NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(AMOUNTS IN US DOLLARS)
NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Organic Agricultural Company Limited (“Organic
Agricultural”, the “Company”, “we” or “us”) was incorporated in the State of Nevada
on April 17, 2018.
The
Company, through its subsidiaries with headquarters in Harbin, China, sells paddy and selenium-enriched paddy products,
rice and other agricultural products. The Company’s
subsidiaries include:
|
●
|
Organic
Agricultural (Samoa) Co., Ltd. (“Organic Agricultural Samoa”), a limited
company incorporated in Samoa on December 15, 2017, is wholly owned by Organic Agricultural.
Organic Agricultural Samoa owns all of the outstanding shares of capital stock of Organic
Agricultural Company Limited (Hong Kong).
|
|
●
|
Organic
Agricultural Company Limited (Hong Kong) (“Organic Agricultural HK”),
which was established on December 6, 2017 under the laws of Hong Kong, is wholly owned
by Organic Agricultural Samoa. Organic Agricultural HK owns all of the registered equity
of Heilongjiang Tianci Liangtian Agricultural Technology Development Company Limited.
|
|
●
|
Heilongjiang
Tianci Liangtian Agricultural Technology Development Company Limited. (“Tianci
Liangtian”), a company incorporated in Heilongjiang, China on November 2, 2017,
is wholly owned by Organic Agricultural HK. Tianci Liangtian owns:
|
|
●
|
all of the
registered equity of Heilongjiang Yuxinqi Agricultural Technology Development Company
Limited (“Yuxinqi”), which was incorporated in Heilongjiang, China on
February 5, 2018. Yuxinqi sells agricultural products, including paddy and other crops,
to customers worldwide.
|
|
●
|
51% of the
registered equity of Baoqing County Lvxin Paddy Rice Plant Specialized Cooperative
(“Lvxin”), a company incorporated in China on February 9, 2012. Lvxin
is an integrated agricultural company providing self-planting paddy to its customers.
|
Reorganization
On May 16, 2018, the Company completed
a corporate reorganization to combine several controlled entities (now referred to as the “subsidiaries”) into Organic
Agricultural. The specific transactions related to this reorganization are as follows:
On March 31, 2017, Hao Shuping and the
shareholders of Lvxin signed an Equity Transfer Agreement, whereby shareholders of Lvxin transferred 51% of the controlling interest
in Lvxin to Hao Shuping. Hao Shuping agreed to pay the Lvxin shareholders RMB 2,029,586 (US$305,472) in cash and cause the company
that would become Organic Agricultural to issue to them 152,736 shares (valued at US$152,736). Hao Shuping and the shareholders
of Lvxin also signed an irrevocable supplemental agreement that gave Hao Shuping voting and managerial control over Lvxin. By
June 22, 2018, Tianci Liangtian paid all of the consideration to Lvxin’s former shareholders.
On January 1, 2018, pursuant to the Equity
Transfer Agreement between Hao Shuping and Tianci Liangtian, Hao Shuping transferred his 51% controlling interest in Lvxin to
Tianci Liangtian. As control of both entities resided with Hao Shuping, we have accounted for the combination of Lvxin with Tianci
Liangtian as a transaction between entities under common control.
On January 8, 2018, the shareholders of Tianci Liangtian
transferred ownership of Tianci Liangtian to Organic Agricultural HK, which is wholly owned by Organic Agricultural Samoa.
On
May 16, 2018, the Company issued 10,000,000 shares of its common stock, par value $0.001 to the shareholders of Organic Agricultural
Samoa, in exchange for 100% of the outstanding shares of Organic Agricultural Samoa (the “Share
Exchange”).
