|
|
|
|
August 31,
2016
|
November 30, 2015
|
|
(Unaudited)
|
|
|
|
|
Balance sheet items, except for stockholders equity, as of periods end
|
0.1497
|
0.1561
|
|
Three Months Ended
|
|
August 31,
2016
|
August 31,
2015
|
|
(Unaudited)
|
(Unaudited)
|
|
|
|
Amounts included in the statements of income and comprehensive income, changes in stockholders equity and cash flows for the periods presented
|
0.1506
|
0.1618
|
12
|
|
|
|
Nine Months Ended
|
|
August 31,
2016
|
August 31,
2015
|
|
(Unaudited)
|
(Unaudited)
|
|
|
|
Amounts included in the statements of income and comprehensive income, changes in stockholders equity and cash flows for the periods presented
|
0.1525
|
0.1624
|
Foreign currency translation adjustments of $(338,017) and $(314,805) for the three months ended August 31, 2016 and 2015, respectively, and $(646,801) and $(317,904) for the nine months ended August 31, 2016 and 2015, respectively, have been reported as other comprehensive income (loss). Other comprehensive income (loss) of the Company consists entirely of foreign currency translation adjustments.
Although PRC government regulations now allow convertibility of the RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representations that the RMB could be converted into US Dollars at that rate or any other rate.
The value of the RMB against the US Dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRCs political and economic conditions. Any significant revaluation of the RMB may materially affect the Companys financial condition in terms of US Dollar reporting. In August 2015, the PRC devalued its currency by approximately 3.5%; in January 2016 the PRC devalued its currency by an additional 0.5%. Further devaluations of its currency could occur.
Revenue recognition
Revenues are primarily derived from selling selenium related products to contract distributors, and from our retail stores. The Companys revenue recognition policies comply with FASB ASC 605
Revenue Recognition.
The Company recognizes product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price paid by the customer is fixed or determinable and (iv) collection of the resulting account receivable is reasonably assured. The Company recognizes revenue for product sales upon transfer of title to the customer. Customer purchase orders and/or contracts are generally used to determine the existence of an arrangement. Shipping documents and the completion of any customer acceptance requirements, when applicable, are used to verify product delivery. The Company assesses whether a price is fixed or determinable based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. The Company has no product returns or sales discounts and allowances because goods delivered and accepted by customers are normally not returnable.
During the three months ended August 31, 2016, the Company commenced franchising the use of the Company's trademark, name identification and other business resources. The franchisee is required to pay franchise fees and management fees to the Company. Franchise fees are recognized only when all material services or conditions relating to the sale have been substantially performed or satisfied by the Company.
13
The Companys revenues for the three and nine months ended August 31, 2016 and 2015 were comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
August 31,
|
|
Nine Months Ended
August 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
17,244,934
|
|
$
875,340
|
|
$
23,026,125
|
|
$
2,173,717
|
Retail
|
|
1,312,332
|
|
191,041
|
|
2,186,352
|
|
899,276
|
Franchise
|
|
31,030
|
|
-
|
|
31,100
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
18,588,296
|
|
$
1,066,381
|
|
$
25,243,577
|
|
$
3,072,993
|
Shipping costs
Shipping costs incurred by the Company are recorded as selling expenses. Shipping costs for the three and nine months ended Aug 31, 2016 and 2015 were $31,573 and $11,357, respectively, and $71,026 and $30,837, respectively.
Advertising costs
Advertising costs are charged to operations when incurred. For the three and nine months ended August 31, 2016 and 2015, advertising expenses were $251,411 and $21,804, respectively, and $295,926 and $60,900, respectively.
Cash and cash equivalents
The Company considers all demand and time deposits and all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Accounts receivable
Accounts receivable are recorded at the contract amount after deduction of trade discounts and, allowances, if any, and do not bear interest. The allowance for doubtful accounts, when necessary, is the Companys best estimate of the amount of probable credit losses from accounts receivable. The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions.
Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
As of August 31, 2016 and November 30, 2015, accounts receivable were $12,471,292 and $267,868, respectively. The Company believes that its accounts receivable are fully collectable and determined that an allowance for doubtful accounts was not necessary.
Inventory
Inventory, comprised principally of boxed selenium capsules, selenium-glossy ganoderma capsules and selenium powder, is valued at the lower of cost or market. The value of inventory is determined using the first-in, first-out method.
14
The Company periodically estimates an inventory allowance for estimated unmarketable inventories when necessary. Inventory amounts are reported net of such allowances, if any. There were no allowances for inventory as of August 31, 2016 and November 30, 2015.
