Notes to the Unaudited Condensed Consolidated
Financial Statements
1. Organization and Nature of Operations:
Business Description
Chineseinvestors.com,
Inc. (the “Company”) was incorporated on January 6, 1997 in the State of Indiana under the corporate name “MAS
Acquisition LII Corp.” Prior to June 12, 2000, the Company was a ‘blank check’ company seeking a business combination
with an unidentified business. On June 12, 2000, the Company acquired 8,200,000 shares of common stock, representing 100% of the
outstanding shares of Chineseinvestors.com, Inc., which was incorporated in the State of California on June 15, 1999. In connection
with this acquisition, Aaron Tsai, the Company’s former sole officer and director, was replaced by Chineseinvestors.com,
Inc.’s officers and directors. After giving effect to the acquisition, Chineseinvestors.com, Inc. became a wholly owned subsidiary
and the name was changed to Chineseinvestors.com, Inc.
Chineseinvestors.com,
Inc. was established as an ‘in language’ (Chinese) financial information web portal, offering news and information
relative to the US Equity and Financial Markets, as well as certain other specific financial markets (including China A Shares,
FOREX, etc.). Over the years, various informational components have been added and the general content of the web portal has improved
as the Company continues to derive a material portion of its income from the various subscription services it offers to its customers,
which provide investment education, news and analysis on the US Equity and Financial Markets as well as news about particular stocks
that we are following. Nevertheless, the Company does not provide subscribers with individualized investment advice and never has
investment discretion over any subscribers’ or site visitors’ funds. In addition, the Company provides investor relations
services for other companies, especially those requiring Mandarin language support, which now accounts for one of the Company’s
most significant revenue sources. These services typically include translating client releases into English from Mandarin or vice
versa, featuring client advertisements on the www.chinesefn.com website, and assisting clients to achieve goals which may be to
increase stock price, to increase awareness about clients and their stock, or to helping clients to move from pink sheets to an
established public securities market. Not all of those goals are shared by every client. Promotions geared to the Chinese American
market are the underlying common thread, generally in the form of advertisements on the chinesefn.com website. In exchange for
services provided, the Company generally receives fees consisting of cash, client securities, or a combination of cash and equity.
Chineseinvestors.com,
Inc. has been in continuous operation since July 1999 using the web domains (uniform resource locators) www.chineseinvestors.com
and www.chinesefn.com. The Company has representative offices in leased office space in Shanghai, China, where most support services
are fulfilled, San Gabriel, California, and Flushing, NY.
In March 2017,
the Company established and registered XiBiDi Biotechnology Co. Ltd./CBD Biotechnology Co. Ltd. (“CBD Biotech”) in
Pudong Free-Trade Area in Shanghai, PRC as a wholly owned foreign enterprise (“WOFE”). CBD Biotech’s primary
focus is online and retail sales of industrial hemp-infused cosmetics and liquor in PRC.
In April 2017,
the Company established ChineseHempOil.com, Inc., dba “Chinese Wellness Center,” (referred to as CHO) a Delaware corporation,
as a subsidiary of the Company in San Gabriel, California. CHO is responsible for the development and operation of the online and
retail sales of industrial hemp products in the United States.
The Company also
incorporated two subsidiaries - Hemp Logic, Inc. (“Hemp Logic”) and CIIX Online, Inc., both Delaware corporations in
April 2017. The two wholly owned subsidiaries never operated since their inception. However, on or about November 11, 2019, Hemp
Logic, CBD Biotech and ChineseInvestors.com, Inc. entered into a Share Exchange Agreement (“SEA”) pursuant to which
the Company sold/transferred to Hemp Logic its one hundred percent (100%) equity interest in CBD Biotech in exchange for newly
issued Class A Common Stock, par value $0.0001 and Class B Common Stock, par value $0.0001. CBD Biotech become a wholly-owned subsidiary
of Hemp Logic and the Company become a majority owner of Hemp Logic. Hemp Logic issued the Company an aggregate of four million
eight hundred forty- one thousand seven hundred thirty-nine (4,841,739) newly-issued Class A Common Stock, par value $0.0001 per
share and Class B Common Stock, par value $0.0001 per share of Hemp Logic in the aggregate (the “Hemp Logic Shares”),
After the SEA, one hundred percent (“100%”) of the equity interests of CBD Biotech are owned by Hemp Logic and approximately
83.9% of Hemp Logic is owned by the Company. The closing of the exchange took place on December 31, 2019. All operations
will be conducted through Hemp Logic and CBD Biotech will continue to operate two business lines, cosmetics and liquor. As of February
29, 2020, the Company owns 77% of Hemp Logic.
In June 2017, the Company formed CBD Biotechnology
Ltd. (“CBD Canada”), a corporation incorporated in the Province of British Columbia, which was slated to focus on the
sales of industrial hemp-products, via online and other distribution channels. CBD Canada has not generated any revenue as of February
29, 2020.
In or about March 2018, the Company established
Bitcoin Trading Academy, LLC, a California limited liability company, formerly known as Stock Surge Momentum. LLC, a California
limited liability company (“BTA LLC”), with Warren (Wei) Wang, the Company’s CEO, as its sole managing member.
Mr. Wang has transferred all of his interest in BTA, LLC to the Company for $1 consideration. BTA LLC began offering in person
and on-line courses on cryptocurrency investment and trading education in July 2018. BTA LLC has since ceased to offer its cryptocurrency
news and courses due to decreased consumer demand, presumably related to the 2018 Cryptocurrency Crash. Although the cryptocurrency
market is slowly rebounding, currently, the Company does not have short-term plans to resume these programs.
In April 2018, the Company established
NewCoins168.com Digital Media Technology Ltd. (Shanghai) as a WOFE registered in China Free Trade Zone, with registered capital
of 10 million RMB. There are no revenues as of February 29, 2020.
In August 2018, the Company formed CIIX
Online Ltd. (“CIIX Online”), a corporation incorporated in the Province of British Columbia, which was anticipated
to focus on the sales of the Company’s subscription service to consumers. There are no revenues as of February 29, 2020.
Donald Capital, LLC, is a Delaware limited
liability company established on May 7, 2018. In exchange for capital contributions totaling $160,000 from ChineseInvestors.com,
Inc., the Company received a 24.99% interest in Donald Capital LLC. The remaining 75.1% is held equally by Hamilton Strategy Group,
Inc. and McDonald Global Enterprises LLC. Alex Hamilton is the CFO of Hemp Logic, Inc. and is the President of Donald Capital LLC.
Mr. Hamilton is also the owner of Hamilton Global Strategy. Donald Capital LLC is a registered broker dealer approved by FINRA
effective May 14, 2019. On or about February 5, 2020, by unanimous written consent of the Company’s Board of Directors, the
Company approved a resolution to sell its 24.9% interest in Donald Capital LLC to a qualified buyer on terms to be agreed upon.
To date, no buyer has been procured.
2. Liquidity and Capital Resources:
Cash Flows – During
the nine months ended February 29, 2020, the Company primarily generated cash from issuances of its debts to fund its operations.
The Company received total proceeds of $3,150,002 of proceeds from the issuance of unsecured promissory notes which accrue interest
at the rate of 10% per annum for the nine months ended February 29, 2020.
Cash flows used in operations for the nine
months ended February 29, 2020 and 2019 were $5,237,878 and $8,398,744, respectively. The decreased cash used in operations was
due to a reduction in general and administrative expenses used in operations.
Capital Resources –
As of February 29, 2020, the Company had cash and cash equivalents of $537,902 as compared to cash and cash equivalents of $1,311,984
as of May 31, 2019.
Since inception in 1997, the Company has
primarily relied upon proceeds from private placements of its equity securities to fund its operations. The Company anticipates
continuing to rely on sales of our securities in order to continue to fund business operations. Issuances of additional shares
will result in dilution to its existing stockholders. There is no assurance that the Company will be able to complete any additional
sales of our equity securities or that it be able arrange for other financing to fund our planned business activities.
Going Concern – The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. There is potential
that the Company will not continue as a going concern. The recoverability of recorded property and equipment, intangible assets,
and other asset amounts shown in the accompanying financial statements is dependent upon the Company’s ability to continue
as a going concern and to achieve a level of profitability. The Company intends on financing its future activities and its working
capital needs largely from the sale of equity securities until such time that funds provided by operations are sufficient to fund
working capital requirements. However, there can be no assurance that the Company will be successful in its efforts. The financial
statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets,
or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
3. Critical Accounting Policies and
Estimates:
Basis of Presentation –
The accompanying condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America for interim financial information and in accordance
with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and
note disclosures required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete audited consolidated
financial statements. The accompanying unaudited financial information should be read in conjunction with the audited consolidated
financial statements, including the notes thereto, as of and for the year ended May 31, 2019, included in our 2019 Annual Report
on Form 10-K filed with the SEC. The information furnished in this report reflects all adjustments (consisting of normal recurring
adjustments), which are, in the opinion of management, necessary for a fair presentation of our financial position, results of
operations and cash flows for each period presented. The results of operations for the three and nine months ended February 29,
2020 are not necessarily indicative of the results for the year ending May 31, 2020 or for any future period.
