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. The stockholders of Chineseinvestors.com, Inc. were issued 8,200,000 shares of common stock, or approximately 96% of the Company’s total outstanding common shares. After giving effect to the acquisition, Chineseinvestors.com, Inc. became a wholly owned subsidiary and the name was changed to Chineseinvestors.com, Inc. Immediately prior to the acquisition of Chineseinvestors.com, Inc., MAS Capital Inc. returned 8,200,000 shares of common stock for cancellation without any consideration.

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, New York City, NY and Flushing, NY and Richmond, British Columbia.

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.

Earlier this year, in February 2019, CBD Biotech formed CBD Biotech, Inc., an exempted company with limited liability incorporated in the Cayman Islands (“CBD Biotech Cayman”) which is solely owned by Wei Wang, CEO of ChineseInvestors.com, Inc. and Alex Hamilton, Chairman and Chief Financial Officer of CBD Biotech.

In April 2017, the Company established ChineseHempOil.com, Inc. dba “Chinese Wellness Center” 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. and CIIX Online, Inc., Delaware companies in April 2017. The two wholly owned subsidiaries have not operated since the inceptions.

In June 2017, the Company formed CBD Biotechnology Ltd. (“CBD Canada”), a corporation incorporated in the Province of British Columbia, which is 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 August 31, 2019.

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, with Warren (Wei) Wang, the Company’s CEO, as its sole managing member. Mr. Wang has transferred all of his interest in Bitcoin Trading Academy, LLC to the Company for $1 consideration. Bitcoin Trading Academy LLC began offering in person and on-line courses on cryptocurrency investment and trading education in July 2018.

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.

In August 2018, the Company formed CIIX Online Ltd. (“CIIX Online”), a corporation incorporated in the Province of British Columbia, which is anticipated to focus on the sales of the Company’s subscription service to consumers.

On November 11, 2018, the Company established Blue Ocean Capital Holding LLC (“BO”), a Delaware limited liability company. On January 23, 2019, BO entered into an Equity Transfer Agreement (“ETA”) with The Connell Company (“CC”) whereby CC will sell its 100% ownership stake in Connell Securities LLC (“CS”) to BO. CS is a registered broker-dealer and member of FINRA. BO is a Delaware limited liability company with two members — Wei Wang, the Company’s chief executive officer, who owns 10% of the issued and outstanding member units and CIIX which owns 90% of the issued and outstanding member units. Pursuant to the ETA, the purchase price of CS is $75,000 and is subject to review and approval of FINRA before the sale can be consummated. In accordance with the ETA, BO’s $75,000 purchase price is held in escrow and will be disbursed to CC upon closing or returned to BO if no closing occurs.

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 CBD Biotech Cayman 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.

2. Liquidity and Capital Resources:

Cash Flows – During the three months ended August 31, 2019, the Company primarily generated cash from issuances of its debts to fund its operations. The Company received total proceeds of $1,547,923 of proceeds from the issuance of unsecured promissory notes which accrue interest at the rate of 10% per annum.

Cash flows used in operations for the three months ended August 31, 2019 and 2018 were $2,096,134 and $2,214,567, respectively. The decreased cash   used in operations was due to increased general and administrative expenses used in operations.

Capital Resources – As of August 31, 2019, the Company had cash and cash equivalents of $756,478 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 months ended August 31, 2019 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.,CBD Biotech, Inc., Hemp Logic, CIIX Online, NewCoins168.com Digital Media Technology Ltd., Bitcoin Trading Academy LLC, CIIX Online Ltd and Blue Ocean Capital Holding LLC. 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:

Investor-relations service income is earned by the Company in return for delivering current, publicly available information related to our clients.

There is no significant adjustment from the implementation of ASU 2014-09.

The Company recognized revenue pursuant to revenue recognition principles presented in SAB Topic 13 prior to May 31, 2018. First, persuasive evidence of an arrangement. Second, delivery has occurred, or services have been rendered. Third the seller’s price to the buyer is fixed or determinable. And last collectability is reasonably assured. We adopted ASU 2014-09, or ASC 606, on June 1, 2018 and it did not have a material impact on our financial position or results of operations. The guidance requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

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 at Breakwater MB, 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 Breakwater MB, LLC for the three months ended August 31, 2019 as no impairment indicator 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 August 31, 2019 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.

As of August 31, 2019 and May 31, 2019, the Company determined that an allowance was not needed. The Company recorded $6,763 bad debt expense for the three months ended August 31, 2019.

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 August 31, 2019 and May 31, 2019, the Company had $255,469 and $608,908 cash balances uninsured, respectively.