As a result of the Share Exchange, Hao
Shuping acquired 48.8% of the Company’s outstanding shares. Prior to the Share Exchange, Hao Shuping controlled Lvxin and
Tianci Liangtian. Therefore, the Share Exchange was accounted for as a business combination of entities under common control in
accordance with ASC 805-50-30-5. Accordingly, the assets and liabilities of the Company and its subsidiaries are presented at
their carrying values at the date of the transaction; the Company’s historical stockholders’ equity was retroactively
restated to the first period presented, as the acquisition of Organic Agricultural Samoa, Organic Agricultural HK, Tianci Liangtian
and Lvxin was treated as a combination of entities under common control.
ORGANIC AGRICULTURAL COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(AMOUNTS IN US DOLLARS)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Going concern
Management has determined there is substantial
doubt about our ability to continue as a going concern as a result of our lack of significant revenues and recurring losses. If
we are unable to generate significant revenue or secure additional financing, we may be required to cease or curtail our operations.
Our financial statements do not include adjustments that might result from the outcome of this uncertainty.
The Company’s operations have been
financed primarily by advances and loans from related parties and proceeds from sales of shares. Hao Shuping, Shen Zhenai and
Xun Jianjun, the shareholders of Lvxin, have been the primary sources of financing for the operations of the entity and continue
to provide support in the future if there is any need for capital. As of December 31,2019, the Company has a balance of 45,612,
37,055, 22,253 and 31,793, respectively, due to Hao Shuping, Shen Zhenai, Xun Jianjun and the Lou Zhengui, the shareholders of
Lvxin. The Company has received $647,260 during the nine months ended December 31, 2019, and an additional $30,000 from January
1, 2020 to the date of filling this report, for the sale of shares. These funds provided sufficient working capital for the Company.
Management intends to expand product offerings
to include value-added products, both products based on rice and products based on other food stuffs, such as organic red beans
and millet.
The marketing personnel of the Company
will endeavor to expand awareness of our brand, open new marketing channels, and educate the nation about the health benefits
of selenium-enriched rice.
In this manner, Management hopes to make sufficient operating
cash inflow to support its future operations and development of the Company in addition to capital raised from sales of shares
and shareholders’ support based on needs.
Basis of presentation
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the instructions to Form 10-Q and Item Regulation S-X, Rule 10-01(c)
Interim Financial Statements, and, therefore, do not include all information and footnotes necessary for a complete presentation
of financial position, results of operations, cash flows, and stockholders’ equity in conformity with generally accepted
accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation of the results
of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results
for the three and nine months ended December 31, 2019 are not necessarily indicative of the results that can be expected for the
year ending March 31, 2020.
The Company’s consolidated financial
statements are expressed in U.S. Dollars and are presented in accordance with Accounting Principles Generally Accepted in the
United States of America (“U.S. GAAP”).
Principles of consolidation
The condensed consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated
in consolidation. The condensed consolidated financial statements include the assets, liabilities, and net income or loss of these
subsidiaries.
The Company’s subsidiaries are listed
as follows:
Name
|
|
Place of
Incorporation
|
|
Attributable
equity interest
%
|
|
Authorized
capital
|
Organic Agricultural (Samoa) Co., Ltd.
|
|
Samoa
|
|
100
|
|
USD 1,000,000
|
Organic Agricultural Company Limited (Hong Kong)
|
|
Hong Kong
|
|
100
|
|
HKD 10,000
|
Heilongjiang Tianci Liangtian Agricultural Technology Development Company
Limited
|
|
China
|
|
100
|
|
0
|
Heilongjiang Yuxinqi Agricultural Technology Development Company Limited
|
|
China
|
|
100
|
|
0
|
Baoqing County Lvxin Paddy Rice Plant Specialized Cooperative
|
|
China
|
|
51
|
|
0
|
Use of estimates
The preparation of consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting periods. Management makes these estimates using the best information available
at the time the estimates are made; however, actual results could differ from those estimates. One significant item subject to
such estimates and assumptions is the inventory valuation allowance. These estimates are often based on complex judgments and
assumptions that management believes to be reasonable but are inherently uncertain and unpredictable. Actual results could differ
from these estimates.
