| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 3. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
● Basis
of presentation The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (the "US GAAP"). The consolidated financial statements include the financial statements
of the Company, its wholly-owned subsidiaries. All significant inter-company transactions and balances between the Company and
its subsidiaries are eliminated upon consolidation.
● Use
of estimates The
preparation of the consolidated financial statements in conformity with the US GAAP requires management to make estimates and
judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date
of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company
bases its estimates and judgments on historical experience and on various other assumptions and information that are believed
to be reasonable under the circumstances. Estimates and assumptions of future events and their effects cannot be perceived with
certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information
is obtained and as our operating environment changes. Significant estimates and assumptions made by management include, among
others, useful lives and impairment of long-lived assets, collectability of accounts receivable, advances to suppliers allowance
for doubtful accounts, reserve of inventory and valuation of derivative liabilities. While the Company believes that the estimates
and assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ
from those estimates. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be necessary.
● Cash Cash
consist primarily of cash on hand and cash in banks which is readily available in checking and saving accounts. The Company maintains
cash with various financial institutions in the PRC where its accounts are uninsured. The Company has not experienced any losses
from funds held in bank accounts and believes it is not exposed to any risk on its cash held in its bank accounts.
● Restricted
cash Cash
that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded in restricted cash
account on the Company's consolidated balance sheet. The Company's restricted cash balance is the amount deposited
in a bank account that was frozen by the local court of Dalian City due to a dispute with a supplier. As of December 31, 2019
and 2018, balances of restricted cash were $311 and $0, respectively.
● Accounts
receivable and allowance for doubtful accounts Accounts
receivable are recorded at the invoiced amount and do not bear interest, which are due within contractual payment terms, generally
30 to 90 days from delivery. Credit is extended based on evaluation of a customer's financial condition, the customer credit-worthiness
and their payment history. Accounts receivable outstanding longer than the contractual payment terms are considered past due.
Past due balances over 90 days and over a specified amount are reviewed individually for collectability. At the end of each period,
the Company specifically evaluates individual customer's financial condition, credit history, and the current economic conditions
to monitor the progress of the collection of accounts receivables. The Company will consider the allowance for doubtful accounts
for any estimated losses resulting from the inability of its customers to make required payments. For the receivables that are
past due or not being paid according to payment terms, the appropriate actions are taken to exhaust all means of collection, including
seeking legal resolution in a court of law. Account balances are charged off against the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit
exposure related to its customers. As of December 31, 2019 and 2018, the allowance for doubtful accounts was $53,182 and $0, respectively.
● Advances
to suppliers Advances
to suppliers consist of prepayments to the NF Group's vendors, such as steel factories and pharmaceutical manufacturers.
We typically receive products from vendors within three to nine months after making prepayments. We continuously monitor delivery
from, and payments to, our vendors while maintaining a provision for estimated credit losses based upon historical experience
and any specific supplier issues, such as discontinuing of inventory supply, that have been identified. If we have difficulty
receiving products from a vendor, we would cease purchasing products from such vendor, request return of our prepayment promptly,
and if necessary, take legal actions. We have not taken such legal actions during the reporting periods. If none of these steps
are unsuccessful, the management will then determine whether the prepayments should be reserved or written off. As of December
31, 2019 and 2018, the balance allowance for doubtful accounts was $11,716 and $0, respectively.
● Inventories Inventories
are stated at the lower of cost or market value. Cost is determined using the weighted average method, and market value is the
middle (the second highest) value among an inventory item's replacement cost, market celling and market floor. Through the
Pharmacy Group, the Company carries out physical inventory counts on a monthly basis at each store and warehouse location. The
Company reviews historical sales activity quarterly to determine excess, slow moving items and potentially obsolete items. The
Company provides inventory reserve based on the excess quantities on hand equal to the difference, if any, between the cost of
the inventory and its estimated market value, or obsolescence of inventories determined principally by customer demand. As of
December 31, 2019 and 2018, the Company recorded allowance for obsolete inventories (the Pharmacy Group's expired medicine)
of $182,258 and $0, respectively.
● Equipment
and vehicles Equipment
and vehicles are stated at cost less accumulated depreciation and impairment, if any. Depreciation is calculated on the straight-line
basis over the following expected useful lives from the date on which they become fully operational and after taking into account
their estimated residual values:
Items Expected Residual
Office equipment 3 years 5 %
Furniture 5 years 5 %
Vehicles 4 years 5 % Expenditures
for repairs and maintenance are expensed as incurred. When assets have been retired or sold, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is recognized in the results of operations.
