NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
Aixin
Life International, Inc. (the “Company” or “Aixin” or “we”)
was incorporated under the laws of the State of Colorado on December 30, 1987 under the name Mercari Communications Group, Ltd
(“Mercari”). Mercari’s business failed in 1990. Mercari conducted no operating activities from June 1, 1990
to August 31, 2001 and was dormant.
During
each year since Mercari was reactivated until 2017, the Company had no revenue and had losses approximately equal to the expenditures
required to reactivate and comply with filing and reporting obligations. Expenditures were paid by Mercari from capital contributions
and loans made by Mercari’s principal stockholders and entities controlled by Mercari’s directors.)
On
January 20, 2017, Algodon sold 10,955,500 shares of the Company’s common stock, 96.5% of the Company’s outstanding
shares, to China Concentric, for $260,000, and assigned its right to the repayment of $150,087 of non-interest bearing advances
to the Company for working capital, pursuant to a Stock Purchase Agreement dated December 20, 2016, as amended. Prior to entering
into the Stock Purchase Agreement with Algodon, neither China Concentric nor any of its affiliates had any relationship to the
Company, Algodon or any of their respective affiliates.
On
February 2, 2017, Mr. Quanzhong Lin purchased 7,380,352 shares of the Company’s common stock, 65.0% of its outstanding
shares from China Concentric for $300,000, pursuant to a Stock Purchase Agreement dated December 21, 2016, which resulted in a
change in control of our company.
On
December 12, 2017, the Company issued 56,838,151 shares of common stock to Mr. Lin, the sole stockholder of AiXin (BVI)
International Group Co., Ltd. a British Virgin Islands corporation (“AiXin BVI”), for his shares of AiXin BVI, pursuant
to a Share Exchange Agreement.
As
a result of the Share Exchange, AiXin BVI became the Company’s wholly-owned subsidiary, and the Company now owns all of
the outstanding shares of HK AiXin International Group Co., Limited, a Hong Kong limited company (“AiXin HK”), which
in turn owns all of the outstanding shares of Chengdu AiXinZhonghong Biological Technology Co., Ltd., a Chinese limited company
(“AiXinZhonghong”), which markets and sells premium-quality nutritional products in China.
AiXin
BVI was incorporated on September 21, 2017 as a holding company and AiXin HK was established in Hong Kong on February 25, 2016
as an intermediate holding company. AiXinZhonghong was established in the People’s Republic of China (“PRC”)
on March 4, 2013, and on May 27, 2017, the local government of the PRC issued a certificate of approval regarding the foreign
ownership of AiXinZhonghong by AiXin HK. Neither AiXin BVI nor AiXin HK had operations prior to December 12, 2017.
For
accounting purposes, the acquisition was accounted for as a reverse acquisition and treated as a recapitalization of the Company
effected by a share exchange, with AiXin BVI as the accounting acquirer. Since neither AiXin BVI nor AiXin HK had operations prior
to December 12, 2017, the historical consolidated financial statements of AiXinZhonghong are now the historical consolidated financial
statements of the Company. The assets and liabilities of AiXinZhonghong were brought forward at their book value and no goodwill
was recognized.
Effective
February 1, 2018, pursuant to Articles of Amendment to the Company’s Articles of Incorporation filed with the Secretary
of State of Colorado, the Company changed its name to AiXin Life International, Inc.
The
Company, through its indirectly owned AiXinZhonghong subsidiary, mainly develops and distributes consumer products by offering
a line of nutritional products. The Company sells the products through exhibition events, conferences, and person-to-person marketing.
Beginning in 2019, the Company began to provide advertising services to clients which engaged the Company to help distribute their
products. During 2019, the Company’s product sales revenue was primarily generated from sales of Huo’s oral solution,
concentrated drinks, goat milk power, and food washing serum. During 2020, the Company’s product sales revenue was primarily
generated from sales of Tonglìke, Huo’s oral solution, probiotics and food washing serum. The Company’s business
mainly focuses on a proactive approach to its customers such as hosting events for clients, which it believes is ideally suited
to marketing its products because sales of nutrition products are strengthened by ongoing personal contact and support, coaching
and education of its clients, as to the benefits of a healthy and active lifestyle.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements
are prepared in conformity with U.S. Generally Accepted Accounting Principles (“US
GAAP”). The functional currency of AiXinZhonghong is Chinese Renminbi (‘‘RMB’’).
The accompanying consolidated financial statements are translated from RMB and presented
in U.S. dollars (“USD”).
The
consolidated financial statements include the accounts of the Company and its current wholly owned subsidiaries, AiXin HK and
AiXinZhonghong. Intercompany transactions and accounts were eliminated in consolidation.