These accompanying
consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United
States of America (“US GAAP”). The consolidated financial statements include the operations of Chineseinvestors.com
Inc. and its subsidiaries. The Company’s wholly owned subsidiaries include ChineseHempOil.com Inc, CBD Biotechnology Co.
Ltd., CIIX Online, NewCoins168.com Digital Media Technology Ltd., Bitcoin Trading Academy LLC, CIIX Online Ltd and Blue Ocean Capital
Holding LLC. The Company’s subsidiaries include 77% of CBD Biotech, Inc., Hemp Logic, of which 23% of Hemp Logic’s
consolidated operating results were shown in non-controlling interest on the consolidated balance sheets. Intercompany accounts
and transactions have been eliminated upon consolidation.
Certain reclassifications
have been made to the consolidated financial statements for prior years to the current year’s presentation. Such reclassifications
have no effect on net income as previously reported.
Use of Estimates –
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The financial statements include some amounts
that are based on management's best estimates and judgments. The most significant estimates relate to depreciation and useful lives,
and contingencies. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant.
Recently Adopted Accounting Pronouncements:
Lease
The Company adopted
Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842),
as of June 1, 2019, using a modified retrospective transition method and as a result, the consolidated balance sheet prior to June
1, 2019 was not restated, continues to be reported under ASC Topic 840, Leases, or ASC 840. For all leases at the lease commencement
date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased
asset for the lease term. The lease liability represents the present value of the lease payments under the lease.
The lease liability
is based on the present value of the remaining minimum lease payments, determined under ASC 842, discounted using our incremental
borrowing rate at the effective date of June 1, 2019, using the original lease term as the tenor. As permitted under the transition
guidance, we elected several practical expedients that permit us to not reassess (1) whether a contract is or contains a lease,
(2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect
costs. The application of the practical expedients did not have a significant impact on the measurement of the operating lease
liability. Adoption of the new standard resulted in the recording of operating right of use assets and the related lease liabilities
of approximately $891,371 and $925,816, respectively, as of June 1, 2019. The difference between the additional lease assets and
lease liabilities was $34,445. The standard did not materially impact our consolidated operating results and had no impact on cash
flows. Please see Note 11.
Stock Compensation
The Company adopted
ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, effective
for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year.
Revenue from Contracts with
Customers – On June 1, 2018, the Company adopted Financial Accounting Standards Board ("FASB")
Accounting Standards Update ("ASU") No. 2014-09, with regard to FASB ASC 606 Revenue from Contracts with
Customers, and have revised certain related accounting policies in connection with revenue recognition and deferred
costs, as follows:
The Company’s
revenue was mainly derived from four sources:
|
1.
|
Investor-relations service income
|
Investor-relations service income is earned by the Company in
return for delivering current, publicly available information related to our clients.
|
a.
|
Identify contracts with clients. The Company enters into service agreements with clients. The Company always discloses the nature of the contract including the contact price.
|
|
b.
|
Identify performance obligations in the contract. Many of our investor-relations service contracts contain multiple performance obligations, including presentation of clients’ information on Chinesefn.com, translation of client all materials to be released, and monthly presentation in the newsletter the Company sends to its registered members. We account for individual performance obligations separately if they are distinct. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.
|
|
c.
|
Determine the transaction price. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. Judgment is required to determine the standalone selling price for each distinct performance obligation. We typically have more than one standalone selling price for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we determine the standalone selling price based on our overall pricing objectives, taking into consideration contract term, industry relevance and other factors. Fees are fixed based on rates specified in the service provided agreements, which do not provide for any refunds or adjustments. In determining the transaction price, the effects of the time value of money is not accounted as the normal term of our service provider agreements are one year or less.
|
|
d.
|
The service contract amount is valued based upon the fair market value of the clients’ stock closing price at the contract date multiplied by the numbers of shares earned when the service is paid by clients’ common stocks other than cash. For the performance obligations, such as the availability of our clients’ information in our website, the revenue is recognized over the term of the services period while the services are being provided.
|
|
e.
|
For the performance obligations will be surrendered at a point of time, the revenue is recognized after the service is provided. In addition, the Company is applying the definition of readily determinable fair value presented at Accounting Standards Codification 820-10-15-5 in assessing the amount to recognize in each accounting period.
|
|
2.
|
Subscription income is recognized over the term of the subscription membership. Subscription fees for our registered members are charged on a per-month basis. Our customers do not have rights to the underlying software code of our solutions, and accordingly, we recognize subscription revenue over time on a straight-line basis over the contract term beginning on the date that our service is made available to the customer. Subscription terms are generally between one to three years but can occasionally be as short as one month or as long as 60 months. Long term deferred revenues are recognized from subscriptions over twelve months.
|
|
3.
|
The Company recognizes revenue of product sales of hemp-related products and liquor distribution upon transfer of title to the customer. Customer purchase orders and/or contracts are generally used to determine the existence of contract. Shipping documents and terms and the completion of any customer acceptance requirements, when applicable, are used to verify product delivery, or to satisfy the performance obligation. The Company determines and allocates the transaction price based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. The Company has minimal product returns or sales discounts and allowances because goods delivered and accepted by customers are normally not returnable.
|
|
4.
|
Other revenues include various fee-based income earned through banner advertisements, webpage hosting and maintenance, on-line promotion and translation services, advertising and promotion fees on the Company’s website, sponsorship fees from investment seminars, road shows, forums on the Company’s website, and referral fees from cryptocurrency referrals. The sales prices of these services are fixed and determinable at the time the contracts are signed and there are no provisions for refunds contained in these contracts. These revenues are recognized when all significant performance obligations have been satisfied and collection of the resulting receivable is reasonably assured.
|
There is no significant adjustment from the implementation of
ASU 2014-09.
Financial Instruments –
Recognition and Measurement – Recognition and measurement of financial assets and financial liabilities - In
January 2016, the FASB issued ASU 2016-01 amending various aspects of the recognition, measurement, presentation, and
disclosure requirements for financial instruments. The changes mainly relate to the requirement to measure equity investments
in unconsolidated subsidiaries, other than those accounted for under the equity method of accounting, at fair value with
changes in fair value recognized in earnings. However, this ASU permits entities to elect to measure equity investments that
do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from
observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This ASU is
effective for the Company as of June 1, 2018.
As a result of
the adoption of this ASU, the Company reclassified $486,789 in the net unrealized losses, net of tax, on equity securities previously
classified as available-for-sale, from accumulated other comprehensive loss to accumulated deficit. In addition, changes in value
due to the revaluation of equity securities are recorded in unrealized gain on equity securities, net in the consolidated statement
of comprehensive (loss) and income.
The equity investment
without readily determinable fair value held by the Company is the long-term investment in Donald Capital LLC. The Company elects
to measure the equity investment using measurement alternative and records the investment at cost minus impairment, if any, plus
or minus changes resulting from qualifying observable prices changes. In addition, the existing impairment model has been replaced
with a new one-step qualitative impairment model. No initial adoption adjustment was recorded for these instruments since the guidance
is required to be applied prospectively for securities measured using the measurement alternative. There is no adjustment to the
cost of the equity investment in Donald Capital, LLC for the three and nine months ended February 29, 2020 as no impairment indicator
was observed by management.
Cash and Cash Equivalents
– The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents.
There were no cash equivalents as of February 29, 2020 and May 31, 2019.
Accounts Receivable, Net
– The Company extends unsecured credit to its customers in the ordinary course of business. Accounts receivable are reported
at their outstanding unpaid principal balances net of allowances for uncollectible accounts. The Company provides for allowances
for uncollectible receivables based on management’s estimate of uncollectible amounts considering age, collection history,
and any other factors considered appropriate. The Company writes off accounts receivable against the allowance for doubtful accounts
when a balance is determined to be uncollectible.
The Company recorded $413,000 and $0 bad
debt expense for the three months ended February 29, 2020 and 2019, respectively, and $593,238 and $0 bad debt expense for the
nine months ended February 29, 2020 and 2019, respectively.
Marketable equity securities
– Marketable equity securities is comprised of publicly traded stocks received in return for providing investor relations
services to the Company’s clients. The service terms range from one month to a year. The Company considers the securities
to be liquid and convertible to cash in under a year. The Company has the ability and intent to liquidate any security that the
Company holds to fund operations over the next twelve months, if necessary, and as such has classified all of its marketable securities
as short-term.
In accordance
with the provisions of topic 820-10-15-5, which states that an equity security has a readily determinable fair value if it meets
the condition of having a “sales prices or bid-and-asked quotations which are currently available on a securities exchange
registered with the U.S. Securities and Exchange Commission (SEC) or in the over-the-counter market, provided that those prices
or quotations for the over-the-counter market are publicly reported by the National Association of Securities Dealers Automated
Quotation systems or by the OTC Markets Group Ins. Restricted stock meets that definition if the restriction terminates within
one year.” These shares were classified as marketable securities in accordance with ASC 320-10-25-1 as the Companies intention
is to sell them in the near-term (less than one year). In compliance with ASC 320-10-35-1, equity securities that have readily
determinable fair values that are classified as marketable securities shall be measured subsequently at fair value in the statement
of financial position. The Company has adopted ASU 2016-01 from June 1, 2018, and as a result, unrealized holding gains and losses
for marketable equity securities (including those classified as current assets) shall be reported as unrealized gain (loss) in
the consolidated statement of operation and comprehensive income (loss) under loss before income taxes.