ORGANIC AGRICULTURAL COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(AMOUNTS IN US DOLLARS)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and cash equivalents
Cash consists of cash on hand and bank
deposits, which are unrestricted as to withdrawal and use. All highly liquid investments with original stated maturities of three
months or less are classified as cash and cash equivalents. The Company’s cash and cash equivalents consist of cash on hand
and cash in bank, as of December 31, 2019 and March 31, 2019.
Revenue recognition
Effective April 1, 2018, the Company adopted
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606 — Revenue
from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products and contracts
by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract;
(3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5)
recognize revenue when each performance obligation is satisfied.
The Company recognizes revenue when the
amount of revenue can be reliably measured, it is probable that economic benefits will flow to the entity, and specific criteria
have been met for each of the Company’s activities as described below.
The Company sells paddy and selenium-enriched
paddy products, rice and other agricultural products. All revenue is recognized when it is both earned and realized. The Company’s
policy is to recognize the sale when the products, ownership and risk of loss have transferred to the purchasers, and collection
of the sales proceeds is reasonably assured, all of which generally occur when the customer receives the products.
Given the nature of this revenue source
of the Company’s business and the applicable rules guiding revenue recognition, the revenue recognition practices for the
sale do not contain estimates that materially affect results of operations nor does the Company have any policy for return of
products.
Fair Value Measurements
The Company applies the provisions of
FASB ASC 820, Fair Value Measurements for fair value measurements of financial assets and financial liabilities and for
fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements. ASC
820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
Fair value is defined as the price that
would be received when selling an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. In determining the fair value for the assets and liabilities required or permitted to be recorded, the
Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market
participants would use when pricing the asset or liability.
ASC 820 establishes a fair value hierarchy
that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value. ASC 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority
to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy
are as follows:
Level 1: Unadjusted quoted prices in active
markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices, other than those
in Level 1, in markets that are not active or for similar assets and liabilities, or inputs that are observable, either directly
or indirectly, for substantially the full term of the asset or liability;
Level 3: Prices or valuation techniques
that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market
activity).
There were no transfers between level
1, level 2 or level 3 measurements during the three and nine months ended December 31, 2019 and 2018.
Financial assets and liabilities of the
Company primarily consists of cash, account receivables, prepaid expenses, inventories, other receivables, right of use asset,
accounts payable and accrued liabilities, customer deposits, due to related parties, and other payables. As at December 31, 2019
and March 31, 2019, the carrying values of these financial instruments approximated their fair values due to the short-term nature
of these instruments.
ORGANIC AGRICULTURAL COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(AMOUNTS IN US DOLLARS)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Functional currency and foreign
currency translation
An
entity’s functional currency is the currency of the primary economic environment in which it operates. Normally that is
the currency of the environment in which the entity primarily generates and expends cash. Management’s judgment is essential
to determine the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing
and inter-company transactions and arrangements. The functional currency of the Company is the Chinese Renminbi (“RMB’),
except the functional currency of Organic Agricultural HK is the Hong Kong Dollar (“HKD”), and the functional currency
of Organic Agricultural Samoa and Organic Agricultural is the United States dollar (“US Dollars” “USD”
or “$”). The reporting currency of these consolidated financial statements is in US Dollars.
The financial statements of the Company,
which are prepared using the RMB and the HKD, are translated into the Company’s reporting currency, the US Dollar. Assets
and liabilities are translated using the exchange rate at each reporting period end date. Revenue and expenses are translated
using average rates prevailing during each reporting period, and shareholders’ equity is translated at historical exchange
rates. Adjustments resulting from the translation are recorded as a separate component of accumulated other comprehensive income
or loss.
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 transactions. Foreign currency exchange gains and losses resulting from these transactions are included in operations.