Unaudited
Interim Financial Information
These
unaudited interim financial statements have been prepared in accordance with GAAP for interim financial reporting and the rules
and regulations of the Securities and Exchange Commission that permit reduced disclosure for interim periods. Therefore, certain
information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed
or omitted. In the opinion of management, all adjustments of a normal recurring nature necessary for a fair presentation of the
financial position, results of operations and cash flows for the periods presented have been made. The results of operations for
the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2020.
The
balance sheets and certain comparative information as of December 31, 2019 are derived from the audited financial statements and
related notes for the year ended December 31, 2019, included in the Company’s 2019 Annual Report on Form 10-K. These unaudited
interim financial statements should be read in conjunction with the annual consolidated financial statements and the accompanying
notes contained in our Annual Report on Form 10-K for the year ended December 31, 2019.
Reclassification
Certain
prior period amounts have been reclassified to conform to the current period presentation and had no effect on previously reported
consolidated net income (loss) or accumulated deficit.
Covid
– 19
On
March 11, 2020, the World Health Organization announced that infections caused by the corona virus disease of 2019 (“COVID-19”)
had become pandemic. The Government of China has adopted various regulations and orders, including mandatory quarantines, limits
on the number of people that may gather in one location, closing non-essential businesses and travel bans to limit the spread
of the disease. Many of these measures have been relaxed due to the decrease in the prevalence of Covid-19 in China. To date,
the ongoing operations of the Company have not been materially adversely effected by the measures taken to limit the spread of
the disease in China, though such measures have impacted its ability to timely complete its closing procedures and report the
results of its operations.
The
measures adopted by the national government of China and local agencies, as well as the likelihood that many individuals and businesses
will voluntarily shut down or self-quarantine, have and are expected to continue to have serious adverse impacts on the economy
of China. The likely overall economic impact of the COVID-19 pandemic will be highly negative to the world’s economy.
Financial
impacts related to COVID-19, including the Company’s actions and costs incurred in response to the pandemic, were not material
to the Company’s financial position, results of operations or cash flows for the nine months ended September 30, 2020. The
Company has implemented procedures to promote employee and customer safety. These measures will not significantly increase its
operating costs. In addition, the Company cannot predict with certainty what measures may be taken by its suppliers and customers
and the impact these measures may have on its 2020 financial position, results of operations or cash flows.
While
the Company continues to operate substantially in the normal course, it cannot forecast with any certainty whether and to what
degree the disruptions caused by the COVID-19 pandemic will increase, or the extent to which the disruption may materially impact
its consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2020.
Use
of Estimates
In
preparing consolidated financial statements in
conformity with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements,
as well as the reported amounts of revenues and expenses during the reporting period.
Significant
estimates, required by management, include the recoverability of long-lived assets, allowance for doubtful accounts, and the reserve
for obsolete and slow-moving inventories. Actual results could differ from those estimates.
Change
in Accounting Estimate
Based
on the recent results of an approval of small business taxpayer status and its receipt of a certificate of no tax due from the
local tax department in March 2020, the Company determined that additionally accrued tax payables for value-added
taxes, city construction tax and education
tax (collectively “Other Taxes”) for the period from January 2014 to April 2016
based on the applicable tax rates for general business taxpayers should be adjusted for a change in accounting estimate.
During
the period from January 2014 to April 2016, the Company determined that it did not meet the requirements of a general business
taxpayer other than the revenue amount level for Other Taxes filing purposes, and therefore, during this period the Company filed
and paid Other Taxes in accordance with the applicable standards for a small business taxpayer. However, based on the principle
of prudence, the Company accrued additional Other Taxes payable using the applicable standards for general business taxpayer for
the same period until the Company’s tax filing status was settled and resolved.
In
March 2020, the local tax department approved the Company’s small business taxpayer status for the period from January 2014
to April 2016 and provided a certificate of no tax due to the Company. As a result, the Company reversed the previously accrued
Other Taxes payable for the period and accounted for it as a change in accounting estimate. The effect of this change reduced
tax payable by $1,168,377, increased non-operating income by $1,168,377, and increased basic and diluted earnings per share by
$0.015 as of and for the year ended December 31, 2019.
Cash
and Cash Equivalents
For
financial statement purposes, the Company considers all highly liquid investments with an original maturity of three months or
less to be cash and cash equivalents.
Accounts
Receivable
The
Company’s policy is to maintain an allowance for potential credit losses on accounts receivable. Management reviews the
composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current
economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. As of September 30, 2020,
and December 31, 2019, the bad debt allowance was $142,732 and $125,690, respectively.
