| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of accounting and presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements include those of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company uses the equity method of accounting for its equity investments in Tianmei Australia. The investment was under common control and can be significantly influenced. Under the equity method, investments are carried at cost and increased or decreased by the Company’s pro-rata share of earnings or losses. The carrying costs of these investments is also increased or decreased to reflect additional contributions or withdrawals of capital. Any difference in the book equity and the Company’s pro-rata share of the net assets of the investment will be reported as gain or loss at the liquidation of the investment. Losses in excess of the investments are recorded when the Company is committed to provide additional financial support. The Company uses the equity method for investment of 30% because the Company has the ability to exercise significant influence over these entities. All consolidated financial statements and notes to the consolidated financial statements are presented in United States dollars (“US Dollar” or “US$” or “$”). Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Foreign currency translations Almost all of the Company assets are located in the PRC. The functional currency for the Company’s operations is the Renminbi (“RMB”). The Company uses the United States Dollar (“US Dollar” or “US$” or “$”) for financial reporting purposes. The financial statements of the Company have been translated into US Dollars in accordance with Financial Accounting Standards Board ("FASB”) Accounting Standards Update ("ASU") Section 830, “ Foreign Currency Matters All asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transactions occurred. Statements of income (loss) and comprehensive income (loss), changes in stockholders’ equity and cash flows have been translated using the average exchange rate for the periods presented. Adjustments resulting from the translation of the Company’s financial statements are recorded as other comprehensive income (loss). The exchange rates used to translate amounts in RMB into US Dollars for the purposes of preparing the financial statements are as follows: November 30, 2016 November 30, 2015 November 30, 2014 Balance sheet items, except for stockholders’ equity, as of year end 0.1452 0.1561 0.1631 Year Ended November 30, 2016 2015 2014 Amounts included in the statements of income and comprehensive income, changes in stockholders’ equity and cash flows for the year presented 0.1515 0.1610 0.1628 For the years ended November 30, 2016, 2015 and 2014, foreign currency translation adjustments of $(1,455,633), $(315,020), and $1,333, 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 PRC’s political and economic conditions. Any significant revaluation of the RMB may materially affect the Company’s 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%; from February 2016 to November 2016, the PRC devalued its currency by an additional 7%. Further devaluations of its currency could occur. Revenue recognition Revenues are primarily derived from selling selenium supplements and selenium products to wholesale customers, contract distributors, and from our retail stores. The Company’s revenue recognition policies comply with FASB ASC 605 “ Revenue Recognition. Wholesale Revenue Wholesale revenue is recognized when title to the product is transferred to the distributors. Title is transferred upon receipt at the distributors’ locations, as determined by the specific sales terms. The Company pays distributors certain incentives for promoting and placing its products, which allows the Company to quickly expand its distribution network and sales volume. The costs associated with these incentives is deducted from gross revenue in the consolidated statements of income and comprehensive income Retail Revenue Company-operated retail store revenues are recognized when payment is tendered at the point of sale. Franchise Revenue In June 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. In September 2016, the Company terminated its two franchise agreements for marketing reasons. The Company returned the total franchise fees to the franchisees and kept the management fees of $35,290 as per the termination agreements. The Company’s net revenues for the years ended November 30, 2016, 2015 and 2014 were comprised as follows: 2016 2015 2014 Wholesale gross revenue-selenium supplements $ 8,600,092 $ 2,945,440 $ 1,930,057 Wholesale gross revenue-selenium products 36,306,396 - - Less: promotion fees-selenium products, (3,745,883 ) - - Wholesale revenues, net 41,160,605 2,945,440 1,930,057 Retail revenue-selenium supplements 2,946,182 - - Retail revenues-selenium products 1,377,922 1,238,815 437,959 Management fee revenues 35,290 - - $ 45,519,999 $ 4,184,255 $ 2,368,016 Shipping costs Shipping costs incurred by the Company are recorded as selling expenses. Shipping costs for the years ended November 30, 2016, 2015 and 2014 were $96,969, $44,326 and $27,545, respectively. Advertising costs Advertising costs are charged to operations when incurred. For the years ended November 30, 2016, 2015 and 2014, advertising expenses were $619,447, $82,110
and $70,013, 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 Company’s best estimate of the amount of probable credit losses from accounts receivable. The Company determines the allowance based on historical write-off experience, the level of past-due accounts based on the contractual terms of the receivable, the relationship with the customer and current 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. The Company does not have any off-balance-sheet credit exposure related to its customers. As of November 30, 2016, 2015 and 2014, accounts receivable were $11,205,011, $267,868 and $0, respectively. The increase is primarily due to the recent sales with new wholesale distributors which has been subsequently fully collected. Therefore, the Company determined that an allowance for doubtful accounts was not necessary. Historically, the Company did not have any uncollectable accounts receivable. 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. 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 November 30, 2016, 2015 and 2014. Fair value of financial instruments FASB ASC 820, “Fair Value Measurement” 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. Fair value of financial instruments (continued) 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, 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 prepayments made to resellers for distributing products to retail stores. In March 2016, the Company entered into agreements with four distributors. In June, July and September 2016, the Company entered into agreements with another four distributors. Prepaid promotion expenses as of November 30, 2016, 2015 and 2014 were $4,275,602, $0 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 $90,872 (RMB 600,000) each year. The related prepaid licensing fees as of November 30, 2016, 2015 and 2014 were $7,259, $7,805 and $8,155, respectively. The license provides for renewal options. Since this agreement requires the advance payment of the annual licensing fee, there were no minimum payments remaining under this agreement as of November 30, 2016, 2015 and 2014. On September 30, 2016, the Company entered into a six-month agreement with an advertising company for $908,725 (RMB 6,000,000). As of November 30, 2016, the unamortized balance of $605,816 was included in prepaid expenses on the balance sheet. The Company applies FASB ASC 360, “ Property, Plant and Equipment 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 Company’s 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 $759,094, $281,766, and
$144,454 as of November 30, 2016, 2015 and 2014, respectively. As of November 30, 2016, the required statutory reserve fund has been fully funded. Income taxes The Company accounts for income taxes in accordance with FASB ASC 740, “ Income Taxes Income taxes (continued) 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 November 30, 2016, 2015 and 2014, the Company does not have a liability for any unrecognized tax benefits. The Company’s tax filings are subject to examination by the tax authorities. The tax years of 2103, 2014 and 2015 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 years ended November 30, 2016, 2015 and 2014. 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. |
