Notes to Consolidated Financial Statements
(Unaudited)
(U.S Dollars unless otherwise noted)
NOTE 1. DESCRIPTION
OF BUSINESS AND ORGANIZATION
China Network Media Inc. (formerly known
as Metha Energy Solutions Inc.) was incorporated on April 18, 2008 under the laws of the State of Delaware.
Science & Technology World Website
Media Holding Co., Ltd. (“Science & Technology Holding”) was organized under the laws of the British Virgin Island
on February 15, 2011.
Science & Technology World Website
Media Group Co., Ltd. (“Science & Technology Media”) was organized under the laws of the British Virgin Island
on February 15, 2011 to serve as a holding company for the People's Republic of China (the "PRC") operations. On September
16, 2011, Science & Technology Media established Science & Technology World Website Hong Kong Media Holding Co., Ltd. (“HK
Science & Technology”) in Hong Kong to serve as an intermediate holding company.
On January 20, 2012, HK Science and Technology
established Science& Technology World Website Trade (Dalian) Co., Ltd (the “WFOE” or “Science & Technology
Trading”) in the PRC. Its purposes are, among others, a platform for online B2B service.
HK Science and Technology and the WFOE
are considered foreign investor and foreign invested enterprise respectively under PRC law. As a result, HK Science & Technology
and the WFOE are subject to limitations under PRC law on foreign ownership of Chinese companies. According to the Catalogue of
Industries for Guiding Foreign Investment (2011 Revision) (the “Catalogue”), there are four kinds of industries which
are encouraged, permitted, restricted and prohibited for foreign investment. The primary business of Dalian Tianyi Culture Development
Co., Ltd (“Dalian Tianyi”) and Science & Technology World Network (Dalian) Co., Ltd (“Science & Technology
(Dalian)”) are within the category in which foreign investment is currently restricted.
On January 21, 2012, the WFOE respectively
entered into a series of agreements with Dalian Tianyi, Science & Technology (Dalian) and their respective shareholders (“Contractual
Arrangements”). The relationship with Dalian Tianyi, Science & Technology (Dalian) and their respective shareholders
are governed by the Contractual Arrangements. The Contractual Arrangements are comprised of a series of agreements, including Exclusive
Technical Consulting Service Agreements and Operating Agreements, through which WFOE has the right to advise, consult, manage and
operate Dalian Tianyi and Science & Technology (Dalian), and collect 85% of their respective net profits. The shareholders
of Dalian Tianyi and Science & Technology (Dalian) have granted WFOE, under the Exclusive Equity Interest Purchase Agreement,
the exclusive right and option to acquire all of their equity interests respectively in Dalian Tianyi and Science & Technology
(Dalian). Furthermore, the shareholders of Dalian Tianyi and Science & Technology (Dalian) are under the procedure of pledging
all of their equity interests respectively in Dalian Tianyi and Science & Technology (Dalian) to WFOE under the Exclusive Equity
Interest Pledge Agreement, and through the Exclusive Equity Interest Pledge Agreement, WFOE can collect the remaining 15% of Dalian
Tianyi and Science & Technology (Dalian)’s respective net profits.
According to the Power of Attorney executed
by the shareholders of Dalian Tianyi and Science & Technology (Dalian), they exclusively authorized WFOE to perform and exercise
any and all of the shareholder’s rights in Dalian Tianyi and Science & Technology (Dalian).
As a result of the Contractual Arrangements,
under generally accepted accounting principles in the United States, or U.S. GAAP, Science & Technology Media is considered
the primary beneficiary of Dalian Tianyi and Science & Technology (Dalian) (“VIEs”).
On October 29, 2012, Science & Technology
Media entered into a Share Exchange Agreement by and among (i) Science & Technology Holding, (ii) the principal shareholders
of China Network Media Inc., (iii) China Network Media Inc., (iv) the shareholders of Science &Technology Holding and (v) Science
& Technology Media.
The acquisition was accounted for as a
“reverse merger,” and Science & Technology Media was deemed to be the accounting acquirer in the reverse merger.
Consequently, the assets and liabilities and the historical operations that would be reflected in the financial statements prior
to the acquisition would be those of Science &Technology Media and its wholly owned subsidiaries and VIEs, and would be recorded
at the historical cost, and the consolidated financial statements after completion of the acquisition would include the assets,
liabilities and operation of China Network Media Inc., Science & Technology Media and its wholly owned subsidiaries and VIEs
from the closing date of the acquisition. As a result of the issuance of the shares of common stock pursuant to the Exchange Agreement,
a change in control of occurred as a result of the acquisition.
In connection with the closing of the Exchange
Agreement, ToftApS, China Network Media Inc. principal shareholder, agreed to cancel its 10,000,000 shares of the common stock
that it owned in China Network Media Inc. and to issue 50,000,000 shares to shareholders of Science & Technology Holding, who
acquired a majority interest in China Network Media Inc., in October 2012 for the purpose of the reverse acquisition of Science
& Technology Media. Additionally, the existing officers and directors from China Network Media Inc. resigned from its board
of directors and all officer positions effective immediately after the closing of the reverse merger. Accordingly, China Network
Media Inc. appointed Mr. Jiang Wei, the former major shareholder of Science & Technology Holding as the Chairman of the Board
and appointed Mr. PengHuiAn, the former major shareholder of Science & Technology Holding as the Chief Executive Officer. The
shareholders of Science & Technology Media shareholder were issued common stock of China Network Media Inc. constituting approximately
95.02% of the fully diluted outstanding shares. After the RTO, 52,620,030 common stocks were outstanding.
