NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
China
Gewang Biotechnology, Inc. (the “Company”), formerly known as Rich Star Development, was incorporated under the laws
of the State of Nevada on May 29, 2009. From its inception until the closing of the reverse merger described below, the Company
was a development-stage company in the business of sourcing and distributing food products, paper products, janitorial products,
restaurant utensils and equipment to the food service industry in the PRC.
On
April 20, 2015, the Company completed a reverse merger transaction through a share exchange with the stockholders of Biotechnology
International Holding Ltd. (“Biotechnology International”), whereby the Company acquired 100% of the outstanding shares
of Biotechnology International in exchange for 32,000,000 shares of its common stock, representing 90.14% of the issued and outstanding
shares of common stock. As a result of the reverse merger, Biotechnology International became the Company’s wholly-owned
subsidiary and the former Biotechnology International stockholders became our controlling stockholders. The share exchange transaction
was treated as a reverse acquisition, with Biotechnology International as the acquirer and the Company as the acquired party for
accounting purposes.
On
January 8, 2015, the Company filed a certificate of amendment to its articles of incorporation to change its name from “Rich
Star Development” to “China Gewang Biotechnology, Inc.”
On
July 20, 2016 the Company filed with the Nevada Secretary of State a Certificate of Amendment to Articles of Incorporation. The
Certificate of Amendment increased the number of authorized shares of common stock from 75 million to 100 million.
Majority-owned
subsidiary: Guangdong Gewang
As
a result of the transaction with Biotechnology International, the Company owns all of the issued and outstanding common stock
of Hong Kong Gewang Holdings Group Limited (“Hong Kong Gewang”), a wholly-owned subsidiary of Biotechnology International,
which in turn owns all of the issued and outstanding common stock of Gewang Selenium Enrichment Information Consulting (Shenzhen)
Co., Ltd. (“Gewang Selenium”). Before August 8, 2016, the Company effectively and substantially controlled Guangdong
Gewang Biotechnology Co., Ltd. (“Guangdong Gewang”) through a series of captive agreements between Guangdong Gewang
and Gewang Selenium. Guangdong Gewang, incorporated under the laws of the People’s Republic of China (“PRC”)
on June 2010, is primarily engaged in the sale of selenium supplements within the PRC. It is a member of the Chinese Selenium
Supplements Association.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
1.
|
ORGANIZATION
(continued)
|
On
July 13, 2016, Gewang Selenium exercised its option to purchase all of the registered equity of Guangdong Gewang. The purchase
price paid for the equity was RMB10,000 (approximately US$1,500). The equity was purchased from Shili Zhang, Yun Zeng and Wei
Xu. Shili Zhang was the Company’s CEO until April 8, 2016 and is the father of Mengdi Zhang, who was the beneficial owner
of 22.7% of the Company's outstanding common stock at the time of the sale on July 13, 2016. The other two sellers are not affiliated
with the Company.
Upon
application to the provincial government for registration of the transfer of equity, the Company was informed that Gewang Selenium
would not be permitted to own 100% of Guangdong Gewang. Therefore the parties modified the exercise of the option to provide that
Gewang Selenium would purchase only 98% of the registered equity of Guangdong Gewang. The purchase price paid for the equity was
RMB 9,800 (approximately US$1,500). The remaining 2% of the registered equity was then sold by Yun Zeng to Haiping Wu for a price
of RMB 200,000 (approximately US$30,400), which equaled 2% of the registered equity of Guangdong Gewang. Haiping Wu is a Director
of Guangdong Gewang. The acquisition, as modified, was then approved by the provincial government on August 8, 2016.
Prior
to the acquisition, Gewang Selenium controlled Guangdong Gewang through a series of contractual agreements, which made Guangdong
Gewang a variable interest entity, the effect of which was to cause the balance sheet and operating results of Guangdong Gewang
to be consolidated with those of Gewang Selenium in the Company's financial statements. As a result of the acquisition by Gewang
Selenium of the registered ownership of Guangdong Gewang, the balance sheet and operating results of Guangdong Gewang will hereafter
continue to be consolidated with those of Gewang Selenium as its majority-owned subsidiary. The previous non-controlling
interest was reclassified to additional paid-in-capital.