The exchange rates used for foreign currency
translation are as follows:
|
|
|
|
For the nine months ended
December 31,
|
|
March 31,
|
|
|
|
|
|
2019
|
|
|
2018
|
|
2019
|
|
|
|
|
|
(USD to RMB/USD
to HKD)
|
|
|
(USD to RMB/USD
to HKD)
|
|
(USD to RMB/USD
to HKD)
|
|
Assets and liabilities
|
|
period end exchange rate
|
|
6.9680/7.7876
|
|
|
6.8776/7.8317
|
|
6.7111/7.8493
|
|
Revenue and expenses
|
|
period average
|
|
6.9612/7.8315
|
|
|
6.7008/7.8408
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
December 31,
|
|
March
31,
|
|
|
|
|
|
2019
|
|
|
2018
|
|
2019
|
|
|
|
|
|
(USD to RMB/USD to HKD)
|
|
|
(USD to RMB/USD to HKD)
|
|
(USD to RMB/USD to HKD)
|
|
Assets and liabilities
|
|
period end exchange rate
|
|
6.9680/7.7876
|
|
|
6.8776/7.8317
|
|
6.7111/7.8493
|
|
Revenue and expenses
|
|
period average
|
|
7.0435/7.8251
|
|
|
6.9162/7.8293
|
|
N/A
|
|
Income taxes
The Company follows FASB ASC Topic 740,
Income Taxes, which requires the recognition of deferred income taxes for the differences between the basis of assets and
liabilities for financial statements and income tax purposes. Under this method, deferred income taxes are recognized for the
tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting
amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Deferred tax assets are also recognized for operating losses and for tax credit carryforwards.
Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
ASC 740-10-30 requires income tax positions
to meet a more-likely-than-not recognition threshold to be recognized in the financial statements. Under ASC 740-10-30, tax positions
that previously failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting
period in which that threshold is met. Under ASC 740-10-40, previously recognized tax positions that no longer meet the more-likely-than-not
threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.
ORGANIC AGRICULTURAL COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(AMOUNTS IN US DOLLARS)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
The application of tax laws and regulations
is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change
as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the
actual liability may be materially different from our estimates, which could result in the need to record additional tax liabilities
or potentially reverse previously recorded tax liabilities or the deferred tax asset valuation allowance.
Lvxin products sales and services have
been exempt from enterprise income tax. According to the “PRC Income Tax Law” Article 27 (1), income from agricultural,
forestry, animal husbandry and the fisheries industries shall be exempt from business tax.
According to the “PRC Income Tax
Law”, Tianci Liantian and Yuxinqi are subject to a 25% standard enterprise income tax in the PRC.
Earnings (loss) per share
The Company computes earnings (loss)
per share (“EPS”) in accordance with FASB ASC 260, Earnings Per Share. ASC 260 requires companies with
complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income (loss) divided by the weighted
average common shares outstanding during the period.
Diluted EPS is similar to basic EPS but
presents the dilutive effect on a per share basis of contracts to issue ordinary common shares (e.g., convertible securities,
options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. The
computation of diluted EPS includes the estimated impact of the exercise of contracts to purchase common stock using the treasury
stock method and the potential common shares associated with convertible debt using the if-converted method. Potential common
shares that have an anti-dilutive effect (i.e., those that increase earnings per share or decrease loss per share) are excluded
from the calculation of diluted EPS.
Share-Based Compensation
The Company follows the provisions of
FASB ASC 718 requiring employee equity awards to be accounted for under the fair value method. Accordingly, share-based compensation
is measured at grant date, based on the fair value of the award and recognized over its vesting period. No equity instruments
were granted during the nine months ended December 31, 2019 and no compensation expense is required to be recognized under provisions
of ASC 718 with respect to employees. During the nine months ended December 31, 2018, specifically on June 13, 2018, the Company
granted a total of 290,000 shares with a fair value on the grant date of $1.30 per share to 8 employees, and $377,000 compensation
expense was recognized under the provisions of ASC 718. These shares were fully vested when issued.
Segment Information and Geographic Data
The Company is operating in one segment
in accordance with the accounting guidance in FASB ASC Topic 280, Segment Reporting. The Company’s revenues are from
the sales of agricultural products from customers in the People’s Republic of China (“PRC”). All assets of the
Company are located in the PRC.
