| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 3. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
● Basis
of presentation and consolidation These
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting
principles in the United States of America ("US GAAP"). These unaudited condensed consolidated financial statements
include the financial statements of the Company and its subsidiaries. All significant inter-company balances and transactions
within the Company have been eliminated upon consolidation. The
unaudited interim condensed consolidated financial information as of March 31, 2020 and for the three months ended March 31, 2020
and 2019 have been prepared, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures, which are normally included in annual consolidated financial statements prepared
in accordance with US GAAP, have been omitted pursuant to those rules and regulations. The unaudited interim condensed consolidated
financial information should be read in conjunction with the consolidated financial statements and the notes thereto, included
in the Company's Form 10-K for the fiscal year ended December 31, 2019 previously filed with the SEC on May 14, 2020. In
the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement
of the Company's unaudited condensed consolidated financial position as of March 31, 2020 and its unaudited condensed consolidated
results of operations for the three months ended March 31, 2020 and 2019, and its unaudited condensed consolidated cash flows
for the three months ended March 31, 2020 and 2019, as applicable, have been made. The interim results of operations are not necessarily
indicative of the operating results for the fiscal year or any future periods.
● Use
of estimates The
preparation of these condensed 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, disclosures of contingent assets and liabilities on
the date of these condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting
periods. 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, fair value of goodwill and valuation of derivative liabilities.
While the Company believes that the estimates and assumptions used in the preparation of these condensed 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.
● Reclassification Certain
prior year balances were reclassified to conform to the current period presentation, which mainly reflect the presentation of
the discontinued operation of the NF Group. Except for the assets and liabilities of the NF Group which were reclassified as discontinued
assets or liabilities and presented as current assets or liabilities in the consolidated balance sheets, there was no other impacts
on reported financial position or cash flows for any of the periods presented.
● Cash Cash
consists 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 bank accounts.
● Restricted
cash Cash
that is restricted as to withdrawal or use under the terms of certain contractual agreements or orders are recorded in a restricted
cash account in the Company's unaudited interim condensed consolidated balance sheet. The Company's restricted cash
balance is the amount of cash deposited in the Company's bank account that was subject to an attachment order by a local
court of Dalian City due to a dispute with a supplier. As of March 31, 2020 and December 31, 2019, balances of restricted cash
were $306 and $311, respectively.
● Accounts
receivable and allowance for doubtful accounts Accounts
receivable are recorded at the invoiced amount and do not bear interest, which 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 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 those 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 March 31, 2020 and December 31, 2019, the allowance for doubtful accounts was $1,039,725 and $53,182,
respectively.
● Advances
to suppliers Advances
to suppliers consist of prepayments to the Company's vendors, such as pharmaceutical manufacturers and upstream medicine
dealers. We typically prepay for the purchase of our selling merchandises, especially for those salable, scarce, personalized
medicine or medical devices. 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 type of legal actions during the reporting
periods. If none of these steps are successful, the management will then determine whether the prepayments should be reserved
or written off. As of March 31, 2020 and December 31, 2019, the allowance for doubtful accounts was $18,409 and $11,716, respectively.
● Inventories Inventories
are stated at the lower of cost or net realizable value. Cost is determined on a weighted average method. The Company carries
out physical inventory counts on a monthly basis at each store directly-owned and those warehouses for temporary storage of our
selling merchandises. The Company reviews historical sales activity quarterly to identify if any 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 net realizable value, or obsolescence of inventories determined principally
by customer demand and the maturity period of the merchandises. As of March 31, 2020 and December 31, 2019, the Company recorded
an allowance for obsolete inventories, which mainly consists of expired medicine, of $297,011 and $182,258, respectively.
● Property,
plant and equipment Property,
plant and equipment 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:
Expected
useful lives Residual
value
Building 20
years 5%
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 the 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
useful lives
Software 10
years
Pharmacy
club members 8
years
● Goodwill Goodwill
represents the excess of the purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities
assumed of an acquired business. In accordance with ASC 350, Goodwill and Other Intangible Assets Goodwill
is tested for impairment at the reporting unit level on at least an annual basis or when an event occurs or circumstances change
that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value. These events or circumstances
include a significant change in stock prices, business environment, legal factors, financial performances, competition, or events
affecting the reporting unit. Application of the goodwill impairment test requires judgment, including the identification of reporting
units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of
the fair value of each reporting unit. The estimation of fair value of reporting unit using a discounted cash flow methodology
also requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation
of the long-term rate of growth for the Company's business, estimation of the useful life over which cash flows will occur,
and determination of the Company's weighted average cost of capital. The estimates used to calculate the fair value of a
reporting unit change from year to year based on operating results and market conditions. Changes in these estimates and assumptions
could materially affect the determination of fair value and goodwill impairment for the reporting unit. Management
evaluated the recoverability of goodwill by performing a qualitative assessment before using a two-step impairment test approach
at the reporting unit level. If the Company reorganizes its reporting structure in a manner that changes the composition of one
or more of its reporting units, goodwill will be reassigned based on the relative fair value of each of the affected reporting
units.
● Impairment
of long-lived assets and intangibles 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. 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 three months ended March 31, 2020 and 2019, the Company did not incur any interest or penalties associated with tax
positions. As of March 31, 2020, the Company did not have any significant unrecognized uncertain tax positions. The
Company conducts all of its business in the PRC and is subject to tax in this jurisdiction. As a result of its corporate structure
the Company files tax returns that are subject to examination by a foreign tax authority.
● Value
added tax Sales
revenue represents the invoiced value of goods sold, net of VAT. All of the Company's products that are sold in the PRC
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 its purchase activities of merchandises, raw materials, utilities, and other materials
which cost was included in the cost of producing or acquiring its products for sales. 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 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 has entered 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 period:
March 31, 2020 March 31, 2019
Period-end RMB:US$1 exchange rate 7.0851 7.0729
Three months end average RMB:US$1 exchange rate 6.9790 6.8541
● Related
parties Parties,
which can be a corporation or individual, 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 and cash equivalents, accounts and retention receivable, prepayments and other receivables, accounts payable, income tax
payable, amounts due to related parties other payables and accrued liabilities approximate 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 its 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 cash, accounts receivable, other receivable, bank credit, accounts payable and other accounts
payable approximate their fair value due to the short-term maturity of these instruments.
● Recent
accounting pronouncements In
November 2018, the FASB issued ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses."
ASU 2018-19 is 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. This standard will become effective
and be adopted by companies of which a new fiscal year starts after 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. |
