
|
$
|
78,147
|
|
Amortization is calculated over a straight-line
basis using the economic life of the asset. Amortization expense for the three months ended August 31, 2016 and 2015 was $2,481
and $2,862 respectively.
6. Commitments and Concentrations:
Office Lease – Shanghai
– The Company entered a lease for new office space in Shanghai, China. The lease period started October 1, 2013 and will
terminate September 31, 2016, on August 2016, the Company renewed this lease at around $5,400 per month to September 30, 2019,
resulting in the following future commitments, based on the exchange rate at August 31, 2016 of the following:
2017 fiscal year
|
|
$
|
48,150
|
|
2018 fiscal year
|
|
$
|
64,800
|
|
2019 fiscal year
|
|
$
|
64,800
|
|
2020 fiscal year
|
|
$
|
21,600
|
|
Office Lease – Denver, Colorado
– The
Company entered a lease for office space in Denver, Colorado. The original lease period started June 1, 2015 and will terminate
May 31, 2018, monthly lease payment was $3,333. On June 2016, the Company and landlord mutually agreed to terminate this contract
on August 15, 2016 and the security deposit was converted to two months of rent at that time.
Office Lease – New York
– The Company entered
a lease for executive office space in New York, NY. The original lease period started April 21, 2015 and was terminated on July
31, 2016. On January 2016, the Company renewed the lease at $2,167 per month to February 28, 2017 and resulting future commitments
at $26,004.
Office Lease – San Gabriel, California
– The
Company entered a lease for executive office space in San Gabriel, California. The Lease period started April 30, 2015 and was
terminated on August 1, 2016. On June, the Company renewed the contract for another 3 years to July 31, 2019 resulting in the following
future commitments:
2017 fiscal year
|
|
$
|
38,175
|
|
2018 fiscal year
|
|
$
|
52,173
|
|
2019 fiscal year
|
|
$
|
53,783
|
|
2020 fiscal year
|
|
$
|
9,300
|
|
Office Lease – Irwindale, California
– On October,
2015, the Company entered a lease for executive office space in Irwindale, California. The Lease is one-year lease at $5000 per
month and that terminates on Nov 10
th
2016 resulting future commitment at $15,000 through termination.
Concentrations
– During
the periods ending August 31, 2016 and 2015, the majority of the Company’s revenue was derived from its operations in PRC
from individuals, primarily in the United States and Canada.
Litigation
– The Company
is involved in legal proceedings from time to time in the ordinary course of its business. As of the date of this filing, the Company
is a party to two lawsuits which, in the opinion of management, upon consideration of corporate council advice, it believes it
is reasonably likely to not have a material adverse effect on the financial condition, results of operation or cash flow of the
Company in the future.
9. Subsequent event
:
Management has evaluated all events subsequent to the date on October
24, 2016, noting that none materially impacted the financial statements or require further disclosure.