China Network Media Inc.’ directors
approved the Exchange Agreement and the transactions contemplated thereby. Simultaneously, the directors of Science & Technology
Media also approved the Exchange Agreement and the transactions contemplated thereby.
As a result of the Exchange Agreement,
China Network Media Inc. acquired 100% of the processing and production operations of Science & Technology Media and its subsidiaries,
the business and operations of which now constitutes its primary business and operations.
On March 19, 2013, the Company submitted
dissolution application for Science & Technology Holding which was approved on April 2, 2013.
China Network Media Inc., its wholly-owned
subsidiaries and VIEs are collectively referred as “the Company”, “we”, “us”, “our”
for the purposes of these notes.
We operate a multi-languages
portal website that serves to the technology industry and provide advertising opportunities to the companies through our diverse
business network in China. The Company currently operates its website through different versions in China.
As our main target, we provide online platform
to business entrepreneurs and corporations with a B2B marketplace that can help our customers:
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¨
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Set
their brand image through multiple languages online magazine, online corporate multimedia advertisement, executives interviews,
institutional alliances and flexible membership package that tailor made based on what our customers need;
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|
¨
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Set
up customer’s online exhibition to introduce their products to the public, where they have our tailor-made corporate introduction
with 3D product description and factory facilities online show room ;
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¨
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Develop
intelligent leisure retirement industry through building a unique international intelligent technology health leisure endowment
industrial district including residential area, holiday resort, spa area etc. ;
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¨
|
Develop
an e-commercial platform to combine the online sales business with above intelligent leisure district and all the branches over
the world to provide elderly products and also exclusive products provided by our agents;
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|
¨
|
B2B
product purchase platform for companies and end-users;
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|
¨
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Online
job opportunity section for corporate clients; and
|
We currently derive a substantial portion
of our revenues from online advertising membership services. Our advertising membership solutions present corporate users with
attractive opportunities to combine the visual impact and engagement of traditional television-like multimedia advertisements and
online magazines with the interactivity and precise targeting capabilities of the Internet. We strive to promote a novel and unique
advertising environment on our website to attract technology enterprises.
NOTE 2. GOING
CONCERN AND LIQUIDITY
The accompanying unaudited consolidated
financial statements have been prepared assuming that the Company will continue as a going concern. The Company currently has limited
revenue and has accumulated deficit of $917,905 and $1,023,818 as of September 30, 2016 and December 31, 2015 and net income of
$128,489 and $544,291 for the nine months ended September 30, 2016 and 2015, respectively. In addition, the company had a negative
cash flow from operating activities for nine months ended September 30, 2016. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. Management plans to fund continuing operations through new financing from
related parties and equity financing arrangements. The Company’s continuation as a going concern is dependent on its ability
to meet its obligations, to obtain additional financing as may be required until 2017 when it can generate sources of recurring
revenues and to ultimately attain profitability. The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
The principal sources of liquidity are
cash and cash equivalents, loans from shareholders, as well as the cash flows generated from our operations.
As of September
30, 2016, the Company had cash and cash equivalents of approximately $73,410. As of December 31, 2015, the Company had cash and
cash equivalents of approximately
$
482,421. Cash and cash equivalents include cash on hand,
deposits in banks with maturities of three months or less, and all highly liquid investments which are unrestricted as to withdrawal
or use, and which have original maturities of three months or less at the time of purchase.
The Company believes that receivables due
from related parties will be collected in near future. Therefore, the cash and cash equivalents combined with proceeds that it
expects to generate from operating activities and receivables collected from related parties are sufficient to meet anticipated
working capital needs, commitments and capital expenditures over the next twelve months. It may, however, require additional cash
resources due to changes in business conditions and other future developments, or changes in general economic conditions.
NOTE 3. VARIABLE
INTEREST ENTITIES
To satisfy PRC laws and regulations, the
Company conducts certain business in the PRC through its VIEs.
The significant terms of the VIE Agreements
are summarized below:
Exclusive Technical Consulting Service
Agreement:
During the term of this Agreement, Science & Technology Trading shall provide the following technical consulting
services to Dalian Tianyi and Science & Technology (Dalian) in accordance with this Agreement: (i) Provision of advanced management
skills to offer a framework for the construction of a new management platform; (ii) Provision of technology information and materials
related to Dalian Tianyi and Science & Technology (Dalian)’s business development and operation. The content of the technology
information and documents may be enhanced or diminished during the performance of this Agreement and upon mutual agreement to address
each Party’s requirements; and (iii) Training of technical and managerial personnel for Dalian Tianyi and Science & Technology
(Dalian) and provision of required training documents. Science & Technology Trading will send technologists and managerial
personnel to Dalian Tianyi and Science & Technology (Dalian) to provide related technology and training services as necessary.