As these shares
will be earned over the term of the contracts, the Company will defer the recognition of the earnings of the revenue over the period
the services are performed. The value recorded will be determined by multiplying the average of the closing price on the last day
of the month for the period being reported based on closing market price per share.
Inventories – Inventories
include industrial hemp finished products and liquor, stated at the lower of cost or net realizable value using the weighted
average cost method. Management reviews inventories for obsolescence and cost in excess of net realizable value at least annually
and write down the cost to its net realizable value and additional cost of goods sold when the carrying value exceeds net realizable
value. There was no reserve needed for inventory obsolescence and slow-moving as of February 29, 2020 and May 31, 2019.
Equity Method Investment –
Under equity method, the Company records its proportionate share of the investee’s profit or loss based on the specified
profit and loss percentage. Distributions received from equity method investees are accounted for as returns on investment and
classified as cash inflows from operating activities, unless the Company’s cumulative distributions received less distributions
received in prior periods that were determined to be returns of investment exceed cumulative equity in earnings recognized by the
Company. When such an excess occurs, the current year distribution up to this excess would be considered a return of investment
and classified as cash inflows from investing activities.
In September 2017, the Company entered
a letter of intent to invest $60,000 (44.45% of ownership) to jointly operate Beijing New Sino-North America Financial Information
Co., Ltd and its subsidiaries (“Sino-U.S. Finance”) with three Chinese individuals to operate a mobile application
under the name of “Sino-U.S. Finance” slated to provide a platform of information and analysis for Chinese-speaking
investors in the PRC and US.
The Company started to account the investment
under equity method in the year ended May 31, 2018 and the proportional operation losses picked up for the year ended of May 31,
2018 was $93,562, higher than the $60,000 investment amount. According to ASC 323-10-35-19, if the carrying amount of the investment
is reduced to zero, and there are no other investments in the investee, the equity method normally is discounted, and investee
losses are no longer reported on the income statement. Thus, the Company recorded $60,000 investment loss for Sino-U.S. Finance
for the year ended May 31, 2018 and with $0 balance under long-term investment as of February 29, 2020 and May 31, 2019.
Property and Equipment, net
– Property and equipment are stated at cost net of accumulated depreciation and amortization, and accumulated impairment,
if any. Depreciation and amortization of property and equipment is provided using the straight-line method over estimated useful
lives ranging from three to five years. Leasehold improvements are amortized over the life of the lease.
Expenditures for major renewals and betterments
that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to
expense as incurred. Gains and losses from retirement or replacement are included in operations.
Website Development,
Net – The Company accounts for its development costs in accordance with ASC 350-50, “Accounting for
Website Development Costs.” The Company’s website comprises multiple features and offerings that are currently
developed with ongoing refinements. In connection with the development of its products, the Company has incurred external
costs for hardware, software, and consulting services, and internal costs for payroll and related expenses of its technology
employees directly involved in the development. All hardware costs are capitalized as fixed assets. Purchased software costs
are capitalized in accordance with ASC 350-50-25 related to accounting for the costs of computer software developed or
obtained for internal use. All other costs are reviewed to determine whether they should be capitalized or expensed.
Impairment of Long-life Assets
– In accordance with ASC 360, the Company reviews its long-lived assets, including property and equipment, for impairment
whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. If the
total of the expected undiscounted future net cash flows is less than the carrying amount of the asset, a loss is recognized for
the difference between the fair value and carrying amount of the asset. There was no impairment for the periods ended February
29, 2020 and May 31, 2019.
Deferred
Revenue – The Company receives payment for subscription revenues in advance before the subscription service is granted.
The Company recognizes the revenue as being earned as the services are delivered. The amount paid for which services have not yet
been delivered related to subscription revenues is recorded as a liability in the current or long-term portion of the liabilities
section of the balance sheet.
The Company also
receives shares of stocks and warrants as means of payments for IR services provided. The fair market value of the stocks and warrants
on the contract date are amortized and recognized as IR revenue over term of the contracts. When these services are prepaid by
clients, the amount of the prepayment is initially recorded as an asset with an offsetting unearned revenue liability.
As of February 29, 2020 and May 31, 2019, the deferred revenue
compromised as following:
|
|
February 29, 2020
|
|
|
May 31, 2019
|
|
Deferred subscriptions
|
|
$
|
800,936
|
|
|
$
|
503,644
|
|
Unearned IR revenues
|
|
|
51,572
|
|
|
|
137,255
|
|
Total
|
|
|
852,508
|
|
|
|
640,899
|
|
Current
|
|
|
(663,700
|
)
|
|
|
(518,570
|
)
|
Noncurrent
|
|
$
|
188,808
|
|
|
$
|
122,329
|
|
Fair Value of Financial Instruments
– Fair value accounting establishes a framework for measuring fair value and expands disclosure about fair value measurements.
Fair value, which is defined as an exit price or the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. This framework provides a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
|
·
|
Level one – Quoted market prices in active markets for identical assets or liabilities;
|
|
·
|
Level two – Inputs other than level one inputs that are either directly or indirectly observable; and
|
|
·
|
Level three – Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
|
The carrying amount
of cash and cash equivalents, marketable equity securities, accounts receivable, due from related party, other current assets,
accounts payable, and short-term notes approximates fair value because of the short-term nature of these instruments and the fair
values close to its carrying value for the non-current deferred revenue.
The following
table summarizes the fair value and carrying value of the Company’s financial instruments as of February 29, 2020:
|
|
Fair Value
|
|
|
Carrying
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Value
|
|
Assets -
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalent
|
|
$
|
537,902
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
537,902
|
|
Marketable equity securities
|
|
|
412,742
|
|
|
|
–
|
|
|
|
–
|
|
|
|
412,742
|
|
Cryptocurrency
|
|
|
12,356
|
|
|
|
–
|
|
|
|
–
|
|
|
|
12,356
|
|
Liability -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term notes
|
|
$
|
–
|
|
|
$
|
8,074,596
|
|
|
$
|
–
|
|
|
$
|
8,618,856
|
|
The following table summarizes the
fair value and carrying value of the Company’s financial instruments as of May 31, 2019:
|
|
Fair Value
|
|
|
Carrying
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Value
|
|
Assets -
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalent
|
|
$
|
1,311,984
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
1,311,984
|
|
Marketable equity securities
|
|
|
1,133,256
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,133,256
|
|
Cryptocurrency
|
|
|
67,420
|
|
|
|
–
|
|
|
|
–
|
|
|
|
67,420
|
|
Liability -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term notes
|
|
$
|
–
|
|
|
$
|
5,387,609
|
|
|
$
|
–
|
|
|
$
|
5,873,709
|
|
Short-term notes
– The fair value of such notes payable had been determined based on 10% and 8% annual interest rates and the proximity to
the issuance date as of February 29, 2020 and May 31, 2019, respectively.
The Company uses
Level 1 of the fair value hierarchy to measure the fair value of digital currencies and revalues its digital currencies at every
reporting period and recognizes gains or losses in the consolidated statements of operations that are attributable to the change
in the fair value of the cryptocurrencies.
Non-Controlling
Interest – The Company accounted for its non-controlling interest of 23%
in Hemp Logic and CBD Biotech as a separate component of equity. In addition, net loss, and components of other comprehensive
income are attributed to both the Company and non-controlling interest.
Segment
Policy – The Company’s reportable segments, service and products. Service segment includes income from financial
news subscriptions and investor relations services. Product segment includes income from hemp related product sales. The operating
results of these business segments are regularly reviewed by the Company’s chief operating decision maker. The Company evaluates
performance based primarily on income (loss) from operations.
Other Revenue – Other
revenue is comprised of revenue related to Forex service fees, miner revenue and other miscellaneous
service revenues generated which are recognized over the term the services are to be provided. For the three-month periods ended
February 29, 2020 and 2019 details as below:
|
|
February 29, 2020
|
|
|
February 28, 2019
|
|
Misc. service revenues
|
|
$
|
2
|
|
|
$
|
6,620
|
|
Bitcoin trading class revenues
|
|
|
–
|
|
|
|
–
|
|
Total
|
|
$
|
2
|
|
|
$
|
6,620
|
|
For the nine-month periods ended February
29, 2020 and February 28, 2019. Details as below:
|
|
February 29, 2020
|
|
|
February 28, 2019
|
|
Misc. service revenues
|
|
$
|
3,863
|
|
|
$
|
64,549
|
|
Bitcoin trading class revenues
|
|
|
–
|
|
|
|
32,898
|
|
Total
|
|
$
|
3,863
|
|
|
$
|
97,447
|
|
Costs of
Services/Products Sold – Costs of services provided are the total direct cost of the Company’s operations in
Shanghai and the US. Cost of products sold includes cost of inventory sold during the period, net of discounts and inventory allowances,
freight and shipping costs, warranty and rework costs.
Income Taxes
– Income taxes are accounted for under the asset and liability method of ASC 740. Deferred tax assets and liabilities are
recognized for net operating loss and other credit carry forwards and the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the tax effect of
transactions are expected to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in the statements of operations in the year that includes the enactment date.