Concentration of Credit Risk
The Company maintains cash balances in
three banks in China. In China, the insurance coverage of each bank is RMB500,000 (approximately USD$75,000). As of December 31,
2019, the Company had total balances of RMB1,552,881 (approximately USD$233,000) that exceeded the insurance amounts.
As of December 31, 2019 and March 31,
2019, the Company has customer deposits of $101,153 and $164,362, respectively. As of December 31, 2019, Shouhang Commerce and
Trade represented 87.1% of total customer deposits. As of March 31, 2019, Shouhang Commerce and Trade represented 76.2% of total
customer deposits. During the nine months ended December 31, 2019, major customers Li Jiaxu, Zhao Shihai, Huiye Group, Jiufu Zhenyuan
and Sun Rongmao generated 40%, 34%, 10%, 5% and 5% of revenue, respectively.
As of December 31, 2019 and September
30, 2019, the Company has customer deposits of $101,153 and $104,046, respectively. As of December 31, 2019, Shouhang Commerce
and Trade represented 87.1% of total customer deposits. As of September 30, 2019, Shouhang Commerce and Trade represented 83.4%
of total customer deposits. During the three months ended December 31, 2019, major customers Li Jiaxu, Zhao Shihai and Huiye Group
generated 34%, 42% and 13% of revenue, respectively.
ORGANIC AGRICULTURAL COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(AMOUNTS IN US DOLLARS)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Recently Adopted Accounting Standards
Revenue
In March 2016, the FASB issued ASU No.
2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus
Net). The amendment in this update affects entities with transactions included within the scope of Topic 606, The scope of that
Topic includes entities that enter into contracts with customers to transfer goods or services (that are an output of the entity’s
ordinary activities) in exchange for consideration. The amendments are intended to improve the operability and understandability
of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, the amendments
in ASU 2016-10 provide more detailed guidance, including additional implementation guidance and examples in the following key
areas: 1) identifying performance obligations and 2) licenses of intellectual property. In May 2016, the FASB issued ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”).
The amendments do not change the core principles of the standard, but clarify the guidance on assessing collectability, presenting
sales taxes, measuring noncash consideration and certain transition matters. This update becomes effective concurrently with ASU
No. 2014-09. The Company adopted ASU 2016-12 effective April 1, 2018. There was no impact on the Company’s financial statements
as a result of adopting Topic 606 for the three and nine months ended December 31, 2019 and 2018.
Leases.
In July 2018, the FASB issued ASU No.
2018-11, Leases (Topic 842): Targeted Improvements, which provides an additional, optional transition method related to implementing
the new leases standard. ASU 2018-11 provides that companies can initially apply the new lease standard at adoption and recognize
a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted the
guidance as of April 1, 2019, there is no cumulative-effect adjustment to the Company’s opening balance of retained earnings
in the period of adoption. See Note 9 - Leases for further details.
We do not believe any recently issued
but not yet effective accounting standards, if currently adopted, would have a material effect on the condensed consolidated financial
position, statements of operations and cash flows.
NOTE 3. PREPAID EXPENSES
Prepaid expenses include prepaid paddy
planting production materials, prepayment of rice processing charges, and prepayment for products to be purchased. As of December
31, 2019 and March 31, 2019, prepayments and deferred expenses were $46,194 and $121,257, respectively.
NOTE 4. LONG-TERM LEASE PREPAYMENTS
Long-term lease prepayments include land
rent prepayment over one year. As of March 31, 2019, long-term lease prepayments were $273,275. As a result of the adoption of
the new accounting standards applicable to leases, long-term lease prepayments were reclassified to offset the lease liability
as of December 31, 2019.
NOTE 5. INVENTORIES
Inventories are generally kept for a short
period of time. Inventories are comprised of growing costs, harvesting costs, raw materials, and finished goods (including harvesting
agricultural produce paddy and processed rice and other agricultural products).