Dalian Tianyi and Science & Technology (Dalian) hereby agrees to accept the technical consulting services provided by Science
& Technology Trading. Dalian Tianyi and Science & Technology (Dalian) further agrees that, during the term of this Agreement,
it shall not accept technical consulting and services from any other party without the prior written consent of Science & Technology
Trading. Science & Technology Trading shall be the sole and exclusive owner of all right, title and interests to any and all
intellectual property rights arising from the performance of this Agreement, including but not limited to, copyrights, patent,
know-how and commercial secrets, whether such intellectual property is developed by Science & Technology Trading or Dalian
Tianyi and Science & Technology (Dalian).
Exclusive Equity Interest Purchase
Agreement:
Under the Exclusive Option Agreements entered into by and among Science & Technology Trading, each of the
PRC Shareholders irrevocably granted to Science & Technology Trading the exclusive right to purchase or designate one or more
persons to purchase all or any portion of the Equity Interest from the PRC Shareholders subject to compliance with legal restrictions
under applicable PRC laws. The PRC Shareholders shall not sell or transfer all or any portion of the Equity Interest to any party
other than Science & Technology Trading and/or the Specified Person.
Equity Interest Pledge Agreement:
Under the Equity Pledge Agreements entered into by and among Science& Technology Trading, the PRC Operating Entities
and each of the PRC Shareholders, the PRC Shareholders pledged all of their equity interests in the PRC Operating Entities as security
to ensure that Science& Technology Trading collects the Consulting Fee under the Service Agreement. The Pledge shall be effective
as of the date that the Pledge is recorded in the register of shareholders of Dalian Tianyi and Science & Technology (Dalian)
and shall remain effective so long as this Agreement remains in effect. During the Term of the Pledge, Science& Technology
Trading shall be entitled to foreclose on the Pledge in accordance with this Agreement in the event that Dalian Tianyi and Science
& Technology (Dalian) fail to pay the Consulting Fees in accordance with the Service Agreement. Science& Technology Trading
shall be entitled to exercise, dispose of or assign the Pledge in accordance with this Agreement.
Powers of Attorney:
The PRC
Shareholders have each executed an irrevocable power of attorney to appoint Science& Technology Trading as their sole representative
with full authority to perform and exercise any and all shareholder’s rights associated with the Equity Interest, including
but not limited to, the right to attend shareholders’ meetings, the right to execute shareholders’ resolutions, the
right to sell, assign, transfer or pledge any or all of the Equity Interest and the right to vote the Equity Interest for all matters,
including but not limited to, the appointment of legal representatives, board members, executive directors, inspectors, chief managers
and other senior management officers and the submission of all the Company’s related documentations to the competent authorities.
The term of each power of attorney is valid so long as such shareholder is a shareholder of the respective PRC Operating Entity.
As a result of these VIE Agreements, the
Company through its wholly-owned subsidiary, Science& Technology Trading, was granted with unconstrained decision making rights
and power over key strategic and operational functions that would significantly impact the PRC Operating Entities or the VIEs’
economic performance, which includes, but is not limited to, the development and execution of the overall business strategy; important
and material decision making; decision making for merger and acquisition targets and execution of merger and acquisition plans;
business partnership strategy development and execution; government liaison; operation management and review; and human resources
recruitment and compensation and incentive strategy development and execution. Science& Technology Trading also provides comprehensive
services to the VIEs for their daily operations, such as operational technical support, OA technical support, accounting support,
general administration support and technical support for products and services. As a result of the Exclusive Business Cooperation
Agreements, the Equity Pledge Agreements and the Exclusive Option Agreements, the Company will bear all of the VIEs’ operating
costs in exchange for 100% of the net income of the VIEs. Under these agreements, the Company has the absolute and exclusive right
to enjoy economic benefits similar to equity ownership through the VIE Agreements with our PRC Operating Entities and their shareholders.
These contractual arrangements may not
be as effective in providing the Company with control over the VIEs as direct ownership. Due to its VIE structure, the Company
has to rely on contractual rights to effect control and management of the VIEs, which exposes it to the risk of potential breach
of contract by the shareholders of the VIEs for a number of reasons. For example, their interests as shareholders of the VIEs and
the interests of the Company may conflict and the Company may fail to resolve such conflicts; the shareholders may believe that
breaching the contracts will lead to greater economic benefit for them; or the shareholders may otherwise act in bad faith. If
any of the foregoing were to happen, the Company may have to rely on legal or arbitral proceedings to enforce its contractual rights,
including specific performance or injunctive relief, and claiming damages. Such arbitral and legal proceedings may cost substantial
financial and other resources, and result in a disruption of its business, and the Company cannot assure that the outcome will
be in its favor. Apart from the above risks, there are no significant judgments or assumptions regarding enforceability of the
contracts.
In addition, as all of these contractual
arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the
PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures.
The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties
in the PRC legal system could further limit the Company’s ability to enforce these contractual arrangements. Furthermore,
these contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene
PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event the Company is unable to enforce
these contractual arrangements, it may not be able to exert effective control over the VIEs, and its ability to conduct its business
may be materially and adversely affected.
The assets of the VIEs can be used to settle
obligations of the consolidated entities. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent
additional claims on the Company’s general assets.
Most of our operations are conducted through
our affiliated companies which the Company controls through contractual agreements in the form of VIEs. Current regulations in
China permit our PRC subsidiaries to pay dividends to us only out of its accumulated distributable profits, if any, determined
in accordance with their articles of association and PRC accounting standards and regulations. The ability of these Chinese affiliates
to make dividends and other payments to us may be restricted by factors that include changes in applicable foreign exchange and
other laws and regulations.
|
A.
|
Under
PRC law, our subsidiary may only pay dividends after 10% of its after-tax profits have been set aside as reserve funds, unless
such reserves have reached at least 50% of its registered capital. Such cash reserve may not be distributed as cash dividends.