Deferred tax assets
are reduced by a full valuation allowance since it is more likely than not that the amount will not be realized. Deferred tax assets
and liabilities are classified as current or noncurrent based on the classification of the underlying asset or liability giving
rise to the temporary difference or the expected date of utilization of the carry forwards.
On December
22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) passed that significantly reforms the Internal Revenue Code of
1986, as amended (the “Internal Revenue Code”). In connection with the analysis of the impact of the TCJA, the
Company determined that it does not have any impact on the financial statements. Subsequent to the end of the third fiscal
quarter, on March 27, 2020, H.R. 478, the CARES Act, was signed into law. The CARES Act contains a number of federal
corporate tax relief provisions that may be of benefit to the Company. The actual effect to the Company will not be known
until after the end of the Company’s fiscal year on May 31, 2020.
The Company considers
the earnings of the non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that
future domestic cash generation will be sufficient to meet future domestic cash needs.
Advertising Costs – Advertising costs are
expensed when incurred.
Earnings (Loss) Per Share
– Earnings (loss) per share is computed using the weighted average number of common shares outstanding during the period.
The Company has adopted ASC 260 “Earnings Per Share”. Fully diluted loss per share are not calculated and presented
on the financial statements as the calculation would be antidilutive.
Stock Based Compensation
– The Company accounts for share-based payments pursuant to ASC 718, “Stock Compensation” and, accordingly, the
Company records compensation expense for share-based awards based upon an assessment of the grant date fair value for stock options
and restricted stock awards using the Black-Scholes option pricing model.
Stock compensation expense for stock options
is recognized over the vesting period of the award or expensed immediately under ASC 718 when stock or options are awarded for
previous or current service without further recourse.
We periodically issue shares of our common
stock to non-employees in non-capital raising transactions for fees and services. We account for stock issued to non-employees
in accordance with ASU 2018-07, Equity-Based Payments to Non-Employees, Nonemployee share-based payment awards nonemployee
share-based payment awards within the scope of Topic 718 are measured at grant-date fair value of the equity instruments that an
entity is obligated to issue when the good has been delivered or the service has been rendered and any other conditions necessary
to earn the right to benefit from the instruments have been satisfied.
Preferred
Stock Beneficial Convertible Feature – Upon issuance of preferred stock convertible in shares of common stock at
a price lower than the fair market value of common stock on the date of issuance, in accordance with the guidance provided in ASC
505-10-50, we have recorded the intrinsic value of this beneficial conversion feature (“BCF”).
According to ASC
470-20-30-6 intrinsic value shall be calculated at the commitment date as the difference between the conversion price and the fair
value of the common stock or other securities into which the security is convertible, multiplied by the number of shares into which
the security is convertible. According to ASC 470-20-30-8, if the intrinsic value of the beneficial conversion feature is greater
than the proceeds allocated to the convertible instrument, the amount of the discount assigned to the beneficial conversion feature
shall be limited to the amount of the proceeds allocated to the convertible instrument. Since all the preferred stocks have been
issued on different dates, we calculate the intrinsic value for each individual preferred stock issuance based on stock issuance
date. If the intrinsic value exceeds actual proceeds we received, actual proceeds will be BCF, otherwise, the intrinsic value is
the BCF.
Foreign Currency –
The Company has operations in the PRC as a representative office in the PRC, the functional and reporting currency is in U.S. dollars.
The functional
currency of the two subsidiaries operated in PRC, CBD Biotech and Newcoins168, is the Chinese Renminbi (“RMB”). The
functional currency of the subsidiary operated in Canada, CIIX Online Ltd. is the Canadian Dollar (“CAD”). Assets and
liabilities are translated at the exchange rates as of the balance sheet date. Shareholders’ contribution is translated at
historical rate. Income and expenditures are translated at the average exchange rate of the period. The RMB is not freely convertible
into foreign currency and all foreign currency exchange transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US dollar at the rates used in translation.
The exchange rates
used were as follows:
February 29, 2020
|
|
|
Spot rate
|
|
RMB 6.99 to US $1.00
|
Average rate for the three months ended February 29, 2020
|
|
RMB 6.98 to US $1.00
|
Average rate for the nine months ended February 29, 2020
|
|
RMB 6.70 to US $1.00
|
Spot rate
|
|
CAD 1.34 to US $1.00
|
Average rate for the three months ended February 29, 2020
|
|
CAD 1.32 to US $1.00
|
Average rate for the nine months ended February 29, 2020
|
|
CAD 1.32 to US $1.00
|
|
|
|
May 31, 2019
|
|
|
Spot rate
|
|
RMB 6.69 to US $1.00
|
Average rate for the three months ended February 28, 2019
|
|
RMB 6.85 to US $1.00
|
Average rate for the nine months ended February 28, 2019
|
|
RMB 6.81 to US $1.00
|
Spot rate
|
|
CAD 1.32 to US $1.00
|
Average rate for the three months ended February 28, 2019
|
|
CAD 1.32 to US $1.00
|
Average rate for the nine months ended February 28, 2019
|
|
CAD 1.32 to US $1.00
|
New Accounting Pronouncements
– Upon issuance of final pronouncements, we review the new accounting literature to determine its relevance, if any, to our
business. The Company is in the progress of evaluating the following accounting updates:
In June 2016,
the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,
for public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this Update are effective
for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Subsequently, the FASB
announced certain codification improvements including ASU 2018-19, ASU-2019-04 and ASU 2019-05. The Company is currently evaluating
the impact will have on its consolidated financial statements and associated disclosures.
Except for the
above-mentioned pronouncements, there are no new recent issued accounting standards that will have material impact on the unaudited
condensed consolidated balance sheets, statements of stockholders’ equity(deficit), statements of operations and comprehensive
income(loss) and statements of cash flows.
4. Stockholders’ Equity:
As of February 29, 2020, the Company was
authorized to issue 700,000,000 shares of common stock, $0.001 par value per share. In addition, 300,000,000 shares
of $0.001 par value preferred stock were authorized. All common stock shares have full dividend rights. However, it is not anticipated
that the Company will be declaring distributions in the foreseeable future.
Series 2012 Convertible Preferred Stock
During
the third quarter of fiscal year 2013, effective February 29, 2012, the Company issued 2,003,776 shares of preferred stock as Series
2012 Convertible Preferred Stock for total proceeds of $2,003,776. The terms of the preferred stock allow the holder to convert
each share of preferred stock into 1.25 shares of common stock at any time after nine months from the date of issuance. The holders
of shares of preferred stock were entitled to receive a dividend of $0.06 per share per annum for the first two years from the
issuance of the instruments. The Company maintained the right to suspend the dividend at its discretion if it is deemed necessary.
The Company has paid off all the dividends for the Series 2012 Convertible Preferred Stock and the holders of this preferred stock
no longer entitled to dividends.
During the nine months period ended February
29, 2020 and 2019, the shareholders of preferred stock series-2012 did not convert any shares of preferred stock. There are 445,000
shares of Series -2012 Convertible Preferred Stock outstanding as of February 29, 2020.
Series A-2014 Convertible Preferred
Stock
In
the years ended May 31, 2016 and 2015 the Company issued 720,000 and 1,885,000 shares of preferred stock as Series A-2014 Convertible
Preferred Stock for total proceeds of $2,605,000. The terms of the preferred stock allow the holder to convert each share of preferred
stock into 2.5 shares of common stock at any time after nine months from the date of issuance. The holders of shares of preferred
stock shall have the right to one vote for each share of common stock into which such preferred stock could convert. The holders
of shares of preferred stock are entitled to receive a dividend of $0.06 per share per annum for the first two years from the issuance
of the instruments, which has been recorded as an accrued dividend on the liabilities section of the balance sheet. The Company
maintained the right to suspend the dividend at its discretion if it is deemed necessary. The Company has paid off all the dividends
for the Series A- 2014 Convertible Preferred Stock and the holders of this preferred stock are no longer entitled to dividends.
During the nine months period ended February
29, 2020, the shareholders of preferred stock series A-2014 converted 0 shares of preferred stock. During the nine months period
ended February 28, 2019, the shareholders of preferred stock series A-2014 converted 250,000 shares of preferred stock for 625,000
of common stock shares at a conversion rate of 1 share of preferred stock series A-2014 for 2.50 shares of common stock.
There are 356,000 shares of Series A-2014 Convertible Preferred Stock outstanding as of February 29, 2020.
Series C-2016
Convertible Preferred Stock
In December 2016,
the Company issued 5,000,043 shares of its Series C-2016 Convertible Preferred Stock at a price of $1.00 per share for total proceeds
of $5,000,043. The terms of the preferred stock allow the holder to convert each share of preferred stock into 3 shares of common
stock at any time after nine months from the date of issuance. The holders of shares of preferred stock are entitled to receive
a dividend of $0.06 per share per annum for the first year from the issuance of the instruments, and the Company maintained the
right to suspend the dividend at its discretion if it is deemed necessary. The Company paid total $232,449 dividends to Series
C-2016 Convertible Preferred Stock and the holders of this preferred stock no longer entitle to dividends.