Fair value of financial instruments
FASB ASC 820,
Fair Value Measurement
specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs). In accordance with ASC 820, the following summarizes the fair value hierarchy:
|
|
Level 1 Inputs -
|
Unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.
|
|
|
Level 2 Inputs -
|
Inputs other than the quoted prices in active markets that are observable either directly or indirectly.
|
|
|
Level 3 Inputs -
|
Inputs based on valuation techniques that are both unobservable and significant to the overall fair value measurements.
|
ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The Company did not identify any assets or liabilities that are required to be presented at fair value on a recurring basis. Carrying values of non-derivative financial instruments, including cash and cash equivalents, accounts receivable, inventory, prepaid expenses, equity investment, accounts payable, payable for equity investment, taxes payable, accrued liabilities and other payables, and loan from stockholder, approximated their fair values due to the short nature of these financial instruments. There were no changes in methods or assumptions during the periods presented.
Prepaid expenses
Prepaid expenses primarily consist of promotion expenses, rent, advertising expenses and licensing fees.
Prepaid promotion expenses represent payments made to resellers for distributing products to retail stores. In March 2016, the Company entered into agreements with four resellers. In June and July 2016, the Company entered into agreements with another two resellers. Prepaid promotion expenses as of August 31, 2016 and November 30, 2015 were $5,409,200 and $0, respectively.
On January 5, 2011, the Company entered into a license agreement for the technology utilized for the manufacture of its products from an unrelated third party for five years from January 2011 to December 2015. On December 30, 2015, the Company renewed the license agreement for another five years to December 2020 for $90,360 (RMB 600,000) each year. The related prepaid licensing fees of $29,940 and $7,805 were included in prepaid expenses on the balance sheets as of August 31, 2016 and November 30, 2015, respectively. The license provides for renewal options. Since this agreement requires the advance payment of the annual licensing fee, there were no payments remaining under this agreement as of August 31, 2016 and November 30, 2015.
15
Impairment of long-live assets
The Company applies FASB ASC 360,
Property, Plant and Equipment
, which addresses the financial accounting and reporting for the recognition and measurement of impairment losses for long-lived assets. In accordance with ASC 360, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company will recognize the impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to those assets. No impairment of long-lived assets was recognized for the three and nine months ended August 31, 2016 and 2015.
Statutory reserve fund
Pursuant to corporate law of the PRC, the Company is required to transfer 10% of its net income, as determined under PRC accounting rules and regulations, to a statutory reserve fund until such reserve balance reaches 50% of the Companys registered capital. The statutory reserve fund is non-distributable other than during liquidation and can be used to fund previous years losses, if any, and may be utilized for business expansion or used to increase registered capital, provided that the remaining reserve balance after use is not less than 25% of registered capital. The statutory reserve fund was $762,555 and $281,766 as of August 31, 2016 and November 30, 2015, respectively. As of August 31, 2016, the required statutory reserve funds have been fully funded.
Income taxes
The Company accounts for income taxes in accordance with FASB ASC 740,
Income Taxes
(ASC 740), which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. Deferred tax assets and liabilities represent the future tax consequences for those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions. As of August 31, 2016 and November 30, 2015, the Company does not have a liability for any unrecognized tax benefits. The Companys tax filings are subject to examination by the tax authorities. The tax years of 2013 and 2014 remain open to examination by tax authorities in the PRC.
The income tax laws of various jurisdictions in which the Company and its subsidiaries operate are summarized as follows:
United States
The Company is subject to United States tax at graduated rates from 15% to 35%. No provisions for income tax in the United States have been made as the Company had no U.S. taxable income for the three and nine months ended August 31, 2016 and 2015.
16
British Virgin Islands
(
BVI)
Biotechnology International is incorporated in the BVI and is governed by the income tax laws of the BVI. According to current BVI income tax law, the applicable income tax rate for the Company is 0%.
Hong Kong
Hong Kong Gewang is incorporated in Hong Kong. Pursuant to the income tax laws of Hong Kong, the Company is not subject to tax on non-Hong Kong source income.
The People's Republic of China (PRC)
Gewang Selenium and Guangdong Gewang are subject to an Enterprise Income Tax at 25% and file their own tax returns.
3.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2016, the Financial Accounting Standards Board ("FASB) issued Accounting Standards Update ("ASU") ASU 2016-02 Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of our pending adoption of the new standard on our financial statements.
In July 2015, the FASB issued ASU 2015-11 (Subtopic 330) - Simplifying the Measurement of Inventory, which provides guidance to companies who account for inventory using either the first-in, first-out (FIFO) or average cost methods. The guidance states that companies should measure inventory at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted. This accounting standard update is not expected to have a material impact on the Companys consolidated financial statements.
In March 2015, the FASB issued ASU 2015-03 Interest Imputation of Interest (Subtopic 835-30). This ASU addressed the simplification and presentation of debt issuance costs by presenting them in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts or premiums. This accounting standard update is not expected to have a material impact on the Companys consolidated financial statements.