Inventory
Inventory
mainly consists of health supplements. Inventory is valued at the lower of average cost or market, cost being determined on a
moving weighted average method at the end of the month. Management compares the cost of inventories with the net realizable value
and an allowance is made for writing down inventories to market value, if lower. The Company recorded no inventory impairment
for the nine months ended September 30, 2020 and 2019, respectively.
In
July 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-11, “Inventory (Topic 330) - Simplifying
the Measurement of Inventory,” which requires that inventory within the scope of the guidance be measured at the lower of
cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal, and transportation.
Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation, and impairment losses, if any. Major repairs and betterments
that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefited.
Maintenance and repairs are expensed as incurred. When property and equipment are retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation
of property and equipment is provided using the straight-line method for substantially all assets with 5% salvage value and estimated
lives as follows:
|
Building
|
20
years
|
|
Office
furniture
|
5
years
|
|
Electronic
Equipment
|
3
years
|
|
Vehicles
|
5
years
|
Impairment
of Long-Lived Assets
Long-lived
assets, which include property and equipment and intangible assets, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable, but at least annually.
Recoverability
of long-lived assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted
future cash flows expected to be generated by it. If the carrying amount of an asset exceeds its estimated undiscounted future
cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds its fair value.
Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.
Based on its review, the Company believes that, as of September 30, 2020 and December 31, 2019, there were no significant impairments
of its long-lived assets.
Income
Taxes
Income
taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts
at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected
to be realized.
The
Company follows Accounting Standards Codification (“ASC”) Topic 740, which prescribes a more-likely-than-not threshold
for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic
740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income
tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in
interim periods, and income tax disclosures.
Under
ASC Topic 740, when tax returns are filed, it is likely that some positions taken would be sustained upon examination by the taxing
authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that
would be ultimately sustained. The benefit of a tax position is recognized in the consolidated financial statements in the period
during which, based on all available evidence, management believes it is more likely than not that the position will be sustained
upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated
with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount
of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion
of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability
for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be
payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits is classified as interest
expense and penalties are classified in selling, general and administrative expenses in the statement of income.
At
September 30, 2020 and December 31, 2019, the Company did not take any uncertain positions that would necessitate recording a
tax related liability.
Revenue
Recognition
ASU
No. 2014-09, Revenue from Contracts with Customers (“Topic 606”), became effective for the Company January
1, 2018. The Company’s revenue recognition disclosure reflects its updated accounting policies that are affected by this
new standard. The Company applied the “modified retrospective” transition method for open contracts for the implementation
of Topic 606. As revenues are and have been primarily from the delivery of health supplements and the performance of related
advertising services, and the Company has no significant post-delivery obligations, this did not result in a material recognition
of revenue on the Company’s accompanying consolidated financial statements for the cumulative impact of applying this new
standard. The Company made no adjustments to its previously-reported total revenues, as those periods continue to be presented
in accordance with its historical accounting practices under Topic 605, Revenue Recognition.
Revenue
from sale of goods under Topic 606 is recognized in a manner that reasonably reflects the delivery of the Company’s
products and services to customers in return for expected consideration and includes the following elements:
|
|
●
|
executed
contract(s) with customers that the Company believes is legally enforceable;
|
|
|
●
|
identification
of performance obligation in the respective contract;
|
|
|
●
|
determination
of the transaction price for each performance obligation in the respective contract;
|
|
|
●
|
allocation
of the transaction price to each performance obligation; and
|
|
|
●
|
recognition
of revenue only when the Company satisfies each performance obligation.
|
These
five elements, as applied to each of the Company’s revenue categories, is summarized below:
|
|
●
|
Revenue
from sale of goods is recognized when goods are shipped to the customer and no other obligation exits. The Company does not
provide unconditional return or other concessions to the customer. The Company’s sales policy allows for the return
of unopened products for cash after deducting certain service and transaction fees. As an alternative to the product return
option, the customers have options of asking for an exchange for products with the same value.
|
|
|
●
|
As
part of the Company’s sales incentive program, the Company occasionally provides free travel to its customers whose
prepayments to purchase the Company’s products reaches a certain amount. There are different travel incentives offered
to customers based on amount received from each customer. The Company records the to-be-provided free travel cost when cash
is collected from customers as a debit to deferred travel cost with corresponding credit to accrued travel cost. Once the
customer utilizes the travel incentive, the cost of travel is recorded as selling expenses and reduces deferred travel cost.
|
Sales
revenue represents the invoiced value of goods, net of value-added taxes (“VAT”). All of the Company’s products
sold in China are subject to the PRC VAT of 17% of the gross sales price prior to May 1, 2018, 16% since May 1, 2018 and 13% since
April 1, 2019. This VAT may be offset by VAT paid by the Company on raw materials and other materials purchased in China. The
Company records VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting
the payables against the receivables. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an
agent for the government.