We calculated
the BCF of the Series C-2016 Convertible Preferred Stock as $4,930,143. The BCF would be recorded as paid-in capital with an offsetting
debit to convertible preferred stock. The discount attributable to the BCF, however, is amortized as a deemed dividend over
the period from issuance to the date the convertible preferred stock becomes convertible. In our case, preferred stock-series C-2016
is convertible after six months from the date of issuance. We then amortize the BCF over six months period, we recorded $3,685,520
as deemed dividend as of May 31, 2018, and we recorded the remaining $1,244,622 as deemed dividend that increases accumulated deficit
for the period ended August 31, 2017.
During the nine months period ended February
29, 2020, the shareholders of preferred stock series C-2016 converted 0 shares of preferred stock. During the nine months period
ended February 28, 2019, the shareholders of preferred stock series C-2016 converted 259,958 shares of preferred stock for 779,874
of common stock shares at a conversion rate of 1 share of preferred stock series C-2016 for 3.00 shares of common stock.
There are 193,000 shares of Series C-2016 Convertible Preferred Stock outstanding as of February 29, 2020.
Series D-2017 Convertible Preferred Stock
For the year ended
May 31, 2018, the Company issued 6,793,050 shares of its Series D-2017 Convertible Preferred Stock at a price of $1.00 per share
for total proceeds of $6,793,050. For the year ended May 31, 2019, the Company issued 3,578,000 shares of its Series D-2017 Convertible
Preferred Stock at a price of $1.00 per share for total proceeds of $3,578,000. The terms of the preferred stock allow the holder
to convert each share of preferred stock into 2 shares of common stock at any time from the date of issuance. The holders of shares
of preferred stock are entitled to receive a dividend of $0.06 per share per annum for the first two years from the issuance, which
has been recorded as an accrued dividend on the liabilities section of the balance sheet. The Company maintained the right to suspend
the dividend at its discretion if it is deemed necessary.
We calculated
the BCF of the preferred shares as $992,700 and $3,933,443 for the year ended May 31, 2019 and 2018, respectively. The BCF would
be recorded as paid-in capital with an offsetting debit to convertible preferred stock. The discount attributable to the BCF, however,
is amortized as a deemed dividend over the period from issuance to the date the convertible preferred stock becomes convertible.
In our case, preferred stock-series D-2017 is convertible at any time from the date of issuance. We recorded $992,700 and $3,933,443
as deemed dividend as of May 31, 2019 and 2018, respectively.
Duplicate certificates totaling 140,000 shares
of Series D-2017 preferred stock were issued to three (3) individual investors. Despite efforts to
secure the return of these duplicate certificates, the Company has been unable to do so; therefore, the Company
recorded $140,000 as loss and we calculated the BCF of the preferred shares are $65,400 as of February 29, 2020. The
Company’s transfer agent has been instructed not remove the restrictions or to convert the duplicate certificates
in the event they are redeemed in the future.
During the nine months period ended February
29, 2020, the shareholders of preferred stock series D-2017 converted 955,000 shares of preferred stock for 1,910,000 of common
stock shares at a conversion rate of 1 share of preferred stock series D-2017 for 2 shares of common stock. During the nine months
period ended February 28, 2019, the shareholders of preferred stock series D-2017 converted 3,649,000 shares of preferred stock
for 7,298,000 of common stock shares at a conversion rate of 1 share of preferred stock series D-2017 for 2 shares of common stock.
There are 5,222,050 shares of Series D-2017 Convertible Preferred Stock outstanding as of February 29, 2020.
Common Stock
In November 2019,
the Company issued Company’s common stock at $0.15 per share to accredited investors for total proceeds of $781,950,
and total 5,213,000 shares were issued as of February 29, 2020.
Stock compensation
On June 4, 2019, the Company awarded various
employees and contractors stock compensation total 2,222,000 shares of common stock. All services to be performed in conjunction
with this award have been fully performed and the shares were fully vested as of the effective date of the award. $999,900 share-based
compensation expense was recorded associated with the award for the nine months ended February 29, 2020.
On September
26, 2019, the Company awarded 2 contractors stock compensation total 188,000 shares of common stock. All services to be performed
in conjunction with this award have been fully performed and the shares were fully vested as of the effective date of the award.
$48,880 share-based compensation expense was recorded associated with the award for the nine months ended February 29, 2020.
On December
23, 2019, the Company’s subsidiary Hemp Logic Inc issued stock compensation total 1,446,250 shares of common stock.
Hemp Logic’s fair market value was not available at grant date, we used the Company’s stock value to calculate
the stock compensation totaled at $300,098 at grant date. The service is to be performed in one year starting November 1,
2019. $100,081 share-based compensation expense was recorded associated with the award for the nine months ended February 29,
2020.
Treasury Stock
On September 25, 2019, the Company entered
into an Assignment and Assumption Agreement with Mr. Paul Dickman, the Company agreed to assign its remaining 8.75% interest in
MB Breakwater, LLC to Mr. Dickman and Mr. Paul Dickman sold 423,000 shares of the Company’s common stock to the Company that
were issued to Mr. Paul Dickman as part of the Company’s incentive compensation arrangement with Mr. Paul Dickman. The share
certificates were received by the Company but Mr. Dickman had not delivered the stock powers required to effect the transfer as
of February 29, 2020. The stock powers were received on April 9, 2020.
Non-controlling
interest
The share exchange agreement, which Hemp Logic, CBD Biotech
and ChineseInvestors.com entered into on November 11, 2019, states that one hundred percent (“100%”) of the equity
interests of CBD Biotech are owned by Hemp Logic and approximately 83.9% of Hemp Logic is owned by the Company. After Hemp Logic
issued stock compensation to its officers and board of directors, the Company’s ownership in Hemp Logic changed to 77%;
therefore, the Company accounted for its non-controlling interest of 23% in Hemp Logic and
CBD Biotech as a separate component of equity. In addition, net loss, and components of other comprehensive income are attributed
to both the Company and non-controlling interest. Please see note 14 for details.
5. Other Current
Assets:
Other current assets consist of deposits
in Chinese Renminbi on building space under an operating lease and are stated at the current exchange rate at period end. Security
deposits of office rent in United States, purchase deposits to vendors for the CBD product purchase, prepaid expenses in both United
States and Shanghai, details as below:
|
|
February 29, 2020
|
|
|
May 31, 2019
|
|
Prepaid expenses
|
|
$
|
66,433
|
|
|
$
|
314,707
|
|
Purchase deposits
|
|
|
160,849
|
|
|
|
49,773
|
|
Cryptocurrencies on hand
|
|
|
12,356
|
|
|
|
67,420
|
|
Other current assets
|
|
|
78,642
|
|
|
|
39,220
|
|
Total other current assets
|
|
$
|
318,280
|
|
|
$
|
471,120
|
|
6. Long-term investments
Long-term
investments include: 1) investment at Breakwater MB, LLC and Grow flow Inc accounted as equity investment without readily
available fair value since the Company does not have the significant influence, the Company sold investment in Breakwater MB, LLC
on September 25, 2019 and 2) investment at Sino-U.S. Finance and Donald Capital LLC are accounted for equity method since the Company
has the ability to exercise significant influence over the investee, under which the Company records its proportionate share of
the investee’s profit or loss based on the specified profit and loss percentage. Distributions received from equity method
investees are accounted for as returns on investment and classified as cash inflows from operating activities, unless the Company’s
cumulative distributions received less distributions received in prior periods that were determined to be returns of investment
exceed cumulative equity in earnings recognized by the Company. When such an excess occurs, the current year distribution up to
this excess would be considered a return of investment and classified as cash inflows from investing activities.
Since the Company’s
investments include privately held companies where quoted market prices are not available and as a result, the cost method, combined
with other intrinsic information, is used to assess the fair value of the investment. If the carrying value is above the fair value
of an investment at the end of any reporting period, the investment is reviewed to determine if the impairment is other than temporary.
Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Once a decline in
fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is
established.
In March 2017,
the Company made a $250,000 investment in Breakwater MB, LLC, a cannabis-focused investment and consulting company, formed by Paul
Dickman, the Company’s former CFO and a former board member of ChineseInvestors.com, Inc., as a means to invest capital in
and provide consulting services to private, cannabis-focused companies as they transition into the public market. The invested
capital was to be primarily used to cover the costs of becoming a publicly traded company, a strategy the Company expected would
provide significant investment appreciation and opportunity for liquidity. All opportunities were to be evaluated by the investment
committee comprised of ChineseInvestors.com, Inc.’s CEO Warren Wang, Medicine Man Technologies CEO Andy Williams, and Paul
Dickman. Mr. Dickman is the managing member of Breakwater MB, LLC and Warren Wang served as an advisor receiving no compensation
for his services.
Breakwater MB,
LLC completed its planned raise of $1,000,000 for 50% of Breakwater MB, LLC’s equity by December 2017. The Company’s
equity position in Breakwater MB, LLC stood at 8.75% with carrying value of $140,000 and 12.5% with carrying value of $250,000
as of May 31, 2019 and May 31, 2018, respectively. ChineseInvestors.com, Inc.’s board reviewed and approved the investment
with Mr. Dickman abstaining from voting. Mr. Dickman held 30% of the equity of Breakwater MB LLC as of May 31, 2018 after a $5,000
cash investment in equity in addition to the services that Mr. Dickman renders to Breakwater MB, LLC.
