NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED MAY
31, 2017 AND 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 its 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.
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.
CHINA GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED MAY
31, 2017 AND 2016
(UNAUDITED) (IN U.S. $)
|
1.
|
ORGANIZATION (continued)
|
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 Company’s
business, through its operating entity in China (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 rights to contract for the manufacture and marketing of selenium products, comprised
of two selenium capsules and one selenium powder, using three selenium formulas developed and owned by the Academy.
Sale
of selenium products
Since March 2016, the Company has signed agreements
with distributors to distribute 89 distinct selenium products to hundreds of retail stores. The products include processed foods
such as selenium enriched porridge, ready to eat foods such as selenium-enriched peanuts, and ingredients such as selenium enriched
flour. The Company is actively engaged in marketing healthy selenium rich foods including Selenium-Rich Maize Residue, Selenium-Rich
Brown Rice. Selenium Enriched Black Beans, Selenium-Enriched Buckwheat Kernel and Selenium-Enriched Ormosia. These foods compliment
the Company’s selenium supplements by raising awareness of the need for selenium in the diets of our target consumer market.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED MAY
31, 2017 AND 2016
(UNAUDITED) (IN U.S. $)
|
1.
|
ORGANIZATION (continued)
|
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. The $1,000,000 purchase price was paid in full on June 17, 2016. Concurrently. Tianmei
Australia acquired ownership, through its wholly owned subsidiaries, of Guangdong Tianmei.
On February 23,
2017, Guangdong Tianmei entered into an acquisition agreement with Chenzhou Qianlifeng Beverage Co., Ltd. (“Chenzhou Qianlifeng”).
Chenzhou Qianlifeng specializes in the bottling and packaging of selenium-rich water. Chenzhou Qianlifeng had a contract with
Guangdong Tianmei, to bottle the 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 purchase price was fully paid on February 23, 2017.
CHINA GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED MAY
31, 2017 AND 2016
(UNAUDITED) (IN U.S. $)
|
1.
|
ORGANIZATION (continued)
|
Equity investment:
Guangdong Tianmei
As a result of
the entry into the foregoing agreements, the Company has a corporate structure which is as follows:
|
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.
CHINA GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED MAY
31, 2017 AND 2016
(UNAUDITED) (IN U.S. $)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Basis of accounting
and presentation (continued)
The unaudited
interim consolidated financial statements of the Company as of May 31, 2017, and for the three and six months ended May 31, 2017
and 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 and six months ended May 31, 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 30% 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 cost of this investment
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 investment because the Company has the ability to exercise significant influence
over Tianmei Australia and its subsidiaries.
The consolidated
financial statements and notes thereto are presented in United States dollars (“US Dollar” or “US$” or
“$”).
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.
CHINA GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED MAY
31, 2017 AND 2016
(UNAUDITED) (IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Foreign currency
translations
Almost all of
the Company assets are located in the PRC. The functional currency for the Company’s operations is the Renminbi (“RMB”).
The Company uses the United States Dollar (“US Dollar” or “US$” 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).