Advertising
Revenue
During
the nine months ended September 30, 2020, the Company provided advertising services to customers. Advertising contracts are signed
to establish the price and advertising services to be provided. Pursuant to the advertising contracts, the Company provides advertising
and marketing services to its clients through exhibition events, conferences, and person-to-person marketing. The Company performs
a credit assessment of the customer to assess the collectability of the contract price prior to entering into contracts.
Most
of the advertisement contracts designated that the Company perform such advertising services for its clients through exhibition
events, conferences, and person-to-person marketing during the contracted period, regardless of the number of such events. As
such, the Company determined that the performance obligation is satisfied over time during the contracted period and revenue is
recognized accordingly. Such advertising revenue amounted to $1,597,330 for the nine months ended September 30, 2020.
A
smaller proportion of the Company’s advertising revenue is generated from services to its clients through exhibition events,
conferences, and person-to-person marketing, and charges based on the number of promotional products sold. Such advertising revenue
amounted to $6,476 for the nine months ended September 30, 2020.
Cost
of Goods Sold
Cost
of goods sold consists primarily of the cost of inventory purchases. Reserve for inventory allowance due to lower of cost or market
is also recorded in cost of goods sold.
Concentration
of Credit Risk
The
operations of the Company are 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, and by the general state of the PRC economy.
The
Company has cash on hand and demand deposits in accounts maintained with state-owned banks within the PRC. Cash in state-owned
banks is covered by insurance up to RMB 500,000 ($72,500) per bank. The Company has not experienced any losses in such accounts
and believes they are not exposed to any risks on its cash in these bank accounts.
Leases
The
Company adopted FASB Accounting Standards Codification, Topic 842, Leases (“ASC 842”) using the modified retrospective
approach, electing the practical expedient that allows the Company not to restate its comparative periods prior to the adoption
of the standard on January 1, 2019. As such, the disclosures required under ASC 842 are not presented for periods before the date
of adoption. For the comparative periods prior to adoption, the Company presented the disclosures which were required under ASC
840.
The
Company applied the following practical expedients in the transition to the new standard allowed under ASC 842:
|
Practical
Expedient
|
Description
|
|
Reassessment
of expired or existing contracts
|
The
Company elected not to reassess, at the application date, whether any expired or existing contracts contained leases, the
lease classification for any expired or existing leases, and the accounting for initial direct costs for any existing leases.
|
|
Use
of hindsight
|
The
Company elected to use hindsight in determining the lease term (that is, when considering options to extend or terminate the
lease and to purchase the underlying asset) and in assessing impairment of right-to-use assets.
|
|
Reassessment
of existing or expired land easements
|
The
Company elected not to evaluate existing or expired land easements that were not previously accounted for as leases under
ASC 840, as allowed under the transition practical expedient. Going forward, new or modified land easements will be evaluated
under ASU No. 2016-02.
|
|
Separation
of lease and non-lease components
|
Lease
agreements that contain both lease and non-lease components are generally accounted for separately.
|
|
Short-term
lease recognition exemption
|
The
Company also elected the short-term lease recognition exemption and will not recognize ROU assets or lease liabilities for
leases with a term less than 12 months.
|
The
new leasing standard requires recognition of leases on the consolidated balance sheets as right-of-use (“ROU”) assets
and lease liabilities. ROU assets represent the Company’s right to use underlying assets for the lease terms and lease liabilities
represent the Company’s obligation to make lease payments arising from the leases. Operating lease ROU assets and operating
lease liabilities are recognized based on the present value and future minimum lease payments over the lease term at commencement
date. The Company’s future minimum based payments used to determine the Company’s lease liabilities mainly include
minimum based rent payments. As most of the Company’s leases do not provide an implicit rate, the Company uses its estimated
incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
The
adoption of ASC 842 had no substantial impact on the Company’s consolidated balance sheets. The most significant impact
was the recognition of the operating lease right-of-use assets and the liability for operating leases. Accordingly, adoption of
this standard resulted in the recognition of operating lease right-of-use assets of $42,835 and operating lease liabilities of
$42,835 on the consolidated balance sheet as of January 1, 2019. The adoption of ASC 842 did not result in a cumulative-effect
adjustment to the opening balance of retained earnings (accumulated deficit).
In
addition, the adoption of the standard did not have a material impact on the Company’s results of operations or cash flows.
Operating lease cost is recognized as a single lease cost on a straight-line basis over the lease term and is recorded in selling,
general and administrative expenses. Variable lease payments for common area maintenance, property taxes and other operating expenses
are recognized as expense in the period when the changes in facts and circumstances on which the variable lease payments are based
occur.