The
business of Guangdong Gewang consists of:
Sale
of selenium supplements
Through
a partnership with the Academy of Agricultural Sciences of Shangdong Province (the “Academy”), a highly regarded research
institute in China, the Company has licensed the exclusive right to contract for the manufacture and marketing of products, two
selenium capsules and one selenium powder, using formulas developed and owned by the Academy.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
1.
|
ORGANIZATION
(continued)
|
Sale
of selenium products
In
March 2016, the Company signed cooperation agreements with six selenium enriched food product manufacturers, providing for Guangdong
Gewang to distribute 89 distinct selenium products to chain stores. The products include processed foods such as selenium enriched
porridge, ready to eat foods such as seleniumenriched peanuts and ingredients such as selenium enriched flower. The Company is
actively engaged in marketing healthy selenium rich foods including SeleniumRich Maize Residue, SeleniumRich Brown Rice. Selenium
Enriched Black Beans, SeleniumEnriched Buckwheat Kernel and SeleniumEnriched Ormosia. The Company's distribution of these foods
compliments the Company’s sale of selenium supplements by raising awareness of the need for selenium in the diets of our
target consumer market.
Equity
investment: Guangdong Tianmei
On
April 28, 2016, the Company's wholly-owned subsidiary, Biotechnology International, entered into an investment agreement with
Guangdong Tianmei Selenium-Rich Beverage Chain Co., Ltd. (“Guangdong Tianmei”). Guangdong Tianmei was organized in
May 2015, and is engaged in the business of distributing selenium-rich bottled water and also functions as a placement agent for
a variety of products from various manufacturers, all within the PRC. The investment agreement provided that Biotechnology International
would pay US$1,000,000 to acquire a 30% interest in an Australian corporation to be formed, which would indirectly own all of
the equity in Guangdong Tianmei.
The
foregoing acquisition by Biotechnology International of 30% of Tianmei Beverage Group Corporation Limited, an Australian corporation
("Tianmei Australia"), was completed in May 2016, at which time Tianmei Australia acquired ownership, through subsidiaries,
of Guangdong Tianmei. The $1,000,000 purchase price was paid in full on June 17, 2016.
On
February 23, 2017, Guangdong Tianmei entered into an acquisition agreement with Chenzhou Qianlifeng Beverage Co., Ltd. (“Chenzhou
Qianlifeng”). Chenzhou Qianlifeng specializes in the production of selenium-rich water, and was contracted by Guangdong
Tianmei to bottle selenium-rich water under Guangdong Tianmei’s label. The acquisition agreement provided that Guangdong
Tianmei would pay RMB 5,000,000 (approximately US$724,600) to acquire a 100% interest in Chenzhou Qianlifeng. The total price
was fully paid on February 23, 2017.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
1.
|
ORGANIZATION
(continued)
|
As
a result of the entry into the foregoing agreements, the Company has a corporate structure which is as follows:
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of accounting and presentation
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America. The consolidated financial statements include those of the Company and its
subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The
unaudited interim consolidated financial statements of the Company as of February 28, 2017, and for the three months ended February
28, 2017 and February 29, 2016 have been prepared in accordance with accounting principles generally accepted in the United States
of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”)
which apply to interim financial statements. Accordingly, they do not include all of the information and footnotes normally required
by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of
management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation
of the results for the periods presented. The results of operations for the three months ended February 28, 2017 are not necessarily
indicative of the results to be expected for future quarters or for the year ending November 30, 2017. The interim consolidated
financial information should be read in conjunction with the consolidated financial statements and the notes thereto, included
in the Company’s Form 10-K filed with the SEC.
The
Company uses the equity method of accounting for its equity investment in Tianmei Australia. Under the equity method, investments
are carried at cost and increased or decreased by the Company’s pro-rata share of earnings or losses. The carrying costs
of these investments is also increased or decreased to reflect additional contributions or withdrawals of capital. Any difference
in the book equity and the Company’s pro-rata share of the net assets of the investment will be reported as gain or loss
at the liquidation of the investment. Losses in excess of the investment are recorded when the Company is committed to provide
additional financial support. The Company uses the equity method for its 30% investment because the Company has the ability to
exercise significant influence over Tianmei Australia and its subsidiaries.