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|
B.
|
The
PRC Income Tax Law also imposes a 10% withholding income tax on dividends generated on or after January 1, 2008 and distributed
by a resident enterprise to its foreign investors, if such foreign investors are considered as non-resident enterprise without
any establishment or place within China or if the received dividends have no connection with such foreign investors’ establishment
or place within China, unless such foreign investors’ jurisdiction of incorporation has a tax treaty with China that provides
for a different withholding arrangement.
|
As of September 30, 2016, the Company has
no plan for distribution of retained earnings.
The following financial statement amounts
and balances of the VIEs were included in the accompanying consolidated financial statements as of and for the nine months and
three months ended September 30, 2016 and 2015, respectively:
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|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
(Unaudited)
|
|
|
|
|
Total assets
|
|
$
|
820,038
|
|
|
$
|
586,746
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
355,174
|
|
|
$
|
265,795
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenues
|
|
$
|
843,713
|
|
|
$
|
1,236,812
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
147,210
|
|
|
$
|
544,291
|
|
|
|
For Three Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenues
|
|
$
|
221,219
|
|
|
$
|
448,151
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
69,354
|
|
|
$
|
256,418
|
|
All of our current revenue is generated
in PRC currency Renminbi (“RMB”). Any future restrictions on currency exchanges may limit our ability to use net revenues
generated in RMB to make dividends or other payments in U.S. dollars or fund possible business activities outside China.
Foreign currency exchange regulation in
China is primarily governed by the following rules:
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¨
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Foreign
Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules;
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¨
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Administration
Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.
|
Under the Administration Rules, RMB is
freely convertible for current account items, including the distribution of dividends, interest payments, trade and service related
foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments
and investments in securities outside of China, unless the prior approval of the State Administration of Foreign Exchange (“SAFE”)
is obtained and prior registration with the SAFE is made. Foreign-invested enterprises like ours that need foreign exchange for
the distribution of profits to their shareholders may affect payment from their foreign exchange accounts or purchase and pay foreign
exchange rates at the designated foreign exchange banks to their foreign shareholders by producing board resolutions for such profit
distribution. Based on their needs, foreign-invested enterprises are permitted to open foreign exchange settlement accounts for
current account receipts and payments of foreign exchange along with specialized accounts for capital account receipts and payments
of foreign exchange at certain designated foreign exchange banks.
NOTE 4. SUMMARIES
OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated balance sheet
as of December 31, 2015, which has been derived from audited financial statements, and the unaudited interim consolidated financial
statements as of September 30, 2016 and for the nine months and three months periods ended September 30, 2016 and 2015 have been
prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information
and footnote disclosures, which are normally included in financial statements prepared in accordance with United States generally
accepted accounting principles (U.S. GAAP), have been condensed or omitted pursuant to such rules and regulations, although we
believe that the disclosures made are adequate to provide for fair presentation. The interim financial information should be read
in conjunction with the Financial Statements and the notes thereto included in the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2015, previously filed with the SEC.
In the opinion of management, all adjustments
(which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial
position as of September 30, 2016, its consolidated results of operations and cash flows for the nine months and three months periods
ended September 30, 2016 and 2015, as applicable, have been made. The interim results of operations are not necessarily indicative
of the operating results for the full fiscal year or any future periods.
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b.
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Principles
of consolidation
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The consolidated financial statements include
the financial statements of the Company and its wholly-owned subsidiaries and VIEs. Upon consolidation, all balances and transactions
between the Company and its subsidiaries and VIEs have been eliminated.
The preparation of consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period. Management makes these estimates using the best information
available at the time the estimates are made; however actual results could differ from those estimates. Significant items subject
to such estimates and assumptions include valuation allowances for receivables and recoverability of carrying amount and the estimated
useful lives of long-lived assets.
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d.
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Cash
and cash equivalents
|
Cash and cash equivalents include cash
on hand, cash on deposit with various financial institutions in PRC and all highly-liquid investments with original maturities
of three months or less at the time of purchase. Cash accounts are not insured or otherwise protected. Should any bank or trust
company holding cash deposits become insolvent, or if the Company is otherwise unable to withdraw funds, the Company would lose
the cash on deposits with that particular bank or other financial institutions.
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e.
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Property
and equipment
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Property and equipment mainly comprise
computer equipment, hardware and office furniture. Property and equipment are recorded at cost less accumulated depreciation with
no residual value.
Depreciation for financial reporting purposes
is provided using the straight-line method over the estimated useful lives of the assets:
Office and other equipment
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5 years
|
|
|
Computers
|
3 years
|
Depreciation expense is allocated among Research
and development expenses, Selling and marketing expenses and General and administrative expenses.
When office equipment and electronic
devices are retired or otherwise disposed of, resulting gain or loss is included in net income or loss in the year
of disposition for the difference between the net book value and proceeds received thereon. Maintenance and
repairs which do not improve or extend the expected useful lives of the assets are charged to expenses as incurred.
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f.