The exchange rates
used to translate amounts in RMB into US Dollars for the purposes of preparing the financial statements are as follows:
|
|
|
May
31,
2017
|
|
|
November 30, 2016
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Balance sheet items, except for stockholders’ equity, as of periods end
|
|
|
0.1474
|
|
|
|
0.1452
|
|
|
|
|
Three Months Ended
|
|
|
|
|
May 31, 2017
|
|
|
May 31, 2016
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Amounts included in the statements of income and comprehensive income, changes in stockholders’ equity and cash flows for the periods presented
|
|
|
0.1451
|
|
|
|
0.1537
|
|
|
|
|
Six Months Ended
|
|
|
|
|
May 31, 2017
|
|
|
May 31, 2016
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Amounts included in the statements of income and comprehensive income, changes in stockholders’ equity and cash flows for the periods presented
|
|
|
0.1454
|
|
|
|
0.1535
|
|
CHINA GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED MAY
31, 2017 AND 2016
(UNAUDITED) (IN U.S. $)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Foreign currency
translations (continued)
The exchange rate
used to translate amounts in Australian Dollars into US Dollars for the purpose of preparing the financial statements are as follows:
|
|
|
May 31,
2017
|
|
|
November 30, 2016
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Balance sheet items, except for stockholders’ equity, as of periods end
|
|
|
0.7435
|
|
|
|
0.7388
|
|
|
|
|
Three Months Ended
|
|
|
|
|
May 31, 2017
|
|
|
May 31, 2016
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Amounts included in the statements of income and comprehensive income, changes in stockholders’ equity and cash flows for the periods presented
|
|
|
0.7560
|
|
|
|
0.7492
|
|
|
|
|
Six Months Ended
|
|
|
|
|
May 31, 2017
|
|
|
May 31, 2016
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Amounts included in the statements of income and comprehensive income, changes in stockholders’ equity and cash flows for the periods presented
|
|
|
0.7505
|
|
|
|
0.7314
|
|
For
the three months ended May 31, 2017 and 2016, foreign currency translation adjustments of
$442,410
and
$(122,371), respectively, and for the six months ended May 31, 2017 and 2016, $501,254 and $(308,784), 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 AND SIX MONTHS ENDED MAY
31, 2017 AND 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
Retail Revenue
Company-operated retail
store revenues are recognized when payment is tendered at the point of sale.
CHINA GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED MAY
31, 2017 AND 2016
(UNAUDITED) (IN U.S. $)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Revenue recognition (continued)
The Company’s
net revenues for the three and six months ended May 31, 2017 and 2016 were comprised as follows:
|
|
|
Three months
ended
May 31,
2017
|
|
|
Three months
ended
May 31,
2016
|
|
|
|
|
|
|
|
|
|
|
Wholesale gross revenue-selenium supplements
|
|
$
|
3,145,551
|
|
|
$
|
3,660,259
|
|
|
Wholesale gross revenue-selenium products
|
|
|
19,018,207
|
|
|
|
1,295,138
|
|
|
Less: promotion fees-selenium products,
|
|
|
(2,090,364
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale revenues, net
|
|
|
20,073,394
|
|
|
|
4,955,397
|
|
|
Retail revenue-selenium supplements
|
|
|
1,254,615
|
|
|
|
481,786
|
|
|
Retail revenue-selenium products
|
|
|
936,725
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,264,734
|
|
|
$
|
5,437,183
|
|
|
|
|
Six months
ended
May 31,
2017
|
|
|
Six months
ended
May 31,
2016
|
|
|
|
|
|
|
|
|
|
|
Wholesale gross revenue-selenium supplements
|
|
$
|
6,220,654
|
|
|
$
|
3,660,259
|
|
|
Wholesale gross revenue-selenium products
|
|
|
37,031,232
|
|
|
|
2,124,223
|
|
|
Less: promotion fees-selenium products,
|
|
|
(4,164,776
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale revenues, net
|
|
|
39,087,110
|
|
|
|
5,784,482
|
|
|
Retail revenue-selenium supplements
|
|
|
2,462,150
|
|
|
|
870,799
|
|
|
Retail revenue-selenium products
|
|
|
1,857,606
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
43,406,866
|
|
|
$
|
6,655,281
|
|
Shipping costs
Shipping costs incurred by the Company are recorded
as selling expenses. Shipping costs for the three and six months ended May 31, 2017 and 2016 were $20,045 and $24,427, respectively,
$45,638 and $39,453, respectively.
CHINA GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED MAY
31, 2017 AND 2016
(UNAUDITED) (IN U.S. $)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Advertising costs
Advertising costs
are charged to operations when incurred. For the three and months ended May 31, 2017 and 2016, advertising expenses were $437,957
and $23,057, respectively, $887,001 and $44,519, 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.
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 May 31,
2017 and November 30, 2016, accounts receivable was $14,336,885 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 has not had 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 May 31, 2017 and November 30, 2016.
CHINA GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED MAY
31, 2017 AND 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.
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 AND SIX MONTHS ENDED MAY
31, 2017 AND 2016
(UNAUDITED) (IN U.S. $)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Prepaid expenses
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 May 31, 2017, and November 30, 2016 were $51,594 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 May 31, 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). On
April
1
, 2017, the Company renewed the advertising agreement for another six months which started on April
1, 2017 and ends on September 30, 2017. As of May 31, 2017, and November 30, 2016, the unamortized balance of $589,640 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 and six months
ended May 31, 2017 and 2016.