In January 2015, the FASB issued ASU 2015-01 Income Statement Extraordinary and Unusual Items (Subtopic 225-20). This ASU addressed the simplification of income statement presentation by eliminating the concept of extraordinary items. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. This accounting standard update is not expected to have a material impact on the Companys consolidated financial statements.
17
In August 2014, the FASB issued authoritative guidance that requires an entitys management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entitys ability to continue as a going concern and requires additional disclosures if certain criteria are met. This guidance is effective for fiscal periods ending after December 15, 2016, with early adoption permitted. This accounting standard update is not expected to have a material impact on the Companys consolidated financial statements.
4.
RELATED PARTY TRANSACTIONS
The Company obtained demand loans from one of its stockholders which are non-interest bearing. The loans of $256,044 as of August 31, 2016 and $166,106 as of November 30, 2015 are reflected as loans from stockholder.
The Company entered into a promotion agreement with Guangdong Tianmei, a related party. Prepaid promotion expenses as of August 31, 2016 and November 30, 2015 were $122,874 and $0, respectively.
The Company entered into an agreement with Guangdong Tianmei on June 10, 2015 to license the usage of the Companys trademark for 10 years. Trademark revenue recorded for the three and nine months ended August 31, 2016 and 2015 were $0, $1,481, $0, and $0, respectively. The future commitment is approximately $1,500 each year.
Equity investment
On April 28, 2016 the Company's wholly-owned subsidiary, Biotechnology International, entered into an investment agreement with Guangdong Tianmei. At that time, 88% of the equity in Guangdong Tianmei was owned by two individuals who together owned 22% of the Company's outstanding shares. The investment agreement provided that Biotechnology International would pay US$1,000,000 to acquire a 30% interest in an Australian corporation to be formed, which would indirectly own all of the equity in Guangdong Tianmei.
The acquisition by Biotechnology International of 30% Tianmei Australia was completed in May 2016, at which time Tianmei Australia acquired ownership, through subsidiaries, of Guangdong Tianmei. The investment agreement provided that payment of the $1,000,000 purchase price was due on June 20, 2016. Payment in full was made on June 17, 2016.
The net worth of Guangdong Tianmei at the time of the acquisition was $4,888,840, 30% of which was $1,466,652. Because the Company and Guangdong Tianmei were under common control at the time of the acquisition, the $466,652 by which the Company's share of the net book value of Guangdong Tianmei exceeded the purchase price has been recorded as an increase to additional paid-in capital.
The changes in the equity investment are summarized as follows:
|
|
|
|
|
|
|
August 31, 2016
|
|
November 30, 2015
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Initial investment
|
|
$
1,466,652
|
|
$
-
|
Pro rata share of net income
|
|
2,143,641
|
|
-
|
|
|
|
|
|
Investment, end of period/year
|
|
$
3,610,293
|
|
$
-
|
18
The following is a summary of results of operations of the investee for the period from the acquisition date to August 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
$
|
19,041,844
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
$
|
7,414,162
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
$
|
4,482,212
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
$
|
7,145,470
|
5.
LEASES
The Company leases its warehouse and office space from an unrelated third party under a one-year operating lease, which expired on July 1, 2016. The lease required the Company to prepay the total rent of $89,813 (RMB 600,000) in advance for one year. On June 29, 2016, the Company renewed the lease, which commenced on July 2, 2016 and expires on July 1, 2017.
The following leases terminated during the reporting period:
·
The Company leased its Chancheng store from an unrelated third party. The lease, which expired on August 31, 2015, required the Company to prepay the rent of $41,314 (RMB 276,000) in advance for one year. The Company renewed this lease to August 31, 2016 and prepaid the rent of $53,888 (RMB 360,000) in advance for one year. On May 31, 2016, the Company terminated the lease with a $4,576 settlement fee.
·
The Company leased its Xiamen store from an unrelated third party. The lease expired on June 1, 2016 and had a renewal option but the Company decided not to renew the lease.
·
The Company leased its Changsha store form an unrelated third party. The lease, which expires on October 7, 2018, required the Company to prepay the rent of $62,869 (RMB 420,000) in advance for one year. On May 31, 2016, the Company terminated the lease with a $0 settlement fee.
The following leases remained in effect at August 31, 2016:
·
The Company leases its flagship store in Guangzhou from an unrelated third party. The lease commenced on June 1, 2016 and expires on May 31, 2017. The lease required the Company to prepay the rent of $143,701 (RMB 960,000) in advance for one year. The Company fully paid the rent in June 2016.