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Impairment
of long-lived assets
|
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. Recoverability
of long-lived assets to be held and used is measured by a comparison of the carrying amount of the asset to the estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future
undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount of the asset and its
fair value. There were no impairment losses for the nine and three months ended September 30, 2016 and 2015, respectively.
The Company recognizes revenue in accordance
with ASC 605,
Revenue Recognition
. Revenues are recognized when the four of the following criteria are met: (i) persuasive
evidence of an arrangement exists, (ii) the service has been rendered, (iii) the fees are fixed or determinable, and (iv) collectability
is reasonably assured. The recognition of revenue involves certain management judgments. The amount and timing of our revenues
could be materially different for any period if management made different judgments or utilized different estimates.
Online Membership Revenue
Online membership revenue includes revenue
from members for brand advertising services as well as others services.
The Company has the arrangements with nonrefundable
up-front fees model (“the Model”) to recognize revenue for the online membership business. We apply the Model, where
a contract is signed to establish a fixed price for our services to be provided for a period of time as a membership enrollment,
for a majority of our online membership revenue. Revenue is recognized ratably over the membership periods on a straight line basis,
unless evidence suggests that the revenue is earned or obligations are fulfilled in a different pattern, over the contractual term
of the arrangement or the expected period during which those specified services will be performed, whichever is longer. The Company
provides advertisement placements to our advertising customers on our different Website channels and in different formats, which
can include, among other things, banners, links, logos, buttons, rich media, pre-roll and post-roll video screens, pause video
screens and content integration, as specified in the contracts with the members. The members can choose various on line services
from the membership contracts based on their yearly membership.
The Company recognizes revenue when all
revenue recognition criteria are met.
A party is considered to be related to
the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under
common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate
families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls
or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties
might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or
operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly
influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate
interests is also a related party.
|
i.
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Earnings
(loss) per share
|
Basic earnings (loss) per share is computed
by dividing income attributable to common shareholders by the weighted average number of common shares outstanding for all periods.
Diluted earnings per share is computed by dividing net loss attributable to common shareholders by the weighted average number
of shares outstanding, increased by common stock equivalents. Common stock equivalents represent incremental shares issuable upon
exercise of outstanding warrants. However, potential common shares are not included in the denominator of the diluted loss per
share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which a net loss is recorded.
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j.
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Foreign
currency transactions and translations
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An entity’s functional currency is
the currency of the primary economic environment in which it operates, normally that is the currency of the environment in which
the entity primarily generates and expends cash. Management’s judgment is essential to determine the functional currency
by assessing various indicators, such as cash flows, sales price and market, expenses, financing and inter-company transactions
and arrangements. The reporting currency of the Company is United States dollars (“U.S. dollars” or “$”),
and the functional currency of HK Science & Technology is Hong Kong dollars (“HK dollar”). The functional currency
of the Company’s PRC subsidiary and VIEs is the RMB, and PRC is the primary economic environment in which the Company operates.
The reporting currency of these consolidated financial statements is U.S. dollars.
For financial reporting purposes, the financial
statements of the Company’s PRC subsidiary and VIEs, which are prepared using the RMB, are translated into the Company’s
reporting currency, U.S. dollars. The financial statements of HK Science & Technology, which are prepared using the HK dollar,
are translated into the Company’s reporting currency, U.S. dollars. Assets and liabilities are translated using the exchange
rate at each balance sheet date. Revenue and expenses are translated using average rates prevailing during each reporting period,
and shareholders' equity is translated at historical exchange rates. Adjustments resulting from the translation are recorded as
a separate component of accumulated other comprehensive income in owners’ equity.
Transactions denominated in currencies
other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of
the transactions. The resulting exchange differences are included in the determination of net income (loss) of the consolidated
financial statements for the respective periods.
The exchange rates used for foreign currency
translation were as follows:
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|
September 30,
2016
|
|
|
December 31,
2015
|
|
(US$1 = RMB)
Balance sheet items, except for equity accounts
|
|
|
6.6702
|
|
|
|
6.4917
|
|
(US$1 = HKD)
|
|
|
|
|
|
|
|
|
Balance sheet items, except for equity accounts
|
|
|
7.7550
|
|
|
|
7.7507
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
(US$1 = RMB)
Items in the statements of operations and comprehensive income (loss), and statements of cash flows
|
|
|
6.5802
|
|
|
|
6.1735
|
|
(US$1 = HKD)
Items in the statements of operations and comprehensive income (loss), and statements of cash flows
|
|
|
7.7638
|
|
|
|
7.7531
|
|
No representation is made that the RMB
amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.
Translations
adjustments resulting from this process are included in accumulated other comprehensive loss in the shareholder’s equity
were $78,076 at September 30, 2016 and
$68,167
at December 31, 2015, respectively.
|
k.
|
Fair
Value Measurements
|
The Company applies
the provisions of ASC Subtopic 820-10, Fair Value Measurements, for fair value measurements of financial assets and financial liabilities
and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements.
ASC 820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
Fair value is
defined as 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. When determining the fair value measurements for assets and liabilities required or
permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact
and it considers assumptions that market participants would use when pricing the asset or liability.
ASC 820 establishes
a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and
the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair
value hierarchy are as follows:
|
¨
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
¨
|
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that
are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
|
|
¨
|
Level
3 inputs to the valuation methodology are unobservable and significant to the fair value.
|
There were no transfers between level 1,
level 2 or level 3 measurements for the three months ended September 30, 2016 and 2015, respectively.