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 May 31, 2017 and November 30, 2016, respectively.
As of November 30, 2016, the required statutory reserve fund has been fully funded.
CHINA GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED MAY
31, 2017 AND 2016
(UNAUDITED) (IN U.S. $)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
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 May 31, 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.
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 and six months ended May 31, 2017 and 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%.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED MAY 31, 2017 AND 2016
(UNAUDITED)
(IN U.S. $)
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Income
taxes (continued)
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 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 standard will have a material impact on our consolidated financial statements.
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 standard will have a material impact on our consolidated
financial statements as currently all leases are prepaid.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED MAY 31, 2017 AND 2016
(UNAUDITED)
(IN U.S. $)
|
3.
|
RECENTLY
ISSUED ACCOUNTING STANDARDS (continued)
|
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.
In
August 2014, the FASB issued authoritative guidance that requires an entity’s management to evaluate whether there are conditions
or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern
and requires additional disclosures if certain criteria are met. This guidance is effective for fiscal periods ending after December
15, 2016, with early adoption permitted. This accounting standard update is not expected to have a material impact on the Company’s
consolidated financial statements.
|
4.
|
RELATED
PARTY TRANSACTIONS
|
The
Company entered into a one-year promotion agreement that expired on March 31, 2017 with Guangdong Tianmei, in which it holds an
indirect 30% ownership interest and renewed the promotion agreement on March 31, 2017 for one year expiring on March 31, 2018.
Under the agreement, Guangdong Tianmei introduced the Company to Guangzhou Huayuda Commerce and Trade Co., Ltd. (“Guangzhou
Huayuda”), which initially had 14 supermarket stores and in August 2016 expanded to 200 stores. The Company sells selenium
enriched products to these supermarkets 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 5,366,000 (US$780,000) and RMB 1,154,000 (US$177,000),
respectively, RMB 14,747,000 (US$2,144,000) and RMB 1,154,000 (US$177,000), respectively, for the three and six months ended May
31, 2017 and 2016. Promotion expenses incurred during the three and six months ended May 31, 2017 and 2016 were $357,373 and $20,421,
respectively, $716,115 and $20,421, 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 and six months ended May 31, 2017 and 2016 were $0 and $0, respectively,
$1,412 and $1,490, respectively. The future commitment is approximately $1,400 each year.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED MAY 31, 2017 AND 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 100% 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 its wholly owned 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 had been recorded as an increase to additional paid-in capital.
The
changes in the equity investment are summarized as follows:
|
Initial investment-April 28, 2016
|
|
$
|
1,466,652
|
|
|
Pro rata share of net income for the year ended November 30, 2016
|
|
|
4,536,760
|
|
|
|
|
|
|
|
|
Investment, November 30, 2016
|
|
|
6,003,412
|
|
|
Pro rata share of net income for the six months ended May 31, 2017
|
|
|
4,665,947
|
|
|
|
|
|
|
|
|
Investment, May 31, 2017
|
|
$
|
10,669,359
|
|
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED MAY 31, 2017 AND 2016
(UNAUDITED)
(IN U.S. $)
|
4.
|
RELATED
PARTY TRANSACTIONS (continued)
|
Th
e
following is summarized balance sheet information of the investee
as of
ended May 31, 2017:
|
Current assets
|
|
$
|
51,625,008
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
$
|
1,825,790
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
3,123,635
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
$
|
-
|
|
|
|
|
|
|
|
|
Equity
|
|
$
|
50,327,163
|
|
The
following is a summary of results of operations of the investee for the six months ended May 31, 2017:
|
Revenue
|
|
$
|
39,446,904
|
|
|
Cost of revenue
|
|
|
(13,228,818
|
)
|
|
Expenses
|
|
|
(12,383,619
|
)
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,834,467
|
|
The
Company leases its warehouse and office space from an unrelated third party under a one-year operating lease. 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 were in effect at May 31, 2017:
|
●
|
The
Company leases its flagship store in Guangzhou from an unrelated third party. The lease
commenced on June 1, 2016 and was to expire on May 31, 2017, and was renewed for another
year. The lease required the Company to prepay the rent of $154,514(RMB 960,000) in advance
for one year. The Company paid the rent in June 2017.
|
|
●
|
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 were to expire on May 31,
2017 and were renewed for another year and expire on May 31, 2018. These leases each
required the Company to prepay the rent of $61,912 (RMB 420,000) in advance for one year.