The
consolidated financial statements and notes to the consolidated financial statements are presented in United States dollars (“US
Dollar” or “US$” or “$”).
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Use
of estimates
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ from those estimates.
Foreign
currency translations
Almost
all of the Company assets are located in the PRC. The functional currency for the Company’s operations is the Renminbi (“RMB”).
The Company uses the United States Dollar (“US Dollar” or “US$” or “$”) for financial reporting
purposes. The financial statements of the Company have been translated into US Dollars in accordance with Financial Accounting
Standards Board ("FASB”) Accounting Standards Codification ("ASC") Section 830, “
Foreign Currency
Matters
.”
All
asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Equity accounts
have been translated at their historical exchange rates when the capital transactions occurred. Statements of income and comprehensive
income, changes in stockholders’ equity and cash flows have been translated using the average exchange rate for the periods
presented. Adjustments resulting from the translation of the Company’s financial statements are recorded as other comprehensive
income (loss).
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Foreign
currency translations (continued)
The
exchange rates used to translate amounts in RMB into US Dollars for the purposes of preparing the financial statements are as
follows:
|
|
|
February 28,
2017
|
|
|
November 30,
2016
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items, except for stockholders’ equity, as of periods end
|
|
|
0.1456
|
|
|
|
0.1452
|
|
|
|
|
Three Months Ended
|
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in the statements of income and
comprehensive income, changes in stockholders’ equity and cash flows for the periods presented
|
|
|
0.1449
|
|
|
|
0.1533
|
|
For
the three months ended February 28, 2017 and February 29, 2016, foreign currency translation adjustments of $
52,792
and
$(186,413), respectively, have been reported as other comprehensive income (loss). Other comprehensive
income (loss) of the Company consists entirely of foreign currency translation adjustments.
Although
the PRC government regulations now allow convertibility of the RMB for current account transactions, significant restrictions
still remain. Hence, such translations should not be construed as representations that the RMB could be converted into US Dollars
at that rate or any other rate.
The
value of the RMB against the US Dollar and other currencies may fluctuate and is affected by, among other things, changes in the
PRC’s political and economic conditions. Any significant revaluation of the RMB may materially affect the Company’s
financial condition in terms of US Dollar reporting. During the year ended December 31, 2016, the PRC devalued its currency by
approximately 8%. Further devaluations of its currency could occur in the future.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Revenue
recognition
Revenues
are primarily derived from selling selenium supplements and selenium products to wholesale customers, contract distributors, and
from our retail stores. The Company’s revenue recognition policies comply with FASB ASC 605 “
Revenue Recognition.
”
The Company recognizes revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred, (iii) the price paid by the customer is fixed or determinable and (iv) collection of the resulting
accounts receivable is reasonably assured. The Company recognizes revenue for sales upon transfer of title to the customers. Customer
purchase orders and/or contracts are generally used to determine the existence of an arrangement. Shipping documents and the completion
of any customer acceptance requirements, when applicable, are used to verify product delivery. The Company assesses whether a
price is fixed or determinable based upon the payment terms associated with the transaction and whether the sales price is subject
to refund or adjustment. For manufacturing defects identified by customers at acceptance, the Company will return the goods to
the manufacturer and receive replacements. The Company has had no product returns or sales discounts and allowances because goods
delivered and accepted by customers are not returnable.
Wholesale
Revenue
Wholesale
revenue is recognized when title to the product is transferred to the distributors. Title is transferred upon receipt at the distributors’
locations, as determined by the specific sales terms.
The
Company pays distributors certain incentives for promoting and placing its products, which allows the Company to quickly expand
its distribution network and sales volume. The costs associated with these incentives is deducted from gross revenue in the consolidated
statements of income and comprehensive income.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Revenue
recognition (continued)
Retail
Revenue
Company-operated
retail store revenues are recognized when payment is tendered at the point of sale.