On August 23, 2018, the Company
entered into a Redemption Agreement and Mutual Release with Mr. Dickman to liquidate 40% of the Company’s investment in
Breakwater MB, LLC. Mr. Dickman agreed to pay an aggregate purchase price of $100,000 ($75,000 at the closing and $25,000 no later
than September 15, 2018) to redeem 5% of the equity (the “Redemption Agreement”). The Redemption Agreement provided
for a mutual release and waiver with regard to any claims the parties to the Redemption Agreement ever had, owned or held, or
now have, own or hold, as against one another resulting from, arising out of or in any manner relating to or based on the Company’s
investment in Breakwater MB LLC, the redemption, or otherwise relating to CIIX’s relationship with Breakwater MB LLC. As
of February 29, 2020, the Company had received the $75,000 payment but not the $25,000 payment due September 15, 2018; therefore
only 3.75% of the equity was redeemed, leaving 8.75%.
For the year ended
May 31, 2019, Breakwater transferred 400,000 shares of its stock holding in Grow Flow Inc to the Company as a dividend distribution.
Those shares were valued at $35,000 based on 20% of the Company’s invested equity holding of $175,000 in Breakwater MB, LLC.
On or about September 25, 2019, the Company
entered into an Assignment and Assumption Agreement with Mr. Dickman, the Company agreed to assign its remaining 8.75% interest
in MB Breakwater, LLC to Mr. Dickman and Mr. Dickman sold 423,000 shares of the Company’s common stock to the Company that
were issued to Mr. Dickman as part of the Company’s incentive compensation arrangement with Mr. Dickman. The share certificates
were received by the Company but Mr. Dickman had not delivered the stock powers required to effect the transfer as of February
29, 2020. The Company recognized loss in amount of $23,675. The Company received the stock powers required on April
9, 2020.
In April 2019,
the Company made a $160,000 investment for 24.9% of Donald Capital LLC a Delaware Corporation’s equity. The remaining
75.1% is held equally by Hamilton Strategy Group, Inc. and McDonald Global Enterprises LLC. Alex Hamilton is the CFO of Hemp Logic,
Inc and the President of Donald Capital LLC. Mr. Hamilton is also the owner of Hamilton Global Strategy. Donald Capital is a boutique
investment bank, approved by FINRA and the SEC on May 14, 2019. As of February 29, 2020, the Company’s equity position in
Donald Capital LLC currently stands at 24.9%. The Company recorded $8,231 and $20,943 investment loss for Donald Capital LLC for
the three and nine months ended February 29, 2020 and with $118,910 balance under long-term investment as of February 29, 2020.
Long term investments
are comprised of the following:
|
|
February 29, 2020
|
|
|
May 31, 2019
|
|
Breakwater Finance MB, LLC
|
|
$
|
–
|
|
|
$
|
140,000
|
|
Donald Capital LLC
|
|
|
118,910
|
|
|
|
148,603
|
|
Grow Flow Inc.
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
$
|
153,910
|
|
|
$
|
323,603
|
|
7. Property and Equipment:
Property and equipment are recorded at cost, net of accumulated
depreciation and are comprised of the following:
|
|
February 29, 2020
|
|
|
May 31, 2019
|
|
Furniture & Fixtures
|
|
$
|
179,620
|
|
|
$
|
179,337
|
|
Leasehold Improvements
|
|
|
95,944
|
|
|
|
96,718
|
|
|
|
|
275,564
|
|
|
|
276,055
|
|
Less: Accumulated Depreciation
|
|
|
(221,396
|
)
|
|
|
(177,805
|
)
|
|
|
$
|
54,168
|
|
|
$
|
98,250
|
|
Depreciation expense for the nine months
ended February 29, 2020 and 2019 was $44,815 and $38,445, respectively.
8. Website development, net:
Website development is comprised of the following:
|
|
February 29, 2020
|
|
|
May 31, 2019
|
|
Website development
|
|
$
|
285,859
|
|
|
$
|
276,861
|
|
Less: Accumulated Amortization
|
|
|
(138,503
|
)
|
|
|
(128,500
|
)
|
|
|
$
|
147,356
|
|
|
$
|
148,361
|
|
Amortization is calculated over a straight-line
basis using the economic life of the asset. Amortization expense for the nine months ended February 29, 2020 and 2019 was $9,330
and $8,348, respectively.
9. Short-term notes:
In August 2018, the board of directors
of the Company approved the offer of unsecured one-year term notes to individual accredited investor lenders for a maximum $3,000,000
with 10% annual interest rate (the “2018 Notes-10%”). The Company issued 2018 Notes-10% in the total amount of $3,030,000
from various individual accredited investor lenders. As of February 29, 2020, some accredited investor lenders of the 2018 Notes-10%
rolled over a portion or all of the principal and interest due and owing on the 2018 Notes – 10% totaling $1,387,026 into
the Company’s 2019 offering of unsecured notes at -with a 10% annual interest rate (the “2019 Notes – 10%”)
and the Company paid off $200,000 to accredited investor lenders. As of February 29, 2020, $1,300,000 of the 2018 Notes-10% were
in default.
In October 2018, the board of directors
of the Company approved the Company to offer unsecured one-year term notes to individual accredited investor lenders for a maximum
$3,000,000 with an 8% annual interest rate (the “2018 Notes – 8%.”). The 2018 Notes – 8% included an incentive
based on the NF Energy Savings Corporation (“NFEC”) share value of $10.38 per share (the “Base Value”).
At the time the 2018 Notes – 8% were executed, the Company held 220,000 shares of NF Energy Savings Corporation (“NFEC”)
(the “Securities”). As provided for in the 2018 Notes – 8%, the Company/Borrower agreed that if Borrower, at
its sole discretion, sold any of the Securities during the term of the 2018 Notes – 8%, all of the Lenders in the Class would
be entitled to receive in the aggregate, twenty percent (20%) of the excess of the sales proceeds of such Securities over the Base
Value (the “Incentive Payment”). The Lender’s share of the Incentive Payment would be determined by the fraction
of the total loan to all loans in the class, not to exceed $3,000,000. As of February 29, 2020, the Company had issued 2018 Notes-8%
in the total amount of $1,154,800 to various individual lenders and as of February 29, 2020, the Company paid incentives totaling
$51,314 incentive to the accredited investor lenders for the 2018 Notes – 8%. As of February 29, 2020, some accredited investor
lenders of 2018 Notes-8% converted all or some portion of the principal and interest due and owing under the 2018 Notes –
10% totaling $110,000 to common stock at $0.15/share. As of February 29, 2020, $1,039,800 of the 2018 Notes-8% were in default.
On February 2019, the board of directors
of the Company approved the offering of unsecured one-year term notes to individual lenders for a maximum $5,000,000 with 10%
annual interest rate (the “2019 Notes-10%”). As of February 29, 2020, the Company has issued 2019 Notes-10% in the
total amount of $5,645,490 to various individual accredited investor lenders. Of the $5,645,490, $1,567,025 was rolled over from
the 2018-Notes 10% in August 2019. As of February 29, 2020, $75,000 of the 2019 Notes-10% were in default and $25,000 converted
to 166,667 shares of Common stock at $0.15/share.
On November 13, 2019 the Company entered
into a Term Loan and Security Agreement with Celtic Bank Corporation ("Celtic") in the original principal amount of $100,000
(the “Celtic Loan”). Bluevine Capital Inc. (“Bluevine”) is the servicer for the Celtic Loan. The Celtic
Loan matures on May 12, 2020. The terms of the Celtic Loan provide for weekly payments which are current as of February 29, 2020.
To secure the Celtic Loan obligations the Company granted to Celtic and to Bluevine, as the collateral agent for Celtic, a continuing
first priority security interest in that certain collateral identified therein.
On November 27, 2019, the Company entered
into a Revenue Purchase Agreement with Pearl Beta Funding, LLC (“PBF”) (the “Revenue Purchase Agreement”).
Pursuant to the Revenue Purchase Agreement, PBF purchased $139,650 worth, approximately 6%, of the Company’s future accounts,
contract rights and other entitlements arising from or relating to the payment of monies from the Company’s customers’
and/or other third party payers (the “Receipts” defined as all payments made by cash, check, electronic transfer or
other form of monetary payment in the ordinary course of the Company’s business), for the payments due to Company as a result
of the Company’s sale of goods and/or services (the “Transactions”) until the purchased amount has been delivered
to PBF. With regard to the Revenue Purchase Agreement, the Company is selling a portion of a future revenue stream to PBF at a
discount. Pursuant to the Security Agreement and Guaranty of Performance (“SAGP”) granted to PBF a security interest
in and lien upon certain collateral identified therein. The remittance provided for in the Revenue Purchase Agreement in the amount
of $1,552 as a good faith estimate of purchased percentage multiplied by the daily average revenues of the Company during the
previous calendar month divided by the number of business days in the calendar month. Pursuant to the Revenue Purchase Agreement
PBF will debit the remittance each business day from the Company’s designated account, until such time as PBF receives payment
in full of the purchased amount of $139,650.