Growing costs, also referred to
as agricultural costs, consist of seeds, cultivation, fertilization, labor costs and soil improvement, pest control and irrigation.
Harvest costs are comprised of
labor and equipment expenses incurred to harvest and deliver crops to the packinghouses.
Raw materials include all costs
of materials purchased to be used in production of the Company’s products.
ORGANIC AGRICULTURAL COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(AMOUNTS IN US DOLLARS)
NOTE 5. INVENTORIES (Continued)
Agricultural produce paddy is grown
in Lvxin’s planting base. This crop has distinct growing, harvest, and selling periods, each of which lasts approximately
four to six months. During the growing period (usually April to September), agricultural costs are capitalized, as they are associated
with benefiting and preparing the crops for the harvest and selling period. During the harvest and selling period, harvest costs
and agricultural costs are capitalized as inventories, then amortized as a cost of sales in accordance with FIFO recognition of
historical costs when the inventory is sold.
Most agricultural costs, including amortization
of capitalized agricultural costs and certain other costs, such as indirect labor including farm supervision and management and
irrigation that benefit multiple crops, are allocated to crops on a per-kilogram basis.
The cost of harvesting agricultural produce
paddy includes all relevant expenditures incurred before and during the entire cultivation period and after harvesting, mainly
including seed, fertilizer and other production materials, land rent, labor, and other related costs, subject to impairment if
the cost of inventory exceeds net realizable value.
Manufactured goods, rice and other
products includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition.
The Company values inventory on its balance
sheet at the lower of cost or net realizable value. Based on recent sales experience, the Company determined that the net realizable
value of its inventory was less than the costs incurred in producing the inventory. Therefore, an impairment charge was made as
of March 31, 2019. At December 31, 2019 and March 31, 2019, inventories consisted of the following:
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Growing cost
|
|
$
|
-
|
|
|
$
|
70,211
|
|
Selenium enriched paddy
|
|
|
568,459
|
|
|
|
396,800
|
|
Rice and other products
|
|
|
50,698
|
|
|
|
68,662
|
|
Packing and other materials
|
|
|
11,876
|
|
|
|
10,170
|
|
Total inventories at cost
|
|
|
631,033
|
|
|
|
545,843
|
|
Inventory-impairment
|
|
|
-
|
|
|
|
(29,439
|
)
|
Inventories, net
|
|
$
|
631,033
|
|
|
$
|
516,404
|
|
For the nine months ended December 31,
2019, inventory-impairment of $28,354 has been reflected in cost of sales since the corresponding inventories have been sold.
NOTE 6. INCOME TAXES
A reconciliation of loss before income
taxes for domestic and foreign locations for the nine months ended December 31, 2019 and 2018 is as follows:
|
|
For
the nine months ended
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
United States
|
|
$
|
(131,884
|
)
|
|
$
|
(87,486
|
)
|
Foreign
|
|
|
(215,622
|
)
|
|
|
(686,092
|
)
|
(Loss) before income taxes
|
|
$
|
(347,506
|
)
|
|
$
|
(773,578
|
)
|
|
|
For
the three months ended
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
United States
|
|
$
|
(58,029
|
)
|
|
$
|
(31,692
|
)
|
Foreign
|
|
|
(13,448
|
)
|
|
|
(14,228
|
)
|
(Loss) before income taxes
|
|
$
|
(71,477
|
)
|
|
$
|
(45,920
|
)
|
ORGANIC AGRICULTURAL COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(AMOUNTS IN US DOLLARS)
NOTE 6. INCOME TAXES (Continued)
The difference between the U.S. federal
statutory income tax rate and the Company’s effective tax rate was as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
U.S. federal statutory income tax rate
|
|
|
21
|
%
|
|
|
21
|
%
|
U.S. Valuation allowance
|
|
|
(21
|
)%
|
|
|
(21
|
)%
|
Rates in PRC, net
|
|
|
25
|
%
|
|
|
25
|
%
|
PRC Valuation allowance
|
|
|
(25
|
)%
|
|
|
(25
|
)%
|
The Company’s effective tax rate
|
|
|
(0
|
)%
|
|
|
(0
|
)%
|
The Company did not recognize deferred
tax assets since it is not likely to realize such deferred taxes. The deferred tax would apply to the Company in the U.S. and
the companies, Yuxinqi and Tianci Liangtian, in China.