Statement
of Cash Flows
In
accordance with ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are
calculated based on the local currencies using the average translation rates. As a result, amounts related to assets and liabilities
reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on
the consolidated balance sheets.
Fair
Value of Financial Instruments
The
carrying amounts of certain of the Company’s financial instruments, including cash and equivalents, accrued liabilities
and accounts payable, approximate their fair value due to their short maturities. FASB ASC Topic 825, “Financial Instruments,”
requires disclosure of the fair value of financial instruments held by the Company. The carrying amounts reported in the consolidated
balance sheets for current liabilities each qualify as financial instruments and are a reasonable estimate of their fair value
because of the short period of time between the origination of such instruments and their expected realization and the current
market rate of interest.
Fair
Value Measurements and Disclosures
ASC
Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, and establishes a three-level valuation
hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The three levels
are defined as follow:
|
|
●
|
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 asset or liability, either directly or indirectly, for substantially the full term of the financial
instrument.
|
|
|
●
|
Level
3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
As
of September 30, 2020 and December 31, 2019, the Company did not identify any assets and liabilities that are required to be presented
on the balance sheet at fair value.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
functional currency of the Company is RMB. For financial reporting purposes, RMB is translated into USD as the reporting currency.
Assets and liabilities are translated at the exchange rate in effect at the balance sheet dates. Revenues and expenses are translated
at the average rate of exchange prevailing during the reporting period.
Translation
adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’
equity as “Accumulated other comprehensive income”. Gains and losses resulting from foreign currency transactions
are included in income. There was no significant fluctuation in the exchange rate for the conversion of RMB to USD after the balance
sheet date.
The
Company uses FASB ASC Topic 220, “Comprehensive Income”. Comprehensive loss is comprised of net loss and all changes
to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and
distributions to stockholders. Comprehensive income (loss) for the three and nine months ended September
30, 2020 and 2019 consisted of net income (loss) and foreign currency translation adjustments.
Earnings
per Share
Basic
income (loss) per share is computed on the basis of the weighted average number of common shares outstanding during the period.
Dilution
is computed by applying the treasury stock method for options and warrants. Under this method, options and warrants are assumed
to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used
to purchase common stock at the average market price during the period.
As
of September 30, 2020 and 2019, the Company did not have any potentially dilutive instruments.
Stock-Based
Compensation
The
Company periodically grants stock options, warrants and awards to employees and non-employees in non-capital raising transactions
as compensation for services rendered. The Company accounts for stock option, stock warrant and stock award grants to employees
based on the authoritative guidance provided by the FASB where the value of the award is measured on the date of grant and recognized
over the vesting period. The Company accounts for stock option, stock warrant and stock award grants to non-employees in accordance
with the authoritative guidance of the FASB where the value of the stock compensation is determined based upon the measurement
date at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance
to earn the equity instruments is complete. Stock-based compensation charges generally are amortized over the vesting period on
a straight-line basis. In certain circumstances where there are no future performance requirements by the employees and non-employees,
option, warrant and award grants are immediately vested and the total stock-based compensation charge is recorded in the period
of the measurement date.
Segment
Reporting
ASC
Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting.
The management approach model is based on the way a company’s chief operating decision maker organizes segments within the
Company for making operating decisions assessing performance and allocating resources. Reportable segments are based on products
and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
Management
determined the Company’s operations constitute a single reportable segment in accordance with ASC 280. The Company operates
exclusively in one business and industry segment: sale of health supplement products.
New
Accounting Pronouncements
In
December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, as part of its initiative to reduce
complexity in accounting standards. The amendments in the ASU are effective for fiscal years beginning after December 15, 2020,
including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods
for which financial statements have not yet been issued. The Company is currently evaluating the effect, if any, that the ASU
will have on its consolidated financial statements.
3.
ADVANCES TO SUPPLIERS
The
Company had advances to suppliers of $223,274 and $281,268 as of September 30, 2020 and December 31, 2019, respectively. Advances
to suppliers primarily include prepayments for products expected to be delivered subsequent to balance sheet dates.
4.
DEFERRED COMMISSION
The
Company paid commissions to its salesmen based on cash collected from the sales. The Company calculated and paid commissions based
on a certain proportion of monthly cash receipts from sales; however, the customers sometimes delay taking delivery of products
after advances were made to the Company, which advances are recorded as unearned revenue. Accordingly, the Company only recognizes
commission expenses as the related revenue is recognized. Commission expenses are recorded as selling expenses. During the year
ended December 31,
2019, the Company returned advances received from its customers. As such, the related deferred commission was expensed in full
as no future revenue would be recognized.
5.