● Intangible
assets Intangible
assets consist primarily of pharmacy store club members, which was recognized at the acquisition of Pharmacy Group, and software
of management systems. Intangible assets are stated at cost less accumulated amortization and impairment, if any. Intangible assets
are amortized using the straight line method with the following estimated useful lives:
Expected
Software 10 years
Pharmacy club members 8 years
● Impairment
of long-lived assets In
accordance with the provisions of ASC Topic 360, " Impairment or Disposal of Long-Lived Assets
● Revenue
recognition We
adopted Accounting Standard Codification ("ASC") Topic 606, Revenues from Contract with Customers ("ASC 606")
for all periods presented. Under ASC 606, revenue is recognized when control of the promised goods and services is transferred
to the Company's customers, in an amount that reflects the consideration that the Company expects to be entitled to in exchange
for those goods and services, net of value-added tax. The Company determines revenue recognition through the following steps:
● Identify
the contract with a customer;
● Identify
the performance obligations in the contract;
● Determine
the transaction price;
● Allocate
the transaction price to the performance obligations in the contract; and
● Recognize
revenue when (or as) the entity satisfies a performance obligation. The
transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price
allocated to each performance obligation is recognized when that performance obligation is satisfied by the control of the promised
goods and services is transferred to the customers, which at a point in time or over time as appropriate. The
Company's revenue is net of value added tax ("VAT") collected on behalf of PRC tax authorities in respect to
the sales of products and services. VAT collected from customers, net of VAT paid for purchases, is recorded as a liability in
the accompanying consolidated balance sheets until it is paid to the relevant PRC tax authorities
● Cost
of revenue Cost
of revenue consists primarily of cost of goods purchased from suppliers plus direct material costs for packaging and storage,
direct labor, which are directly attributable to the acquisition and maintaining of products for sales. Cost of revenues also
include impairment loss of our products which are obsolete or expired for sale, if any. Shipping and handling costs, associated
with the distribution of finished products to customers, are borne by the customers.
● Comprehensive
income ASC
Topic 220, "Comprehensive Income",
● Income
taxes Income
taxes are determined in accordance with the provisions of ASC Topic 740, " Income Taxes ASC
740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements
uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized
in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities.
Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant
facts. For
the years ended December 31, 2019 and 2018, the Company did not have any interest and penalties associated with tax positions.
As of December 31, 2019, the Company did not have any significant unrecognized uncertain tax positions. The
Company conducts the majority of its businesses in the PRC and is subject to tax in this jurisdiction. As a result of its business
activities, the Company files tax returns that are subject to examination by the PRC.
● Value
added tax Sales
revenue represents the invoiced value of goods, net of VAT. All of the Company's products are sold in the PRC and are subject
to a VAT on the gross sales price. The VAT rates range up to 17%, depending on the type of products sold. The VAT may be offset
by VAT paid by the Company on raw materials and other materials included in the cost of producing or acquiring its finished products.
The Company records a VAT payable net of payments if the VAT payable on the gross sales is larger than VAT paid by the Company
on purchase of materials or finished goods; on the other hand, the Company records a VAT deductible in the accompanying financial
statements net of any VAT payable at the end of reporting period.
● Convertible
promissory notes The
Company records debt net of debt discount for beneficial conversion features and warrants, on a relative fair value basis. Beneficial
conversion features are recorded pursuant to the Beneficial Conversion and Debt Topics of the FASB Accounting Standards Codification.
The amounts allocated to warrants and beneficial conversion rights are recorded as debt discount and as additional paid-in-capital.
Debt discount is amortized to interest expense over the life of the debt.
● Derivative
instruments The
Company enters into financing arrangements that consist of freestanding derivative instruments or are hybrid instruments that
contain embedded derivative features. The Company accounts for these arrangements in accordance with Accounting Standards Codification
topic 815, Accounting for Derivative Instruments and Hedging Activities ("ASC 815") as well as related interpretation
of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the
balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly
and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized
as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based
on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of each
instrument. We
estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered
to be consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors,
the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative
instruments, such as free-standing warrants, we generally use the Black-Scholes model, adjusted for the effect of dilution, because
it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary
to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant
and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal
and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive
to changes in the trading market price of our common stock. Since derivative financial instruments are initially and subsequently
carried at fair values, our income (expense) going forward will reflect the volatility in these estimate and assumption changes.
Under the terms of the new accounting standard, increases in the trading price of the Company's common stock and increases
in fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases
in the trading price of the company's common stock and decreases in trading fair value during a given financial quarter
result in the application of non-cash derivative income.
● Net
loss per share The
Company calculates net loss per share in accordance with ASC Topic 260, "Earnings per Share."
● Foreign
currencies translation Transactions
denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates
prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional
currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting
exchange differences are recorded in the statement of operations. The
reporting currency of the Company is the United States Dollar ("US$"). The Company's subsidiaries in the PRC maintain
their books and records in their local currency, the Renminbi Yuan ("RMB"), which is the functional currency as being
the primary currency of the economic environment in which these entities operate. In
general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not the US$ are translated
into US$, in accordance with ASC Topic 830-30, " Translation of Financial Statement", Translation
of amounts from RMB into US$ has been made at the following exchange rates for the respective year:
2019 2018
Year-end RMB:US$1 exchange rate 6.9762 6.8764
Annual average RMB:US$1 exchange rate 6.8985 6.6146
● Retirement
plan costs Contributions
to retirement plans (which are defined contribution plans) are charged to general and administrative expenses in the accompanying
consolidated statements of operation as the related employee service is provided. The Pharmacy Group accrued approximately$20,000
retirement plan costs in 2019.