The
Company’s net revenues for the three months ended February 28, 2017 and February 29, 2016 were comprised as follows:
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Wholesale gross revenue-selenium supplements
|
|
$
|
3,075,103
|
|
|
$
|
829,085
|
|
|
Wholesale gross revenue-selenium products
|
|
|
18,013,025
|
|
|
|
-
|
|
|
Less: promotion fees-selenium products,
|
|
|
(2,074,411
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale revenues, net
|
|
|
19,013,717
|
|
|
|
829,085
|
|
|
Retail revenue-selenium supplements
|
|
|
1,207,534
|
|
|
|
389,013
|
|
|
Retail revenue-selenium products
|
|
|
920,881
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,142,132
|
|
|
$
|
1,218,098
|
|
Shipping
costs
Shipping
costs incurred by the Company are recorded as selling expenses. Shipping costs for the three months ended February 28, 2017 and
February 29, 2016 were $25,593 and $15,026, respectively.
Advertising
costs
Advertising
costs are charged to operations when incurred. For the three months ended February 28, 2017 and February 29, 2016, advertising
expenses were $449,044 and $21,462, respectively.
Cash
and cash equivalents
The
Company considers all demand and time deposits and all highly liquid investments with an original maturity of three months or
less to be cash equivalents.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Accounts
receivable
Accounts
receivable are recorded at the contract amount after deduction of trade discounts and, allowances, if any, and do not bear interest.
The allowance for doubtful accounts, when necessary, is the Company’s best estimate of the amount of probable credit losses
from accounts receivable. The Company determines the allowance based on historical write-off experience, the level of past-due
accounts based on the contractual terms of the receivable, the relationship with the customer and current economic conditions.
Account
balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery
is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.
As
of February 28, 2017 and November 30, 2016, accounts receivable were $14,374,154 and $11,205,011, respectively. The increase is
primarily due to the recent sales with new wholesale distributors, which has been subsequently fully collected. Therefore, the
Company determined that an allowance for doubtful accounts was not necessary. Historically, the Company did not have any uncollectable
accounts receivable.
Inventory
Inventory,
comprised principally of boxed selenium capsules, selenium-glossy ganoderma capsules and selenium powder, is valued at the lower
of cost or market. The value of inventory is determined using the first-in, first-out method.
The
Company periodically estimates an inventory allowance for estimated unmarketable inventories when necessary. Inventory amounts
are reported net of such allowances, if any. There were no allowances for inventory as of February 28, 2017 and November 30, 2016.
Property
and Equipment
Fixed
assets are recorded at cost, less accumulated depreciation. Cost includes the prices paid to acquire the assets, and any
expenditures that substantially increase an asset’s value or extends the useful life of an existing asset. Depreciation
is computed using the straight-line method over the estimated useful lives of the assets. Major repairs and betterments that
significantly extend original useful lives or improve productivity are capitalized and depreciated over the periods
benefited. Maintenance and repairs are generally expensed as incurred. The estimated useful lives for fixed asset categories
are as follows:
|
Furniture and equipment
|
3-5years
|
|
Motor vehicles
|
4 years
|
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Fair
value of financial instruments
FASB
ASC 820,
“Fair Value Measurement”
specifies a hierarchy of valuation techniques based upon whether the inputs
to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent
sources (observable inputs). In accordance with ASC 820, the following summarizes the fair value hierarchy:
|
Level 1 Inputs –
|
Unadjusted quoted market prices for
identical assets and liabilities in an active market that the Company has the ability to access.
|
|
|
|
|
Level 2 Inputs –
|
Inputs other than the quoted prices
in active markets that are observable either directly or indirectly.
|
|
|
|
|
Level 3 Inputs –
|
Inputs based on valuation techniques
that are both unobservable and significant to the overall fair value measurements.
|
ASC
820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure
fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is
based on the lowest level input that is significant to the fair value measurement. Valuation techniques used need to maximize
the use of observable inputs and minimize the use of unobservable inputs.