The Company fully paid the rent in June 2017. Since these leases require the advance
payment of the annual rent, there are no minimum payments remaining under these leases.
|
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED MAY 31, 2017 AND 2016
(UNAUDITED)
(IN U.S. $)
Prepaid
lease payments were $7,371 and $ 221,123 at May 31, 2017 and November 30, 2016, respectively. Rent expense for the three and six
months ended May 31, 2017 and 2016 was $102,907 and $66,872, respectively, $205,028 and $133,557, respectively.
Fixed
assets as of May 31, 2017 and November 30, 2016 are summarized as follows:
|
|
|
May
31,
2017
|
|
|
November 30,
2016
|
|
|
|
|
|
|
|
|
|
|
Electronic equipment
|
|
$
|
127,785
|
|
|
$
|
125,850
|
|
|
Motor vehicles
|
|
|
123,014
|
|
|
|
121,151
|
|
|
Office equipment
|
|
|
12,216
|
|
|
|
12,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
263,015
|
|
|
|
259,032
|
|
|
Less: accumulated depreciation
|
|
|
(158,726
|
)
|
|
|
(130,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets - net
|
|
$
|
104,289
|
|
|
$
|
128,767
|
|
For
the three and six months ended May 31, 2017 and 2016, depreciation expense was $13,050 and $14,653, respectively, $26,050 and
$24,761, respectively.
The
Company obtained non-interest bearing demand loans from a former officer and stockholder, who resigned on April 8, 2016. The loans
of $228,359 and $228,238 at May 31, 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 $407,677 and $237,639 at
May 31, 2017
and November 30, 2016, respectively,
are reflected as loans from stockholder.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED MAY 31, 2017 AND 2016
(UNAUDITED)
(IN U.S. $)
The
provision for income taxes for the three and six months ended May 31, 2017 and 2016 consisted of the following:
|
|
|
Three Months Ended
May 31,
|
|
|
Six Months Ended
May 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
1,319,811
|
|
|
$
|
416,553
|
|
|
$
|
2,546,163
|
|
|
$
|
539,969
|
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,319,811
|
|
|
$
|
416,553
|
|
|
$
|
2,546,163
|
|
|
$
|
539,969
|
|
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 May 31, 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, 2016 and December
31, 2015 and 2014 remain open to examination by the IRS.
The
Company has not established deferred income taxes on accumulated undistributed earnings of Tianmei Australia. Such earnings are
expected to remain reinvested indefinitely. Further, repatriation of all accumulated earnings would be impracticable to the extent
that such earnings represents capital needed to support normal business operations.
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.
|
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.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED MAY 31, 2017 AND 2016
(UNAUDITED)
(IN U.S. $)
|
9.
|
CONCENTRATION
OF CREDIT AND BUSINESS RISKS (continued)
|
Major
customers
For
the three and six months ended May 31, 2017, three customers accounted for 66% and 64% of total sales, respectively, the largest
of which accounted for 25% and 25%, respectively. For the three and six months ended May 31, 2016, three customers accounted for
64% and 64% of total sales, respectively, the largest of which accounted for 29% and 27%, respectively. As of May 31, 2017, three
customers accounted for 71% 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.
|
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.
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. The agreement expires
on August 31, 2026.
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
was to expire on April 7, 2017 and was renewed for an additional year. For the three and six months ended May 31, 2017, the CEO
received $21,000 and $42,000, respectively, as additional monthly compensation. For the three and six months ended May 31, 2016,
the CEO received $7,000 and $7,000, respectively, as additional monthly compensation.
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.
CHINA
GEWANG BIOTECHNOLOGY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED MAY 31, 2017 AND 2016
(UNAUDITED)
(IN U.S. $)