As of September 30, 2016 the Company used
Level 3 to measure the fair value of the shares that the Company issued to employees and part-time consultants for the service
rendered. As the Company’s shares were still not active on OTCBB, no quoted price for those shares.
The carrying values of the Company’s
financial assets and liabilities, including accounts receivables, other current assets, and accrued expenses and other current
liabilities, are a reasonable estimate of fair value because of the short period of time between the origination of such instruments
and their expected realization and if applicable, their stated interest rate approximates current rates available.
|
l.
|
Share-Based
Compensation
|
Pursuant to ASC Topic 718,
Compensation
- Stock Compensation
, the Company measures the cost of employee services received in exchange for an award of stock-based compensation
based on the grant-date fair value of the award. The cost is recognized over the requisite service period, except for awards granted
to employees for past services, which are fully expensed by the grant date.
|
m.
|
Recently
adopted accounting pronouncements
|
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue
arising from contracts with customers and supersedes current revenue recognition guidance. In August 2015, the FASB issued ASU
2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendment in this update defers
the effective date of ASU 2014-09 for all entities by one year to annual periods beginning after December 15, 2017. Early adoption
is permitted as of the original effective date, interim and annual reporting periods after December 15, 2016. Entities have the
option of using either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. In April and May 2016, the
FASB issued ASU 2016-10 and ASU 2016-12, Revenue from Contracts with Customers. These new standards will identify performance obligations.
The Company is currently evaluating the effect of these new standards, including the transition method, to determine the impact
on the Company's consolidated financial position, results of operations, cash flows, or related disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842), aimed at making leasing activities more transparent and comparable. The new standard requires substantially
all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including
today’s operating leases. For public business entities, the standard is effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. For all other entities, the standard is effective for fiscal years
beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application
is permitted for all entities. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated
financial condition, results of operations and cash flows.
In March, 2016, the FASB issued ASU 2016-09,
"Improvements to Employee Share-Based Payment Accounting." This update was issued as part of a simplification effort
for the accounting of share-based payment transactions, including the income tax consequences, classification of awards as either
equity or liabilities, and classification on the statement of cash flows. The amendment is effective for annual periods beginning
after December 15, 2016, and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the impact
of the adoption of this guidance on its consolidated financial condition, results of operations, financial condition and cash flows.
We do not believe other recently issued
but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position,
statements of operations and cash flows.
NOTE 5. EARNINGS
PER SHARE
The FASB’s accounting standard for
earnings per share requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology
used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available
to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into
account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted
into common stock. The Company has no potential dilutive securities as of September 30, 2016.
The following is a reconciliation of the
basic and diluted earnings per share computations for the three and nine months ended September 30, 2016 and 2015, respectively:
|
|
For Three Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net income for basic and diluted earnings per share
|
|
$
|
69,694
|
|
|
$
|
256,418
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in basic and diluted computation
|
|
|
65,830,533
|
|
|
|
65,604,533
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.001
|
|
|
$
|
0.004
|
|
|
|
For Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net income for basic and diluted earnings per share
|
|
$
|
128,489
|
|
|
$
|
544,291
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in basic and diluted computation
|
|
|
65,770,464
|
|
|
|
65,540,074
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.002
|
|
|
$
|
0.008
|
|
NOTE 6. CONCENTRATION
OF RISK
Credit risk
Financial instruments that potentially
expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents and related parties receivables.
The Company places its cash and cash equivalents
with financial institutions, which management believes are of high-credit ratings and quality.
The related parties receivables are regularly
monitored and an impairment analysis is performed at each reporting date based on the payment history and financial position of
related parties.
The Company conducts credit evaluations
of customers and generally does not require collateral or other security from its customers. The Company establishes an allowance
for doubtful accounts primarily based upon the age of the receivables and factors surrounding the credit risk of specific customers.
Concentration of customers and suppliers
For the nine months ended September 30,
2016, two customers accounted for 71% and 26% of the Company’s sales, respectively. For the nine months ended September 30,
2015, three customers accounted for 40%, 14% and 14% of the Company’s sales, respectively. Except for the afore-mentioned
customers, there was no other single customer who accounted for more than 10% of the Company’s sales for the nine months
ended September 30, 2016 and 2015, respectively.
For the three months ended September 30,
2016, one customer accounted for 97% of the Company’s sales. For the three months ended September 30, 2015, one customer
accounted for 59% of the Company’s sales, respectively. Except for the afore-mentioned customers, there was no other single
customer who accounted for more than 10% of the Company’s sales for the three months ended September 30, 2016 and 2015, respectively.
For the nine months and three months ended
September 30, 2016 and 2015, there was no supplier who accounted for more than 10% of the Company’s purchases.
As of September 30, 2016 two customers
accounted for 61% and 31% of due from related parties. As of December 31, 2015 there was no customer who accounted for more than
10% of the Company’s due from related parties.