The
Company did not identify any assets or liabilities that are required to be presented at fair value on a recurring basis. Carrying
values of non-derivative financial instruments, including cash and cash equivalents, accounts receivable, inventory, prepaid expenses,
accounts payable, taxes payable, accrued liabilities and other payables, and loan from stockholder, approximated their fair values
due to the short nature of these financial instruments. There were no changes in methods or assumptions during the periods presented.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Prepaid
expenses
Prepaid
expenses primarily consist of promotion expenses, rent, advertising expenses and licensing fees.
Prepaid
promotion expenses represent prepayments made to resellers for distributing our products to retail stores. Prepaid promotion expenses
as of February 28, 2017, and November 30, 2016 were $2,653,684 and $4,275,602, respectively.
On
January 5, 2011, the Company entered into a license agreement for the technology utilized for the manufacture of its selenium
capsules and powder products from an unrelated third party for five years from January 2011 to December 2015. On December 30,
2015, the Company renewed the license agreement for another five years to December 2020 for $86,912 (RMB 600,000) each year. The
related prepaid licensing fees as of February 28, 2017, and November 30, 2016 were $72,785 and $7,259, respectively. The license
provides for renewal options. Since this agreement requires the advance payment of the annual licensing fee, there were no minimum
payments remaining under this agreement as of February 28, 2017 and November 30, 2016.
On
September 30, 2016, the Company entered into a six-month agreement with an advertising company for $908,725 (RMB 6,000,000). As
of February 28, 2017, and November 30, 2016, the unamortized balance of $145,570 and $605,816, respectively, was included in prepaid
expenses on the balance sheet.
Impairment
of long-lived assets
The
Company applies FASB ASC 360, “
Property, Plant and Equipment
,” which addresses the financial accounting and
reporting for the recognition and measurement of impairment losses for long-lived assets. In accordance with ASC 360, long-lived
assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The Company will recognize the impairment of long-lived assets in the event the net book value of such assets
exceeds the future undiscounted cash flows attributable to those assets. No impairment of long-lived assets was recognized for
the three months ended February 28, 2017 and February 29, 2016.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Statutory
reserve fund
Pursuant
to corporate law of the PRC, the Company is required to transfer 10% of its net income, as determined under PRC accounting rules
and regulations, to a statutory reserve fund until such reserve balance reaches 50% of the Company’s registered capital.
The statutory reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses,
if any, and may be utilized for business expansion or used to increase registered capital, provided that the remaining reserve
balance after use is not less than 25% of registered capital. The statutory reserve fund was $759,094 as of February 28, 2017
and November 30, 2016, respectively. As of November 30, 2016, the required statutory reserve fund has been fully funded.
Income
taxes
The
Company accounts for income taxes in accordance with FASB ASC 740, “
Income Taxes
” (“ASC 740”),
which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial
statement and income tax purposes. Deferred tax assets and liabilities represent the future tax consequences for those differences,
which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized
for operating losses that are available to offset future taxable income. A valuation allowance is established when necessary to
reduce deferred tax assets to the amount expected to be realized.
ASC
740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in
the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is
more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on
the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance
on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities,
and accounting for interest and penalties associated with tax positions. As of February 28, 2017 and November 30, 2016, the Company
does not have a liability for any unrecognized tax benefits. The Company’s tax filings are subject to examination by the
tax authorities. The tax years of 2013, 2014 and 2015 remain open to examination by tax authorities in the PRC.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Income
taxes (continued)
The
income tax laws of various jurisdictions in which the Company and its subsidiaries operate are summarized as follows:
United
States
The
Company is subject to United States tax at graduated rates from 15% to 35%. No provisions for income tax in the United States
have been made as the Company had no U.S. taxable income for the three months ended February 28, 2017 and February 29, 2016.
British
Virgin Islands
(“
BVI”)
Biotechnology
International is incorporated in the BVI and is governed by the income tax laws of the BVI. According to current BVI income tax
law, the applicable income tax rate for the Company is 0%.
Hong
Kong
Hong
Kong Gewang is incorporated in Hong Kong. Pursuant to the income tax laws of Hong Kong, the Company is not subject to tax on non-Hong
Kong source income.
The
People's Republic of China (“PRC”)
Gewang
Selenium and Guangdong Gewang are subject to an Enterprise Income Tax at 25% and file their own tax returns.