On December
24, 2019, the Company entered into an unsecured promissory note in the original principal amount of $150,000 from one individual
lender (the “December 24, 2019 Note”). The December 24, 2019 Note has a one year term and provides for payment of twenty-four
(24) bi-monthly installments of principal and interest beginning on January 15, 2020, followed by a principal and interest payment
due on January 30, 2020, and continuing on the 15th and the 30th day of each consecutive month, until paid in full in the amounts
set forth in the corresponding amortization schedule. The December 24, 2019 Note provides for interest at the rate of 18.65% interest
and default interest of 21.10%. Any unpaid principal and all accrued but unpaid interest is due and payable on the maturity date.
On December 21,
2019, the Company entered into an unsecured promissory note in the original principal amount of $210,000 from one individual lender
(the “December 21, 2019 Note”). The December 21, 2019 Note has a one year terms and provides for payment of twenty-four (24)
bi-monthly installments of principal and interest beginning on January 15, 2020, followed by a principal and interest payment due
on January 30, 2020, and continuing on the 15th and the 30th day of each consecutive month, until paid in full in the amounts set
forth in the corresponding amortization schedule. The December 21, 2019 Note provides for interest at the rate of 18.65% interest
and default interest of 21.10%. Any unpaid principal and all accrued but unpaid interest is due and payable on the maturity date.
On January 14,
2020, the Company entered into an unsecured promissory note in the original principal amount of $70,000 from one individual lender
(the “January 14, 2020 Note”). The January 14, 2020 Note has a 6 months terms and provides for payment of twelve (12) bi-monthly
installments of principal and interest beginning on February 15, 2020, followed by a principal and interest payment due on February
29, 2020, and continuing on the 15th and the 30th day of each consecutive month, until paid in full in the amounts set forth in
the corresponding amortization schedule. The January 14, 2020 Note provides for interest at the rate of 18.65% interest and default
interest of 21.10%. Any unpaid principal and all accrued but unpaid interest is due and payable on the maturity date.
On January 9,
2020, the Company entered into a Securities Purchase Agreement (the “Power Up January 2020 Agreement”), in connection
with the issuance of a convertible note to the Company in favor of Power Up Lending Group Ltd., in the aggregate principal amount
of $88,000, for a one-year term with an annual interest rate of 8% per annum. (the “January 2020-8% Note”), convertible
into shares of common stock, $0.001 par value per share, of the Company (the “Common Stock”), upon the terms and subject
to the limitations and conditions set forth in the January 2020-8% Note and the Power Up January 2020 Agreement, along with an
irrevocable letter agreement with Globex Transfer, LLC, the Company’s transfer agent, with respect to the reserve of shares
of Common Stock of the Company to be issued upon any conversion of the January 2020-8% Note.
On February 11,
2020, the Company entered into a Securities Purchase Agreement (the “Power Up February 22, 2020 Agreement”), in connection
with the issuance of a convertible note to the Company in favor of Power Up Lending Group Ltd., in the aggregate principal amount
of $53,000, for a one-year term with an annual interest rate of 8% per annum. (the “February 11, 2020-8% Note”), convertible
into shares of common stock, $0.001 par value per share, of the Company (the “Common Stock”), upon the terms and subject
to the limitations and conditions set forth in the February 11, 2020-8% Note and the Power Up February 22, 2020 Agreement, along
with an irrevocable letter agreement with Globex Transfer, LLC, the Company’s transfer agent, with respect to the reserve
of shares of Common Stock of the Company to be issued upon any conversion of the February 11, 2020-8% Note.
On February 24,
2020, the Company entered into a Securities Purchase Agreement (the “Crown Bridge February 2020 Agreement”), in connection
with the issuance of a convertible note to the Company in favor of Crown Bridge Partners, LLC in the aggregate principal amount
of $75,000, for a one-year term with an annual interest rate of 8% per annum. (the “Crown Bridge February 2020-8% Note”),
convertible into shares of common stock, $0.001 par value per share, of the Company (the “Common Stock”), upon the
terms and subject to the limitations and conditions set forth in the Crown Bridge February 2020-8% Note and the Crown Bridge February
2020 Agreement, along with an irrevocable letter agreement with Globex Transfer, LLC, the Company’s transfer agent, with
respect to the reserve of shares of Common Stock of the Company to be issued upon any conversion of the Crown Bridge February 2020-8%
Note.
As of February 29, 2020 and May 31, 2019,
the short-term notes are compromised as follows:
|
|
February 29, 2020
|
|
|
May 31, 2019
|
|
|
|
|
|
|
|
|
Short-term 2018 notes-annual interest rate 10% due August to October 2019
|
|
$
|
1,300,000
|
|
|
$
|
3,030,000
|
|
Short-term 2018 notes-annual interest rate 8% due November 2019 to January 2020
|
|
|
1,039,800
|
|
|
|
1,154,800
|
|
Short-term 2019 notes-annual interest rate 10% due February 2020 to November 2020
|
|
|
5,645,490
|
|
|
|
1,688,909
|
|
Celtic Bank Corporation
|
|
|
49,993
|
|
|
|
–
|
|
Pearl Beta Funding LLC
|
|
|
3,812
|
|
|
|
–
|
|
Debt-2020 note-annual interest rate 18.65%-Semimonthly payments
|
|
|
363,761
|
|
|
|
–
|
|
Debt-2020-8%
|
|
|
216,000
|
|
|
|
–
|
|
Total Short-term notes
|
|
$
|
8,618,856
|
|
|
$
|
5,873,709
|
|
10. Other Current Liabilities:
Other current
liabilities compromise as following:
|
|
February 29, 2020
|
|
|
May 31, 2019
|
|
Accrued dividends
|
|
$
|
413,552
|
|
|
$
|
195,554
|
|
Accrued interests and others
|
|
|
548,940
|
|
|
|
143,377
|
|
Accrued payroll and taxes
|
|
|
276,292
|
|
|
|
299,317
|
|
Total
|
|
$
|
1,238,784
|
|
|
$
|
638,248
|
|
Accrued dividends
as of February 29, 2020 and May 31, 2019 are comprised of dividends payable to the preferred stockholders, Series D-2017 in the
amount of $402,217 and $195,554, respectively. On or about December 17, 2019, the Company’s Board of Directors approved a
resolution that provides for an equity dividend payable in the Company’s Rule 144 restricted common stock, equal to two (2)
times the amount of the stated dividend amount of 6% for the Series D-2017 preferred shareholders, calculated using a base price
of $0.15 USD per share of common stock and declared payable on the outstanding preferred stock of the Company to the Series D -2017
preferred shareholders of record between December 1, 2018 and May 31, 2019 in satisfaction of the dividends which accrued but were
unpaid for the fiscal year ended May 31, 2019. It is likely that the Company’s Board will likewise recommend and approve
an equity payment for dividends to Series D-2017 shareholders payable as of February 29, 2020. As of the date of this filing the
stock certificates for the dividends payable for the period ended May 31, 2019 have not been issued, but are in process.
Accrued interest as of February 29, 2020
represents interest payable for the 2018 Notes - 10%, 2018 Notes – 8%, 2019 Notes 10% and 2020 Notes-8%. Accrued
interest as of May 31, 2019 represents interest payable for the 2018 Notes -10%, the 2018 Notes -8%, and 2019 Notes -10%.
11. Segments and Geographic Areas
The Company operates business in two operating
segments: Financial News and Investor Relation Services and Industrial Hemp Product Sales. Segment disclosures are on a performance
basis consistent with internal management reporting.
Information about segments during the periods
presented were as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Geographic Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
$
|
40,997
|
|
|
$
|
1,030,397
|
|
|
$
|
1,068,047
|
|
|
$
|
1,464,734
|
|
USA
|
|
|
402,768
|
|
|
|
414,425
|
|
|
|
2,182,607
|
|
|
|
1,353,022
|
|
Total
|
|
$
|
443,765
|
|
|
$
|
1,444,822
|
|
|
$
|
3,250,654
|
|
|
$
|
2,817,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
356,809
|
|
|
$
|
383,504
|
|
|
$
|
2,008,735
|
|
|
$
|
1,323,817
|
|
Products
|
|
|
86,956
|
|
|
|
1,061,318
|
|
|
|
1,241,919
|
|
|
|
1,493,939
|
|
Total
|
|
$
|
443,765
|
|
|
$
|
1,444,822
|
|
|
$
|
3,250,654
|
|
|
$
|
2,817,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenue Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
297,739
|
|
|
$
|
253,135
|
|
|
$
|
1,012,287
|
|
|
$
|
1,106,084
|
|
Products
|
|
|
39,355
|
|
|
|
759,369
|
|
|
|
917,627
|
|
|
|
958,198
|
|
Total
|
|
$
|
377,094
|
|
|
$
|
1,012,504
|
|
|
$
|
1,929,914
|
|
|
$
|
2,064,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
1,881,028
|
|
|
$
|
2,791,341
|
|
|
$
|
6,589,893
|
|
|
$
|
7,279,150
|
|
Products
|
|
|
450,149
|
|
|
|
780,435
|
|
|
|
1,259,711
|
|
|
|
1,549,268
|
|
Total
|
|
$
|
2,331,177
|
|
|
$
|
3,571,776
|
|
|
$
|
7,849,604
|
|
|
$
|
8,828,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
|
(1,821,958
|
)
|
|
$
|
(2,660,972
|
)
|
|
|
(5,593,445
|
)
|
|
$
|
(7,061,417
|
)
|
Products
|
|
|
(402,548
|
)
|
|
|
(478,486
|
)
|
|
|
(935,419
|
)
|
|
|
(1,013,527
|
)
|
Total
|
|
$
|
(2,224,506
|
)
|
|
$
|
(3,139,458
|
)
|
|
$
|
(6,528,864
|
)
|
|
$
|
(8,074,944
|
)
|
12. Risk and Uncertainties:
Concentration
of Credit Risk – The Company maintains cash at banks in the United States and People’s Republic of China (“PRC”).