Major customers and vendors- For the three months ended August 31, 2019, one customer accounted for 38% of total revenue of the Company with no accounts receivable outstanding as of August 31, 2019. One customer accounted for 11% of the total revenue of the Company for the three months ended August 31, 2018 without accounts receivable outstanding as of August 31, 2018.

There is one vendor accounted 91% of the total purchase of the Company for the three months ended August 31, 2019. There is no vendor concentration for the Company for the three months ended August 31, 2018.

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.

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 records a reserve against the inventory 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 August 31, 2019 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 August 31, 2019 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 August 31, 2019 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 August 31, 2019 and May 31, 2019, the deferred revenue compromised as following:

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:

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 August 31, 2019:

The following table summarizes the fair value and carrying value of the Company’s financial instruments as of May 31, 2019:

Short-term notes – The fair value of such notes payable had been determined based on 10% and 6% annual interest rates and the proximity to the issuance date as of August 31, 2019 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.

Other Revenue – Other revenue is comprised of revenue related to Forex service fees, referral fees and other miscellaneous service revenues generated which are recognized over the term the services are to be provided. For the three-month periods ended August 31, 2019 and 2018 details as below:

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”). The TCJA, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, effective as of January 1, 2018; limitation of the tax deduction for interest expense; limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such tax losses may be carried forward indefinitely); and repeal of the federal corporate Alternative Minimum Tax (“AMT”).

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.

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:

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, 2019, 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 August 31, 2019 and May 31, 2019, the Company was authorized to issue 80,000,000 shares of common stock, $0.001 par value per share. In addition, 20,000,000 shares of $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 entitle to dividends.

During the three month period ended August 31, 2019 and 2018, the shareholders of preferred stock series-2012 did not convert any shares of preferred stock.

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 no longer entitle to dividends.

During the three month period ended August 31, 2019, the shareholders of preferred stock series A-2014 converted 0 shares of preferred stock. During the three months period ended August 31, 2018 the shareholders of preferred stock Series A-2014 converted 200,000 shares of preferred stock for 500,000 of common stock shares at a conversion rate of 1 share of Series A-2014 preferred stock for 2.50 shares of common stock.

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 (defined below, the beneficial conversion feature) 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 three month period ended August 31, 2019, the shareholders of preferred stock series C-2016 converted 0 shares of preferred stock. During the three months period ended August 31, 2018, the shareholders of preferred stock C-2016 converted 90,000 shares of preferred stock for 270,000 of common stock shares at a conversion rate of 1 Series C-2016 share of preferred stock for 3.00 shares of common stock. 

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.

During the three months ended August 31, 2019, the shareholders of preferred stock series D-2017 converted 515,000 shares of preferred stock for 1,030,000 of common stock shares at a conversion rate of 1 share of preferred stock series D-2017 for 2.00 shares of common stock. During the three months ended August 31, 2018, the shareholders of preferred stock series D-2017 converted 1,643,000 shares of preferred stock for 3,286,000 of common stock shares at a conversion rate of 1 share of preferred stock series D-2017 for 2.00 shares of common stock.

Stock compensation and stock payable

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 three months ended August 31, 2019.

As part of the above award Melissa N. Armstrong, Esq. was awarded 250,000 shares of the Company’s 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.

There is no stock compensation payable as of August 31, 2019 and May 31, 2019.

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:

6. Long-term investments

Long-term investments include: 1) investment at Breakwater MB, LLC accounted as equity investment without readily available fair value since the Company does not have the significant influence, 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 expects will provide significant investment appreciation and opportunity for liquidity. All opportunities will 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 serves 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 stands at 8.75% with carrying value $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 the portion of 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 August 31, 2019, the Company had received the $75,000 payment but not the $25,000 payment due September 15, 2018. The redemption agreement will be amended to reflect the payment by Breakwater MB, LLC in the amount of $75,000 only. The Company’s equity position in Breakwater MB, LLC currently stands at 8.75% as of August 31, 2019.

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.

In September 2017, the Company entered a letter of intent for investment cooperation to invest $60,000 (44.45% of ownership) to jointly operate Sino-U.S. Finance. The investee was to operate a mobile application under the name of “Sino-U.S. Finance” to provide the platform of information and analysis for Chinese investors in the PRC and US. The Company started to account the investment under equity method for the quarter May 31, 2018 and the proportional operation losses picked up for the year ended of May 31, 2018 were $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, with $0 balance under long-term investment as of August 31, 2019.

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 CBD Biotech Cayman and is 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 August 31, 2019, the Company’s equity position in Donald Capital LLC currently stands at 24.9%. The Company recorded $6,054 investment loss for Donald Capital LLC for the three months ended August 31, 2019 and with $133,799 balance under long-term investment as of August 31, 2019.