3.
|
RECENTLY
ISSUED ACCOUNTING STANDARDS
|
In
May 2014, the FASB issued ASU No. 2014-09, "
Revenue from Contracts with Customers
(Topic 606).'' This guidance supersedes
current guidance on revenue recognition in Topic 605, "
Revenue Recognition
.'' In addition, there are disclosure requirements
related to the nature, amount, timing, and uncertainty of revenue recognition. In August 2015, the FASB issued ASU No.2015-14
to defer the effective date of ASU No. 2014-09 for all entities by one year. For public business entities that follow U.S. GAAP,
the deferral results in the new revenue standard being effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2017, with early adoption permitted for interim and annual periods beginning after December 15, 2016.
In March 2016, the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers, with respect to
Principal versus Agent Considerations. In April 2016, the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts
with Customers, with respect to Identifying Performance Obligations and Licensing. In April 2016, the FASB additionally issued
Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers, with respect to Narrow-Scope Improvements and
Practical Expedients. In December 2016, the FASB issued Accounting Standards Update No. 2016-20, Revenue from Contracts with Customers,
with respect to Technical Corrections and Improvements. We do not believe this will have a material impact on our consolidated
financial statements as currently they are not effective.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
3.
|
RECENTLY
ISSUED ACCOUNTING STANDARDS (continued)
|
In
February 2016, the FASB issued ASU 2016-02, “
Leases
.” The new standard establishes a right-of-use (“ROU”)
model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer
than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense
recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and
operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial
statements, with certain practical expedients available. We do not believe this will have a material impact on our consolidated
financial statements as currently all leases are prepaid.
In
July 2015, the FASB issued ASU 2015-11 (Subtopic 330), “
Simplifying the Measurement of Inventory
,” which provides
guidance to companies who account for inventory using either the first-in, first-out (“FIFO”) or average cost methods.
The guidance states that companies should measure inventory at the lower of cost or net realizable value. Net realizable value
is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion,
disposal and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted.
This accounting standard update is not expected to have a material impact on the Company’s consolidated financial statements.
4.
|
RELATED
PARTY TRANSACTIONS
|
In
March 2016 the Company entered into a one year promotion agreement with Guangdong Tianmei, in which it now holds an indirect
30% ownership interest. The agreement expired on March 31, 2017. Under the agreement, Guangdong Tianmei introduced the
Company to Guangzhou Huayuda Commerce and Trade Co., Ltd. (“Guangzhou Huayuda”). Guangzhou Huayuda operated 14
stores in March 2016, and in August 2016 it expanded to 200 stores. The Company sells selenium enriched products to these
stores, and pays a monthly promotion fee to Guangdong Tianmei for each product sold in each store of RMB 108 (US$16.60).
Sales to Guangzhou Huayuda were approximately RMB 9,381,000 (US$1,359,000) for the three months ended February 28, 2017.
Promotion expenses incurred during the three months ended February 28, 2017 and February 29, 2016 were $356,686 and $0,
respectively.
The
Company entered into an agreement with Guangdong Tianmei on June 10, 2015 to license the use of the Company’s trademark
for 10 years. Trademark revenue recorded for the three months ended February 28, 2017 and February 29, 2016 were $1,470 and $0,
respectively. The future commitment is approximately $1,500 each year.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
4.
|
RELATED
PARTY TRANSACTIONS (continued)
|
Equity
investment
On
April 28, 2016, the Company's wholly-owned subsidiary, Biotechnology International, entered into an investment agreement with
Guangdong Tianmei. At that time, 88% of the equity in Guangdong Tianmei was owned by two individuals who together directly or
indirectly owned
approximately 57% of the
Company's
outstanding shares. The investment agreement required that Biotechnology International pay US$1,000,000 to acquire a 30% interest
in an Australian corporation, which would indirectly own all of the equity in Guangdong Tianmei.
The
acquisition by Biotechnology International of 30% of Tianmei Australia was completed in May 2016, at which time Tianmei Australia
acquired ownership, through subsidiaries, of Guangdong Tianmei.