Should any bank holding cash become insolvent, or if the Company is otherwise unable to withdraw funds, the Company would lose
the cash deposited with that bank; however, the Company has not experienced any losses in such accounts and believes it is not
exposed to any significant risks on its cash in bank accounts. In the PRC, a depositor has up to RMB 500,000 insured by the People’s
Bank of China Financial Stability Bureau (“FSD”), whereas the standard insurance amount is $250,000 per depositor
in a bank insured by the Federal Deposit Insurance Corporation (“FDIC”) in the United States. As of February 29, 2020
and May 31, 2019, the Company had $0 and $608,908 cash balances uninsured, respectively.
Major customers
and vendors- For the nine months ended February 29, 2020, two customers each accounted for 23% and 13% of the total revenue
of the Company, without accounts receivable outstanding as of February 29, 2020. For the nine months ended February 28, 2019, two
customers each accounted for 14% and 12% of total service revenue of the Company with no accounts receivable outstanding as of
February 28, 2019.
One vendor accounted
35% of the total purchases by the Company for the nine months ended February 29, 2020. There was no vendor concentration for the
Company as of and for the nine months ended February 28, 2019.
The Company has
operations in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced
by the political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy.
Coronavirus
disease 2019- On January 30, 2020, the spread of novel coronavirus (“COVID-19”) was declared a Public Health
Emergency of International Concern by the World Health Organization ("WHO"). Subsequently, on March 11, 2020, WHO characterized
the COVID-19 outbreak as a pandemic.
We will continue
to monitor the impact of COVID-19, but at the date of this report it is too early to determine the full impact this virus may have
on the global financial markets and the overall economy. Should this emerging macro-economic risk continue for an extended period,
there could be an adverse material financial impact to our businesses and investments, including a material reduction in our results
of operations.
13. Commitments and Contingencies:
Operating Leases
The Company currently
maintains leased space in Shanghai, China, San Gabriel, California, Flushing, NY and it also maintains a correspondence
address in Arcadia, California on a month to month basis.
We lease certain
office space from third parties. For leases beginning in June 1, 2019 and later, at the inception of a contract we assess whether
the contract is, or contains, a lease. Our assessment is based on: (1) whether the contract involves the use of a distinct identified
asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period,
and (3) whether we have the right to direct the use of the asset. At inception of a lease, we allocate the consideration in the
contract to each lease component based on its relative stand-alone price to determine the lease payments.
Most leases include
one or more options to renew, with renewal terms that can extend the lease term from one year or more. The exercise of lease renewal
options is at our sole discretion. Our leases do not include options to purchase the leased property. The depreciable life of assets
and leasehold improvements are limited by the expected lease term. Certain of our lease agreements include rental payments adjusted
periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive
covenants. All our leases are operating lease.
As of February
29, 2020, our operating lease right of use assets and operating lease liability are approximately $492,125 and $506,647 respectively.
The rent expense for the three and nine months ended February 29, 2020 is $145,837 and $333,537, respectively.
Future minimum
lease commitments for office facilities as of February 29, 2020 are as follows:
For the fiscal years ending May 31,
|
|
|
|
|
2020 (three months)
|
|
|
$
|
64,125
|
|
2021
|
|
|
|
227,900
|
|
2022
|
|
|
|
126,900
|
|
2023
|
|
|
|
33,030
|
|
|
|
|
$
|
451,955
|
|
Litigation – The Company
is involved in legal proceedings from time to time in the ordinary course of its business.
On September 1, 2016, the Company entered
into a Service Provider Agreement with SINO-GLOBAL SHIPPING AMERICA LTD (“SINO”) to perform investor relations services
for SINO in exchange for 60,000 shares of SINO Rule of 144 restricted stock. When entering the 2016 Note Agreements, the Company
believed that the SINO shares would be delivered as provided for in the agreement. However, the shares were not delivered purportedly
due to a disagreement among SINO’s management, and as a result, the Company has not obtained the SINO shares as of February
29, 2020. On January 9, 2018, the Company filed a lawsuit in the Los Angeles County Superior Court, Case No. EC067692 for breach
of contract and common counts against SINO-GLOBAL SHIPPING AMERICA LTD. The dispute was ultimately arbitrated by the American
Arbitration Association in May 2019 and the parties reached a settlement whereby SINO will issue 40,000 shares of its Rule 144
restricted Common Stock to the Company. The Settlement Agreement was executed by the parties and the Company is in receipt of
the share certificate, but is awaiting receipt of a new share certificate, less the amount of settlement shares due to the Company’s
counsel under the contingency arrangement.
On or about September
19, 2019 a lawsuit entitled J. Jim Ye v. ChineseInvestors.com, Inc. and Warren Wei Wang, was filed in Los Angeles County
Superior Court, Glendale Courthouse, as Case No. 19GDCV01195, alleging causes of action for rescission of purchase of securities
due to fraud, violation of Cal. Buss. & Prof. Code Section 17200, et seq., and fraudulent concealment. It is the Company’s
position that the Plaintiff’s claims have no merit. The Company has retained counsel to defend the action. This action is
pending.
14. Non-Controlling
Interest:
On November 11,
2019, Hemp Logic, CBD Biotech and ChineseInvestors.com, Inc. entered into a Share Exchange Agreement (“SEA”) pursuant
to which the Company sold/transferred to Hemp Logic its one hundred percent (100%) equity interest in CBD Biotech in exchange for
newly issued Class A Common Stock, par value $0.0001 and Class B Common Stock, par value $0.0001. CBD Biotech became a wholly-owned
subsidiary of Hemp Logic and the Company became a majority owner of Hemp Logic. Hemp Logic issued the Company an aggregate of four
million eight hundred forty-one thousand seven hundred thirty-nine (4,841,739) newly-issued 2,521,739 shares of Class A Common
Stock and 2,320,000 shares of Class B Common Stock of Hemp Logic in the aggregate (the “Hemp Logic Shares”). After
the SEA, one hundred percent (“100%”) of the equity interests of CBD Biotech are owned by Hemp Logic and approximately
83.9% of Hemp Logic is owned by the Company. The closing of the exchange took place on December 31, 2019. As of February 29, 2020,
the Company own 77% of Hemp Logic Inc.
Hemp Logic, Inc.
is conducting private offering of up to 1,666,666 Series A Convertible Preferred Shares, par value USD $0.0001 (the “Series
A Preferred Shares”), at a purchase price of USD $3.00 per Preferred Share (the "Purchase Price"). As of February
29, 2020, Hemp Logic received $813,000 from various investors for 217,000 shares of Hemp Logic’s series A preferred shares.
Hemp Logic also issued stock compensation to its officers and board of directors total 1,446,250 shares of its common stock. The
stock compensation issuance in Hemp Logic changed the Company’s ownership in Hemp Logic Inc. to 77%. $813,000 were recorded
as contribution from non-controlling interest on the Company’s consolidated statement of shareholders’ equity.
15. Related Party Transactions:
As of February 29, 2020, the Company advanced $27,971 to
the CEO, Mr. Warren Wang and $7,979 to Donald Capital LLC for daily operation.
Mrs.
Lan Jiang is the spouse of the Company’s CEO, Mr. Warren Wang. During the three months ended February 29, 2020 and
2019, she received salary compensation of $45,000 and $45,000, respectively.
The Company purchased the shares of
Medicine Man Technologies, Inc. (“MDCL”) in April 2014 using the equity method of accounting initially and
accounted for the ownership as an investment available for sale as of May 31, 2015 as the Company no longer had
“significant influence” over MDCL as a result of shares issuance. The Company liquidated 1,306,378 shares of MDCL
for $1,996,939 cash during the year ended May 31, 2017. The Company received an additional 31,250 shares of MDCL stock for IR
services which were provided for a period of six months starting January 15, 2019. The Company liquidated 34,457 shares of
MDCL for $99,207 cash and record $43,595 gain during the nine months ended February 29, 2020. The Company’s
records indicated that an additional 38,031 shares were held; however, the issuer’s transfer agent is not in
agreement; therefore, the Company also wrote off the remaining 38,031 shares as unrecoverable. There is no MDCL stock left as
of February 29, 2020.
16. Subsequent Event:
On March 11, 2020 Qi Zhang and Yan Fang
An, by and through their Counsel, filed a Complaint for Breach of Contract in the U.S. District Court, Central District of California,
Case No. 2:20-cv-02356 related to the breach of two unsecured promissory notes. The Company has retained counsel and is pursuing
its defenses.