DEFERRED TRAVEL COST
As
part of the Company’s sales incentive program, the Company occasionally provided free travel to its customers whose prepayments
to purchase the Company’s products reached a certain amount. There are different travel incentives offered to customers
based on the amount received from each customer. The Company recorded the to-be-provided free travel cost when cash is collected
from customers as deferred travel cost with a corresponding account of accrued travel cost, and recorded it as a selling expense
once the prepayment from customers was recognized as revenue. During the year ended December 31, 2019, the Company returned advances
received from its customers. As such, the related deferred travel cost was expensed in full as no future revenue would be recognized.
6.
INVENTORY
Inventory
consisted of the following at September 30,
2020 and December 31, 2019:
|
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
Finished goods – health supplements
|
|
$
|
83,525
|
|
|
$
|
49,487
|
|
7.
LOAN TO THIRD PARTY
On
June 8, 2020, the Company entered into an unsecured loan agreement with a third party, pursuant to which the Company agreed to
lend RMB 50,300,000, equivalent to $7,408,389, to the third party. This loan bears interest of RMB 74,000, equivalent to $10,582,
per day, and will mature on July 28, 2020. As of September
30, 2020, the Company has received the repayment of principal and interest in full amount,
and recorded interest income of $529,116 during the nine months ended September 30, 2020.
8.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following at September
30, 2020 and December 31, 2019:
|
|
|
September 30,
2020
|
|
|
December 31, 2019
|
|
|
Vehicle
|
|
$
|
277,357
|
|
|
$
|
268,342
|
|
|
Office furniture
|
|
|
46,575
|
|
|
|
45,423
|
|
|
Electronic equipment
|
|
|
14,273
|
|
|
|
13,920
|
|
|
Total
|
|
|
338,205
|
|
|
|
327,685
|
|
|
Less: Accumulated depreciation
|
|
|
(264,442
|
)
|
|
|
(223,176
|
)
|
|
Property and equipment, net
|
|
$
|
73,763
|
|
|
$
|
104,509
|
|
Depreciation
expense for the nine months ended September 30,
2020 and 2019 was $34,572 and $66,433, respectively. Depreciation expense for the three months ended September 30,
2020 and 2019 was $9,761 and $12,807, respectively.
9.
TAXES PAYABLE
Taxes
payable consisted of the following at September
30, 2020 and December 31, 2019:
|
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
Value-added
|
|
$
|
28,065
|
|
|
$
|
49,502
|
|
|
Income
|
|
|
32,176
|
|
|
|
31,380
|
|
|
City construction
|
|
|
2,118
|
|
|
|
3,615
|
|
|
Education
|
|
|
1,562
|
|
|
|
2,629
|
|
|
Other
|
|
|
10,214
|
|
|
|
10,252
|
|
|
Taxes payable
|
|
$
|
74,135
|
|
|
$
|
97,378
|
|
See
Note 2 for the change in accounting estimate of taxes payable.
10.
ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued
liabilities and other payables consisted of the following at September
30, 2020 and December 31, 2019:
|
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
Accrued employees’ social insurance
|
|
$
|
356,131
|
|
|
$
|
357,378
|
|
|
Accrued professional fees
|
|
|
52,413
|
|
|
|
162,000
|
|
|
Accrued payroll and commission
|
|
|
131,975
|
|
|
|
89,748
|
|
|
Other payables
|
|
|
20,395
|
|
|
|
38,178
|
|
|
Total
|
|
$
|
560,914
|
|
|
$
|
647,304
|
|
11.
LEASE
On
September 12, 2018, the Company entered into a contract to sell its rights to a portion of a building with a buyer (the “Buyer”),
at which time the Buyer paid RMB 100,000 ($14,898) to a shareholder of the Company as a down payment. The contract stipulated
the remaining RMB 8,900,000 ($1,325,964) should be paid by the Buyer on or before September 30, 2018 and before the Company would
be required to go to the relevant authority to effectuate the transfer of its property rights. The Buyer failed to make the payment
on or prior to September 30, 2018, a default under the contract which gave the Company the right to terminate the contract. In
October 2018, the Buyer delivered to the shareholder an additional RMB 7 million ($1.0 million). On March 25, 2019, the parties
entered into a supplemental agreement which provided that the Company would transfer the property rights to Buyer if it agreed
the Company would get the benefit of the RMB 7,000,000 ($1,042,893) and otherwise pay the remaining balance of RMB 1,200,000 ($178,782)
on or prior to March 31, 2019. The RMB 1,200,000 ($178,782) was paid directly to the shareholder on a timely basis and the Company
was given the benefit of the RMB 8,900,000 ($1,325,964) delivered to the Shareholder. The
cost and accumulated depreciation of the building was $1,739,228 and $364,834, respectively. The Company recorded a loss on sale
of $32,945 during the nine months ended September 30, 2019. $1,340,862 of the proceeds from the sale was collected by the principal
shareholder which was offset against amounts due to the shareholder.