The
net worth of Guangdong Tianmei at the time of the acquisition was $4,888,840, 30% of which was $1,466,652. As the Company and
Guangdong Tianmei were under common control at the time of the acquisition, the $466,652 by which the Company's share of the net
book value of Guangdong Tianmei exceeded the purchase price has been recorded as an increase to additional paid-in capital.
The
changes in the equity investment are summarized as follows:
|
|
|
February 28,
2017
|
|
|
November 30,
2016
|
|
|
|
|
|
|
|
|
|
|
Initial investment
|
|
$
|
1,466,652
|
|
|
$
|
1,466,652
|
|
|
Pro rata share of net income for the year ended November 30, 2016
|
|
|
4,536,760
|
|
|
|
4,536,760
|
|
|
Pro rata share of net income for the three months ended February 28, 2017
|
|
|
2,153,016
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment, end of year/period
|
|
$
|
8,156,428
|
|
|
$
|
6,003,412
|
|
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
|
4.
|
RELATED
PARTY TRANSACTIONS (continued)
|
Equity
investment (continued)
The following is a summarized
balance sheet of the investee as of February 28, 2017:
|
Current
assets
|
|
$
|
34,168,608
|
|
|
|
|
|
|
|
|
Noncurrent
assets
|
|
$
|
3,417,741
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
9,544,371
|
|
|
|
|
|
|
|
|
Noncurrent
liabilities
|
|
$
|
-
|
|
|
|
|
|
|
|
|
Equity
|
|
$
|
28,041,978
|
|
The
following is a summary of results of operations of the investee for the three months ended February 28, 2017:
|
Revenue
|
|
$
|
20,059,817
|
|
|
Cost
of revenue
|
|
|
(7,246,434
|
)
|
|
Expenses
|
|
|
(5,636,675
|
)
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
7,176,708
|
|
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
The
Company leased its warehouse and office space from an unrelated third party under a one-year operating lease, which expired on
July 1, 2016. The lease required the Company to prepay the total rent of US$86,912 (RMB 600,000) in advance for one year. On June
29, 2016, the Company renewed the lease with total rent of approximately US$86,900 (RMB 600,000), which commenced on July 2, 2016
and expires on July 1, 2017.
The
following additional leases are in effect at February 28, 2017:
|
●
|
The
Company leases its flagship store in Guangzhou from an unrelated third party. The lease
commenced on June 1, 2016 and expires on May 31, 2017. The lease required the Company
to prepay the rent of $145,396 (RMB 960,000) in advance for one year. The Company paid
the rent in June 2016.
|
|
●
|
The
Company leases its Foshan store, Longyan store and Zhuzhou store from three unrelated
third parties. All three leases commenced on June 1, 2016 and expire on May 31, 2017.
These leases each required the Company to prepay the rent of $63,611 (RMB 420,000) in
advance for one year. The Company fully paid the rent in June 2016. Since these leases
require the advance payment of the annual rent, there are no minimum payments remaining
under these leases.
|
Prepaid
lease payments were $109,905 and $ 221,123 at February 28, 2017 and November 30, 2016, respectively. Rent expense for the three
months ended February 28, 2017 and February 29, 2016 was $102,121 and $66,686, respectively.
Fixed
assets as of February 28, 2017 and November 30, 2016 are summarized as follows:
|
|
|
February 28,
2017
|
|
|
November 30,
2016
|
|
|
|
|
|
|
|
|
|
|
Electronic
equipment
|
|
$
|
126,190
|
|
|
$
|
125,850
|
|
|
Motor
vehicles
|
|
|
121,479
|
|
|
|
121,151
|
|
|
Office
equipment
|
|
|
12,063
|
|
|
|
12,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
259,732
|
|
|
|
259,032
|
|
|
Less:
accumulated depreciation
|
|
|
(143,681
|
)
|
|
|
(130,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets - net
|
|
$
|
116,051
|
|
|
$
|
128,767
|
|
For
the three months ended February 28, 2017 and February 29, 2016, depreciation expense was $13,000 and $10,108, respectively.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
The
Company obtained non-interest bearing demand loans from a former officer and stockholder, who resigned from office on April 8,
2016. The loans of $228,259 and $228,238 at February 28, 2017 and November 30, 2016, respectively, are reflected as loans from
third party.