7. Property and Equipment:

Property and equipment are recorded at cost, net of accumulated depreciation and are comprised of the following:

Depreciation expense for the three months ended August 31, 2019 and 2018 was $12,090 and $8,947, respectively.

8. Website development, net:

Website development is comprised of the following:

Amortization is calculated over a straight-line basis using the economic life of the asset. Amortization expense for the three months ended August 31, 2019 and 2018 was $3,077 and $2,759, respectively.

9. Short-term notes:

On August 2018, the board of directors of the Company approved the Company to offer unsecured one-year term notes (the “2018 Notes-10%”) to individual lenders for a maximum $3,000,000 with 10% annual interest rate. The Company has issued 2018 Notes-10% in the total amount of $3,030,000 from various individual lenders. As of August 31, 2019, some lenders of 2018 Notes-10% rolled over their principle and interest totaling $1,387,026 to 2019 Note-10%. $885,000 of the 2018 Note-10% are in default and $795,000 will be due in September 2019.

On October 2018, the board of directors of the Company approved the Company to offer unsecured one-year term notes (the “2018 Notes-8%”) to individual lenders for a maximum $3,000,000 with 8% annual interest rate. At the time the Notes were executed, the Company held 220,000 shares of NF Energy Savings Corporation (“NFEC”) (the “Securities”). As of August 31, 2019, the Company had issued 2018 Notes-8% in the total amount of $1,154,800 to various individual lenders. The 2018 Notes – 8% included an incentive based on the NFEC share value of $10.38 per share (the “Base Value”). As provided for in the 2018 Notes – 8%, the Company/ Borrower agreed that if Borrower, at its sole discretion, sold any of the Securities, 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 exceed $3,000,000. As of August 31, 2019, the Company paid incentives totaling $51,314 incentive to the lenders. 

On February 2019, the board of directors of the Company approved the Company offering unsecured one-year term notes (the “2019 Notes-10%”) to individual lenders for a maximum $5,000,000 with 10% annual interest rate. As of August 31, 2019, the Company has issued 2019 Notes-10% in the total amount of $4,586,832 from various individual lenders. Of the $4,586,832, $1,387,026 are rollover from 2018-10% notes in August 2019.

As of August 31, 2019 and May 31, 2019, the short-term notes are compromised as follows:

10. Other Current Liabilities:

Other current liabilities compromise as following:

Accrued dividends as of August 31, 2019 and May 31, 2019 are comprised of dividends payable to the preferred stockholders, Series D-2017 in the amount of $279,012 and $195,554, respectively.

Accrued interest as of August 31, 2019 represents interest payable for the 2018 Notes and 2019 Notes. Accrued interest as of May 31, 2019 represents interest payable for the 2018-10% Notes, 2018-8% Notes and 2019-10% Notes. 

11. Commitments and Contingencies:

Operating Leases

The Company currently maintains leased space in Shanghai, China, San Gabriel, California, New York City, NY, Flushing, NY and Richmond, British Columbia, Canada. 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 August 31, 2019, our operating lease right of use assets and operating lease liability are approximately $891,371 and $925,816, respectively. The rent expense for the three months ended August 31, 2019 is $89,190.

Future minimum lease commitments for office facilities as of August 31, 2019 are as follows:

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 August 31, 2019. 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 recently executed by the parties and the Company is awaiting receipt of the settlement shares.

In or about October 9, 2018, a former employee filed an administrative claim with the U.S. Equal Employment Commission. In or about June 2019, the former employee and the Company entered into a “no fault” Confidential Settlement Agreement pursuant to which all claims and controversies were fully and finally settled.

12. Related Party Transactions:

As of August 31, 2019, the Company advanced $3,414 to the CEO, Mr. Warren Wang for daily operation.

Mrs. Lan Jiang is the spouse of the Company’s CEO, Mr. Warren Wang. During the three months ended August 31, 2019 and 2018, 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 31,250 shares of MDCL stock for IR services which will be provided for a period of six months starting January 15, 2019. As of August 31, 2019 and May 31, 2019, the Company still held 72,488 shares of MDCL stock representing $209,200 and $260,232, respectively, of value based upon the closing market price of $2.89 and $3.59, respectively.

13. Subsequent event:

On or about September 26, 2019, Blue Ocean, LLC terminated the Equity Transfer Agreement dated January 23, 2019. On September 29, 2019, the escrow deposit of $75,000 was returned to the Company, less agreed upon approved fees. The total amount of $69,422 was returned to the Company.