Concurrent
with the completion of this sale, the Company entered into an agreement to lease a portion of the building back from the Buyer
over a lease term of 2 years. The Company accounted for this lease as an operating lease right-of-use asset and a corresponding
operating lease liability in accordance with the Lease Standard. As
a result, $207,049 (RMB 1,389,731) was recorded as operating lease right-of-use asset and
lease liability on March 31, 2019 when the lease commenced based on a 4.75% discount factor.
The
Company also has operating leases for other sales locations under various operating lease arrangements. The leases have remaining
lease terms of approximately six months to 3 years.
Balance
sheet information related to the Company’s leases is presented below:
|
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
Operating Leases
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
128,679
|
|
|
$
|
213,897
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities – current
|
|
$
|
101,544
|
|
|
$
|
146,370
|
|
|
Operating lease liability – non-current
|
|
|
27,135
|
|
|
|
67,526
|
|
|
Total operating lease liabilities
|
|
$
|
128,679
|
|
|
$
|
213,896
|
|
The
following provides details of the Company’s lease expenses:
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Operating lease expenses
|
|
$
|
13,878
|
|
|
$
|
26,314
|
|
|
$
|
66,622
|
|
|
$
|
52,983
|
|
Other
information related to leases is presented below:
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Cash Paid For Amounts Included In Measurement of Liabilities:
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
66,622
|
|
|
$
|
52,983
|
|
|
|
|
September
30, 2020
|
|
|
December 31, 2019
|
|
|
Weighted Average Remaining Lease Term:
|
|
|
|
|
|
|
|
Operating leases
|
|
1.39 years
|
|
|
1.87 years
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate:
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
4.75
|
%
|
|
|
4.75
|
%
|
Maturities
of lease liabilities were as follows:
|
For the year ending December 31:
|
|
|
|
|
2020 (excluding the nine months ended September 30, 2020)
|
|
$
|
40,642
|
|
|
2021
|
|
|
69,280
|
|
|
2022
|
|
|
16,392
|
|
|
2023
|
|
|
6,603
|
|
|
Total lease payments
|
|
|
132,917
|
|
|
Less: imputed interest
|
|
|
(4,238
|
)
|
|
Total lease liabilities
|
|
|
128,679
|
|
|
Less: current portion
|
|
|
(101,544
|
)
|
|
Lease liabilities – non-current portion
|
|
$
|
27,135
|
|
12.
UNEARNED REVENUE
As
of September 30, 2020 and
December 31, 2019, the Company had unearned revenue of $1,106 and $0, respectively. The unearned revenue was advances received
from customers for the Company’s products and services.
13.
RELATED PARTY TRANSACTIONS
Prepayments
for acquisition
As
of September 30,
2020 and December 31, 2019, the Company had advances to multiple related parties in the aggregate amount of $0 and $4,053,587,
respectively. The balance at December 31, 2019 consisted of balances of $697,699 to Aixin Pharmacy Co., Ltd, Xinjin Branch,
$855,324 to Aixin Liucheng Pharmacy Co., Ltd, $654,776 to Aixin Pharmacy Co., Ltd. Jianyang Store, $71,821 to Aixin Shangyan Hotel
Management Co., Ltd., and $1,773,967 to Aixin Pharmacy Co., Ltd. All of those related parties are entities controlled by Mr. Quanzhong
Lin. The advances made were for the future acquisition of these related parties.
As
of September 30,
2020, these prepayments were returned to the Company in full.
Advance
to/from a Shareholder
At
September 30, 2020 and
December 31, 2019, the Company had advances from a major shareholder of $970,699 and $0, respectively. At September 30,
2020 and December 31, 2019, the Company had advances to the same major shareholder of $0
and $1,284,994, respectively. The advances are payable on demand and bear no interest.
Office
lease from a Major Shareholder
In
May 2014, the Company entered a lease with its major shareholder for office use; the lease term was three years until May 2017
with an option to renew. The monthly rent was RMB 5,000 ($736), the Company was required to prepay each year’s annual rent
at 15th of May of each year. The Company renewed the lease until May 28, 2023 with monthly rents of RMB 5,000 ($736), payable
quarterly. The future annual minimum lease payment at September 30, 2020 is $8,837 for the year ending September 30, 2021.
14.
INCOME TAXES
The
Company was incorporated in the United States of America (“USA”) and has operations in one tax jurisdiction, i.e.
the PRC. The Company generated substantially all of its sales from its operations in the PRC for the nine months ended September
30, 2020 and 2019, and recorded income tax provision for the periods.
China
has a tax rate of 25% for all enterprises (including foreign-invested enterprises).