·
The Company leases its Foshan store, Longyan store and Zhuzhou store from three unrelated third parties. All these three leases commenced on June 1, 2016 and expires on May 31, 2017. These three leases each require the Company to prepay the rent of $62,869 (RMB 420,000) in advance for one year. The Company fully paid the rent in June 2016. Since these leases require the advance payment of the annual rent, there are no minimum payments remaining under these leases.
Prepaid lease payments totaled $324,077 and $179,515 at August 31, 2016 and November 30, 2015, respectively. Rent expense for the three and nine months ended August 31, 2016 and 2015 was $106,692 and $55,186, respectively, and $240,249 and $117,740, respectively.
19
6.
FIXED ASSETS
Fixed assets as of August 31, 2016 and November 30, 2015 are summarized as follows:
|
|
|
|
|
2016
|
|
2015
|
|
(Unaudited)
|
|
|
Electronic equipment
|
$
101,024
|
|
$
68,733
|
Motor vehicles
|
124,916
|
|
69,714
|
Office equipment
|
12,405
|
|
12,936
|
|
|
|
|
|
238,345
|
|
151,383
|
Less: accumulated depreciation
|
(120,886)
|
|
(85,523)
|
|
|
|
|
Fixed assets - net
|
$
117,459
|
|
$
65,860
|
For the three and nine months ended August 31, 2016 and 2015, depreciation expense was $14,855 and $8,741, respectively, and $39,616 and $22,656, respectively.
7.
INCOME TAXES
The provision for income taxes for the three and nine months ended August 31, 2016 and 2015 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
August 31,
|
|
Nine Months Ended
August 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Current
|
$
|
1,230,889
|
$
|
100,544
|
$
|
1,770,858
|
$
|
338,154
|
Deferred
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
1,230,889
|
$
|
100,544
|
$
|
1,770,858
|
$
|
338,154
|
No provisions for income taxes in the United States have been made. The Company did not generate any income in the United States or otherwise have any U.S. taxable income. The Company does not believe that it has any U.S. Federal income tax liabilities with respect to any transactions that the Company or any of its subsidiaries may have engaged in through August 31, 2016. However, there can be no assurance that the IRS will agree with this position, and therefore the Company ultimately could be liable for U.S. Federal income taxes, interest and penalties. The tax years ended November 30, 2015, December 31, 2014, and 2013 remain open to examination by the IRS.
The Company did not file on time its U.S. federal income tax returns, including, without limitation, information returns on Internal Revenue Service (IRS) Form 5471,
Information Return of U.S. Persons with Respect to Certain Foreign Corporations
for the short year tax return ended November 30, 2015 required to be filed as a result of the change in fiscal year. Failure to furnish any income tax returns and information returns with respect to any foreign business entity required, within the time prescribed by the IRS, subjects the Company to certain civil penalties. Management is of the opinion that penalties, if any, that may be assessed would not be material to the consolidated financial statements.
20
8.
CONCENTRATION OF CREDIT AND BUSINESS RISKS
Cash and cash equivalents
Substantially all of the Companys assets and bank accounts are in banks located in the PRC and are not covered by protection similar to that provided by the FDIC on funds held in United States banks.
Major customers
For the three and nine months ended August 31, 2016, three customers counted for 56% and five customers counted for 67% of total sales, respectively. As of August 31, 2016, three customers accounted for 65% of accounts receivable, the largest being 39%. As of November 30, 2015, seven customers accounted for 90% of accounts receivable.
Vulnerability Due to Operations in the PRC
The Companys operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than twenty years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRCs political, economic and social conditions. There is also no guarantee that the PRC governments pursuit of economic reforms will be consistent or effective. The economy in the PRC has recently started to narrow.
9.
ISSUANCE OF COMMON STOCK
On January 18, 2016 the Company sold an aggregate of 12,000,000 shares of common stock to four individuals in a private offering. None of the purchasers were affiliated with the Company. The purchase price for the shares was three RMB (approximately US$0.4561) per share, or a total of 36 million RMB (approximately US$5,473,200). The purchase price was paid by the investors to Guangdong Gewang, which is managed by the Companys wholly-owned subsidiary and accounted for as a variable interest entity at that time.
On May 16, 2016 the Company sold an aggregate of 17,500,000 shares of common stock to two entities in a private offering. Neither of the purchasers was affiliated with the Company. The purchase price for the shares was US$0.25 per share, or a total of US$4,375,000. The purchase price was paid by the investors to Guangdong Gewang, which was managed by a wholly-owned subsidiary of the Company and accounted for as a variable interest entity at that time.
10.
PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
The following is the condensed financial information of China Gewang Biotechnology, Inc., the US parent, consisting of balance sheets as of August 31, 2016 and November 30, 2015, and statements of income and cash flows for the three and nine months ended August 31, 2016 and 2015.
21
Condensed Balance Sheets