● Related
parties Parties,
which can be a corporation or individuals, are considered to be related if the Company has the ability, directly or indirectly,
to control the other party or exercise significant influence over the other party in making financial and operational decisions.
Companies are also considered to be related if they are subject to common control or common significant influence.
● Segment
reporting ASC
Topic 280, " Segment Reporting
● Fair
value of financial instruments The
carrying value of the Company's financial instruments (excluding short-term bank borrowing and convertible promissory notes):
cash, accounts receivable, prepayments and other receivables, accounts payable, income tax payable, amount due to related parties,
other payables and accrued liabilities approximate at their fair values because of the short-term nature of these financial instruments. Management
believes, based on the current market prices or interest rates for similar debt instruments, the fair value of its obligation
under finance lease and short-term bank borrowing approximate the carrying amount. The
Company also follows the guidance of the ASC Topic 820-10, " Fair Value Measurements and Disclosures
Level
1
Level
2:
Level
3: Fair
value estimates are made at a specific point in time based on relevant market information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined
with precision. Changes in assumptions could significantly affect the estimates. The
carrying amount of cash, restricted deposits, trade receivables, other accounts receivable, bank credit, trade payables and other
accounts payable approximate their fair value due to the short-term maturity of these instruments.
● Recent
accounting pronouncements In February 2016, the FASB issued ASU
No. 2016-02, Leases (Topic 842), to increase the transparency and comparability about leases among entities. The new guidance
requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts (other than
leases that meet the definition of a short-term lease). It also requires additional disclosures about leasing arrangements. ASU
2016-02 is effective for interim and annual periods beginning after December 15, 2018, and requires a modified retrospective approach
to adoption assuming the Company will remain an emerging growth company at that date. Early adoption is permitted. In September
2017, the FASB issued ASU No. 2017-13, which to clarify effective dates that public business entities and other entities were
required to adopt ASC Topic 842 for annual reporting. A public business entity that otherwise would not meet the definition of
a public business entity except for a requirement to include or the inclusion of its financial statements or financial information
in another entity's filing with the SEC adopting ASC Topic 842 for annual reporting periods beginning after December 15, 2019,
and interim reporting periods within annual reporting periods beginning after December 15, 2020. ASU No. 2017-13 also amended
that all components of a leveraged lease be recalculated from inception of the lease based on the revised after tax cash flows
arising from the change in the tax law, including revised tax rates. The difference between the amounts originally recorded and
the recalculated amounts must be included in income of the year in which the tax law is enacted. The Company has not early adopted
this update and it will become effective on January 1, 2020. The Company is currently evaluating the impact of this new standard
on its financial statements and related disclosures. In
January 2017, the Financial Accounting Standard Board ("FASB") issued ASU 2017-04, Intangibles - Goodwill and Other
(Topic 350): Simplifying the Accounting for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 removes Step 2 of the
goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount
by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard,
which will be effective for the Company beginning in the first quarter of fiscal year 2020, is required to be applied prospectively.
The Company does not believe that the adoption of ASU 2017-04 will have a material impact on the Company's consolidated
financial statements. In
June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07"),
which supersedes ASC 505-50 and expands the scope of ASC 718 to include all share-based payments arrangements related to the acquisition
of goods and services from both employees and nonemployees. For public companies, the amendments are effective for annual reporting
periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted,
but no earlier than a company's adoption date of ASC 606. The Company does not believe that the adoption of ASU 2018-07 will have
a material impact on the Company's consolidated financial statements. In
August 2018, the FASB issued Accounting Standard Update ("ASU") No. 2018-13, Fair Value Measurement (Topic 820), which
modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including, among other changes,
the consideration of costs and benefits when evaluating disclosure requirements. For public companies, the amendments are effective
for annual reporting periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption
is permitted. The Company is currently assessing the impact that adopting this new accounting guidance will have on the Company's
financial statements and footnote disclosures. In
October 2018, the FASB issued ASU 2018-17, "Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for
Variable Interest Entities". The new standard changes how entities evaluate decision-making fees under the variable interest
entity guidance. The new standard is effective for fiscal years beginning after December 15, 2019, and interim periods within
those fiscal years. Early adoption is permitted in any interim period after issuance. The standard should be applied on a modified
retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption.
The Company expects that the adoption of this ASU will not have a material impact on the Company's consolidated financial
statements. In
November 2018, the FASB issued ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses."
ASU 2018-19 is issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology
that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to
inform credit loss estimates. We will be required to use a forward-looking expected credit loss model for accounts receivables,
loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through
an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be
adopted upon the effective date for us beginning July 1, 2020. Adoption of the standard will be applied using a modified retrospective
approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology
with the new standard. We are currently evaluating the impact of this standard in our consolidated financial statements, including
accounting policies, processes, and systems. In
December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU
2019-12"), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain
exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application.
This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020,
with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements
and related disclosures. Other
accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption
until a future date are not expected to have a material impact on the Company's consolidated financial statements upon adoption. |