Uncertain
Tax Positions
Interest
associated with unrecognized tax benefits are classified as income tax, and penalties are classified in selling, general and administrative
expenses in the statements of operations. For the nine months ended September 30, 2020 and 2019, the Company had no unrecognized
tax benefits and related interest and penalties expenses. Currently, the Company is not subject to examination by major tax jurisdictions.
15.
STOCKHOLDERS’ EQUITY
On August 17, 2020, by unanimous written consent
in lieu of a meeting, the Board adopted resolutions authorizing a one (1)-for-four (4) reverse stock split and on August 19, 2020
the Company filed Articles of Amendment to effect the reverse stock split with the Secretary of State of the State of Colorado.
The reverse stock split becomes effective on October 27, 2020. According to the Articles of Amendment, the Company is authorized
to issue 20,000,000 shares of blank check preferred stock at $0.001 par value and 500,000,000 shares of common stock at
$.00001 par value. All share, earnings per share and price per share information has been retroactively adjusted to reflect
the reverse stock split.
At
September 30, 2020 and December 31, 2019, the Company had 49,999,901 and 85,049,576 post-split common shares issued and outstanding,
respectively.
During
the nine months ended September 30, 2020, 35,049,675 post-split shares owned by a major shareholder were cancelled.
During
the nine months ended September 30, 2019, the same major shareholder contributed $1,249,125 to the Company with no common shares
issued.
Stock
Awards Issued for Services
On
October 22, 2019, the Company granted and issued 37,500 shares to its employees and contractors under its 2019 Equity
Incentive Plan. The stock awards were valued at $337,500 based on the closing price of $9 on the grant date.
On
October 24, 2019, the Company granted and issued 550,000 shares to its employees and contractors under its 2019 Equity
Incentive Plan. The stock awards were valued at $1,520,200 based on the closing price of $2.764 on the grant date.
The
stock awards will vest over five (5) years from the grant date, and the grantee will forfeit a portion of the shares granted (“Shares
Granted”) if the grantee is no longer employed by or contracted with the Company. Specifically, the grantee will forfeit
80% of Shares Granted if no longer employed by or contracted with the Company on the date that is one year from the grant date,
forfeit 60% of Shares Granted if no longer employed by or contracted with the Company on the date that is two years from the grant
date, forfeit 40% of Shares Granted if no longer employed by or contracted with the Company on the date that is three years from
the grant date, and forfeit 20% of Shares Granted if no longer employed by or contracted with the Company on the date that is
four years from the grant date. Effective on the 5th year from the grant date, none of the shares will be subject to
forfeiture.
For
the nine months ended September 30, 2020 and 2019, stock-based compensation expenses were $278,655 and $0, respectively. As of
September 30, 2020, unrecognized compensation expenses related to these stock awards are $1,508,632. These expenses are expected
to be recognized over 4 years.
16.
STATUTORY RESERVES
Pursuant
to the PRC corporate law, the Company is now only required to maintain one statutory reserve by appropriating from its after-tax
profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings.
Surplus
reserve fund
The
Company is now required to transfer 10% of its net income, as determined under PRC accounting rules and regulations, to a statutory
surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital.
The
surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses,
if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders
in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining
reserve balance after such issue is not less than 25% of the registered capital.
Common
welfare fund
Common
welfare fund is a voluntary fund to which the Company can elect to transfer 5% to 10% of its net income, as determined under PRC
accounting rules and regulations. The Company did not make any contribution to this fund during the nine months ended September
30, 2020 and 2019.
This
fund can only be utilized on capital items for the collective benefit of the Company’s employees, such as construction of
dormitories, cafeteria facilities, and other staff welfare facilities. This fund is non-distributable other than upon liquidation.
17.
OPERATING CONTINGENCIES
The
Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks associated with, among others, the political, economic and
legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
The
Company’s sales, purchases and expenses are denominated in RMB and all of the Company’s assets and liabilities are
also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange
transactions are required by law to be transacted only by authorized financial institutions. Remittances in currencies other than
RMB may require certain supporting documentation to affect the remittance.
The
Company is, from time to time, involved in litigation incidental to the conduct of its business regarding merchandise sold, employment
matters, and litigation regarding intellectual property rights.
The
Company believes that current pending litigation will not have a material adverse effect on its consolidated financial position,
results of operations or cash flows.
18.
SUBSEQUENT EVENT
The
Company announced on October 27, 2020 that the Amendment to its Articles of Incorporation to effect a reverse stock split of its
issued and outstanding common stock, at a ratio of 1-for- 4 would become effective at 5:01 PM on October 27, 2020. The
Company’s common stock began trading on a split-adjusted basis commencing upon market open on October 28, 2020.