The
Company obtained
non-interest bearing
demand loans from one of its stockholders.
The loans of $366,852 and $237,639 at
February 28, 2017
and November 30, 2016, respectively,
are reflected as loans from stockholder.
The
provision for income taxes for the three months ended February 28, 2017 and February 29, 2016 consisted of the following:
|
|
|
2017
|
|
|
2016
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Current
|
|
$
|
1,219,136
|
|
|
$
|
123,416
|
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,219,136
|
|
|
$
|
123,416
|
|
No
provisions for income taxes in the United States have been made. The Company did not generate any income in the United States
or otherwise have any U.S. taxable income. The Company does not believe that it has any U.S. Federal income tax liabilities with
respect to any transactions that the Company or any of its subsidiaries may have engaged in through February 28, 2017. However,
there can be no assurance that the Internal Revenue Service (“IRS”) will agree with this position, and therefore the
Company ultimately could be liable for U.S. Federal income taxes, interest and penalties. The tax years ended November 30, 2015
and December 31, 2014 and 2013 remain open to examination by the IRS.
The
Company did not file on time its U.S. federal income tax returns, including, without limitation, information returns on IRS Form
5471, “
Information Return of U.S. Persons with Respect to Certain Foreign Corporations
” for the short year
tax return ended November 30, 2015 filed as a result of the change in fiscal year. Failure to furnish any income
tax returns and information returns with respect to any foreign business entity required, within the time prescribed by the IRS,
subjects the Company to certain civil penalties. Management is of the opinion that penalties, if any, that may be assessed would
not be material to the consolidated financial statements.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
9.
|
CONCENTRATION
OF CREDIT AND BUSINESS RISKS
|
Cash
and cash equivalents
Substantially
all of the Company’s assets and bank accounts are in banks located in the PRC and are not covered by protection similar
to that provided by the FDIC on funds held in United States banks.
Major
customers
For
the three months ended February 28, 2017, three customers accounted for 62% of total sales, the largest of which accounted for
25%. For the three months ended February 29, 2016, no customers accounted for over 10% of total sales. As of February 28, 2017,
three customers accounted for 67% of trade accounts receivable, the largest of which accounted for 27%. As of November 30, 2016,
three customers accounted for 64% of trade accounts receivable, the largest of which accounted for 24%
Vulnerability
Due to Operations in the PRC
The
Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although
the PRC government has been pursuing economic reform policies for more than twenty years, no assurance can be given that the PRC
government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event
of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic
and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent
or effective. The economy in the PRC has recently started to narrow.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)
10.
|
COMMITMENTS
AND CONTINGENCIES
|
On
December 30, 2015, the Company entered into a technology usage agreement with the Academy for the right to use a non-patented
selenium-enrichment technology for its supplements manufacturing. The agreement commenced on December 30, 2015 and expires on
December 29, 2020. The annual fee of RMB 600,000 (approximately US$87,000) is required to be paid in advance before December 30
each year.
On
April 8, 2016, Guangdong Gewang entered into a Performance Salary Assessment Agreement with the Company’s Chief Executive
Officer (“CEO”). The agreement states that the CEO would receive additional monthly compensation of RMB 50,000 (approximately
US$7,000), only when the monthly net income of Guangdong Gewang exceeds RMB 2,500,000 (approximately US$363,000). The agreement
commenced on April 8, 2016 and expired on April 7, 2017. For three months ended February 28, 2017, the CEO received additional
monthly compensation in each month.
On
July 1, 2016, the Company entered into three year agreements with four of its directors for total compensation of approximately
$15,000 (RMB 110,000) per month.
As
of September 1, 2016, the Company has a long-term agreement with the Academy. This agreement entitles the Company to the exclusive
right of first refusal to use the research related to advanced selenium-enrichment techniques and technology that the Academy
develops. The agreement calls for quarterly payments of approximately $579,700 (RMB 4,000,000). For the use of the techniques
and/or technology developed, additional charges will be negotiated.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
(UNAUDITED) (IN U.S. $)