NOTE 7. PREPAID
EXPENSES AND OTHER CURRENT ASSETS
At September 30, 2016 and December 31,
2015, prepayment and other current assets consist of:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
(Unaudited)
|
|
|
|
|
Prepayment to advertisement and internet resources providers
|
|
$
|
2,705
|
|
|
$
|
3,419
|
|
Other current assets
|
|
|
15,528
|
|
|
|
13,985
|
|
|
|
$
|
18,233
|
|
|
$
|
17,404
|
|
Prepayment to advertisement and internet
resources providers consists of the deposits required by and made to the telecommunication platform operators for using their network
services.
NOTE
8. PROPERTY AND EQUIPMENT
Property and equipment consists of network
equipment and servers used for hosting Company’s website and furniture, equipment and computers used in the office.
Property and equipment consists of the
following:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
(Unaudited)
|
|
|
|
|
Office and other equipment
|
|
$
|
116,965
|
|
|
$
|
92,665
|
|
Computers
|
|
|
59,451
|
|
|
|
61,087
|
|
Property and equipment, cost
|
|
|
176,416
|
|
|
|
153,752
|
|
Less: accumulated depreciation
|
|
|
(151,027
|
)
|
|
|
(148,067
|
)
|
Property and equipment, net
|
|
$
|
25,389
|
|
|
$
|
5,685
|
|
Depreciation expense for the nine months
ended September 30, 2016 and 2015 were $7,018 and $14,429, respectively. Depreciation expense for the three months ended September
30, 2016 and 2015 were $3,336 and $2,422, respectively.
NOTE
9. RELATED PARTY TRANSACTIONS
For the nine and three months periods of
September 30, 2016 the Company derived revenue from Science & Technology Network Business (Dalian) Co., Ltd and Science &
Technology Healthy Industry (Dalian) Co., Ltd, related companies owned by the Chairman, Mr. Jiang Wei as below:.
|
|
For Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Science & Technology Network Business (Dalian) Co., Ltd
|
|
$
|
219,353
|
|
|
$
|
174,328
|
|
Science & Technology Healthy Industry (Dalian) Co., Ltd
|
|
$
|
597,632
|
|
|
|
-
|
|
Total
|
|
$
|
816,985
|
|
|
$
|
174,328
|
|
|
|
For Three Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Science & Technology Network Business (Dalian) Co., Ltd
|
|
|
-
|
|
|
$
|
174,328
|
|
Science & Technology Healthy Industry (Dalian) Co., Ltd
|
|
$
|
215,344
|
|
|
|
-
|
|
Total
|
|
$
|
215,344
|
|
|
$
|
174,328
|
|
The services that the company provided
were the same as they provide to third parties. And the price was established according to the company’s principle which
consists with third parties.
For the nine and three months of September
30, 2016 the Company paid Science & Technology Network Business (Dalian) Co., Ltd $30,598 and $0 for the website upgrading.
At September 30, 2016 and December 31,
2015 the Company had balances due from (due to) related parties as below:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Due from related parties
|
|
|
|
|
|
|
|
|
Science & Technology Network Business (Dalian) Co., Ltd.
|
|
$
|
229,378
|
|
|
|
-
|
|
Science & Technology Healthy Industry (Dalian) Co., Ltd.
|
|
$
|
458,756
|
|
|
|
-
|
|
These receivables were for the services the Company provided
to these two related party companies. $229,378 due from Science & Technology Network Business (Dalian) Co., Ltd. has been collected
subsequently till the filing of this report, and $229,378 due from Science & Technology Healthy Industry (Dalian) Co., Ltd.
has been collected subsequently till the filing of this report.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Due from related parties
|
|
|
|
|
|
|
|
|
Science & Technology Healthy Industry (Dalian) Co., Ltd.
|
|
$
|
59,218
|
|
|
|
-
|
|
This receivable was due on demand, non-interest bearing and
has no maturity date. All of this amount has been collected subsequently till the filing of this document.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Due to related parties
|
|
|
|
|
|
|
|
|
Xie He Si Decoration Co., Ltd.
|
|
$
|
78,169
|
|
|
$
|
80,251
|
|
This payable is due on demand, is non-interest
bearing and has no maturity date.
NOTE
10. DEFERRED REVENUE
Deferred revenue represents customer payments
made in advance for membership contracts while services have not been fully provided. Membership contracts are typically billed
on full basis in advance and revenue is recognized ratably over the membership period.
As of September 30, 2016 and December 31,
2015, deferred revenue consisted of the following:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
(Unaudited)
|
|
|
|
|
Deferred revenue, current
|
|
$
|
2,122
|
|
|
$
|
26,366
|
|
NOTE
11. OTHER CURRENT LIABILITIES
Other current liabilities consist of the
following:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
(Unaudited)
|
|
|
|
|
Payroll payable
|
|
$
|
21,675
|
|
|
$
|
21,736
|
|
Other payable
|
|
|
11,119
|
|
|
|
1,778
|
|
Total
|
|
$
|
32,794
|
|
|
$
|
23,514
|
|
NOTE
12. TAXATION
Science & Technology Trading and our
combined VIEs are established in Dalian, Province, PRC, and governed by the Income Tax Law of the PRC concerning privately-held
enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements
after appropriate tax adjustments in 2016 and 2015.
The effective tax rate for the Company
for the nine months ended September 30, 2016 and 2015 was 47% and 26% respectively.
A reconciliation of the provision for income
taxes determined at the U.S. federal corporate income tax rate to the Company’s effective income tax rate is as follows:
|
|
For Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Unaudited
|
|
|
Unaudited
|
|
US federal rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Taxable income
|
|
|
241,670
|
|
|
|
733,484
|
|
Computed expected income tax expense
|
|
|
(82,168
|
)
|
|
|
(249,385
|
)
|
Reconciliation items:
|
|
|
|
|
|
|
|
|
Rate differential for domestic earnings
|
|
|
21,750
|
|
|
|
66,014
|
|
Non-deductible expenses
|
|
|
(275
|
)
|
|
|
(219
|
)
|
Valuation allowance on deferred tax assets
|
|
|
(52,488
|
)
|
|
|
(5,603
|
)
|
Effective income tax expense
|
|
$
|
(113,181
|
)
|
|
$
|
(189,193
|
)
|
The effective tax rate for the Company
for the three months ended September 30, 2016 and 2015 was 32% and 19% respectively.
A reconciliation of the provision for income
taxes determined at the U.S. federal corporate income tax rate to the Company’s effective income tax rate is as follows:
|
|
For Three Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Unaudited
|
|
|
Unaudited
|
|
US federal rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Taxable income
|
|
|
103,203
|
|
|
|
318,156
|
|
Computed expected income tax expense
|
|
|
(35,089
|
)
|
|
|
(108,173
|
)
|
Reconciliation items:
|
|
|
|
|
|
|
|
|
Rate differential for domestic earnings
|
|
|
9,288
|
|
|
|
28,634
|
|
Non-deductible expenses
|
|
|
2
|
|
|
|
(20
|
)
|
Valuation allowance on deferred tax assets
|
|
|
(7,710
|
)
|
|
|
(17,821
|
)
|
Effective income tax expense
|
|
$
|
(33,509
|
)
|
|
$
|
(61,738
|
)
|
Realization of the net deferred tax assets
is dependent on factors including future reversals of existing taxable temporary differences and adequate future taxable income,
exclusive of reversing deductible temporary differences and tax loss or credit carry forwards. The Company evaluates the potential
realization of deferred tax assets on an entity-by-entity basis. As of September 30, 2016, valuation allowances were provided against
deferred tax assets in entities where it was determined it was more likely than not that the benefits of the deferred tax assets
will not be realized. The Company had deferred tax assets which consisted of tax loss carry-forwards, which can be carried forward
to offset future taxable income for five years from the year the loss occurred. The management determines it is more likely than
not that these deferred tax assets could not be recognized, so full allowances were provided as of September 30, 2016 and December
31, 2015.
|
B)
|
Value
Added Tax and relevant surcharge
|
Revenue of our membership and advertising
planning services are subject to 6% value added tax (“VAT”) and 0.72% total surcharge of the gross service income for
the business incurred on and after November 1, 2013.
The Company pays the VAT when the invoices
are issued to customers and estimates the income tax as the full received amounts had been recognized as revenue.
NOTE
13. STATUTORY RESERVES
As stipulated by the laws and regulations
for enterprises operating in PRC, the subsidiaries of the Company are required to make annual appropriations to a statutory surplus
reserve fund. Specifically, the subsidiaries of the Company are required to allocate 10% of their profits after taxes, as determined
in accordance with the PRC accounting standards applicable to the subsidiaries of the Company, to a statutory surplus reserve until
such reserve reaches 50% of the registered capital of the subsidiaries of the Company. The Company can use the statutory surplus
reserve to offset deficits, expand its plant or increase capital when and only when the reserve balance exceeds 50% of the registered
capital, and the amount capitalized should be limited to 50% of the statutory surplus reserve. The Company appropriated statutory
surplus of $22,576 and $0 as of September 30, 2016 and December 31, 2015, respectively.
NOTE 14. SHARES
GRANTED AND ISSUED TO EMPLOYEES
On February 10, 2015, the Company determined
to grant equity awards of 429,200 shares to 2 part-time consultants and 46 employees for the services rendered. The total fair
value of these shares at the date of grant was estimated to be $21,224.
On November 27, 2015, the Company determined
to grant equity awards of 75,000 shares to one part-time consultant for the services rendered. The total fair value of these shares
at the date of grant was estimated to be $3,709.
On April 19, 2016, the Company grants equity
awards of shares of common stock to employees for the services rendered. The total fair value of these shares at the date of grant
was $7,467.
The fair value of the shares granted was
$0.04945 per share calculated through the application of an income approach to evaluate the future value of the operation into
a present market value. This method eliminates the discrepancy in time value of money by using a discount rate to reflect all business
risks including intrinsic and extrinsic uncertainties in relation to the operation.
Major assumptions used for measuring the
fair value as follow:
|
•
|
It is assumed that there will be no material change in the existing political, legal, technological, fiscal or economic condition which may adversely affect the business of the Company;
|
|
•
|
The Company will adhere to the terms that bond with the contracts and agreements;
|
|
•
|
The Company’s competitive advantages and disadvantages will not change significantly during the period.
|
NOTE 15. COMMITMENTS
The Company’s
operating lease commitment as of September 30, 2016 and December 31, 2015 were $22,675 and $17,121, respectively. The unpaid contract
amount is expected to be paid in one year.
NOTE 16. SUBSEQUENT
EVENTS
Except disclosed in
Note 9, there were no any significant events occurred subsequent to the balance sheet date but prior to the filing of this report
that would have a material impact on our consolidated financial statements.