As of December 31, 2019, Yuxinqi and Tianci
Liangtian have total net operating loss carry forwards of $646,490 in the PRC that expire in 2024. Due to the uncertainty of utilizing
these carry forwards, the Company provided a 100% allowance on all deferred tax assets of approximately $161,623 and $99,774 related
to its operations in the PRC as of December 31, 2019 and March 31, 2019, respectively. The PRC valuation allowance has increased
by approximately $65,000 and $161,000 for the nine months, and $27,000 and $4,000 for the three months, ended December 31, 2019
and 2018, respectively.
The Company has incurred losses from its
United States operations during all periods presented of approximately $337,000. The Company’s United States operations
consist solely of ownership of its foreign subsidiaries, and the losses arise from administration expenses. Accordingly, management
provided a 100% valuation allowance of approximately $71,000 and $43,000 against the deferred tax assets related to the Company’s
United States operations as of December 31, 2019 and March 31, 2019, respectively, because the deferred tax benefits of the net
operating loss carry forwards in the United States will not likely be utilized. The US valuation allowance has increased by approximately
$28,000 and $18,000 for the nine months, and $12,000 and $7,000 for the three months, ended December 31, 2019 and 2018, respectively.
The Company is subject to examination
by the Internal Revenue Service (IRS) in the United States as well as by the taxing authorities in China, where the firm has significant
business operations. The tax years under examination vary by jurisdiction. The table below presents the earliest tax year that
remain subject to examination by major jurisdiction.
|
|
The year as of
|
U.S. Federal
|
|
March 31, 2019
|
China
|
|
January 31, 2015
|
United States
The Company is subject to the U.S. corporation
tax rate of 21%.
Samoa
Organic Agricultural (Samoa) Co., Ltd
was incorporated in Samoa and, under the current laws of Samoa, it is not subject to income tax.
China
Tianci Liantian and Yuxinqi are subject to a 25% standard enterprise
income tax in the PRC. There was no provision for income taxes for the three and nine months ended December 31, 2019 and 2018.
Lvxin products sales and services are
exempt from enterprise income tax, according to the “PRC Income Tax Law” Article 27 (1), which states that income
from agricultural, forestry, animal husbandries and the fisheries Industries shall be exempt from business income taxes.
NOTE 7. OTHER PAYABLES
Other payables consisted of the following as of the periods
indicated:
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Xun Jianjun
|
|
$
|
-
|
|
|
$
|
14,901
|
|
Advances for shares to be issued
|
|
|
-
|
|
|
|
53,300
|
|
Others
|
|
|
-
|
|
|
|
83
|
|
|
|
$
|
-
|
|
|
$
|
68,284
|
|
ORGANIC AGRICULTURAL COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(AMOUNTS IN US DOLLARS)
NOTE 7. OTHER PAYABLES (Continued)
As of March 31, 2019, the Company had
received an advance for 41,000 shares to be issued of $53,300. The shares were subsequently issued on June 21, 2019.
NOTE 8. RELATED PARTY TRANSACTIONS
Amounts due to related parties
Amounts due to related parties consisted of the following as
of the periods indicated:
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Hao Shuping
|
|
$
|
45,612
|
|
|
$
|
47,489
|
|
Shen Zhenai
|
|
|
37,055
|
|
|
|
9,952
|
|
Lou Zhengui
|
|
|
31,793
|
|
|
|
34,866
|
|
Xun Jianjun
|
|
|
22,253
|
|
|
|
|
|
|
|
$
|
136,713
|
|
|
$
|
92,307
|
|
Hao Shuping is the main shareholder of
the Company, Shen Zhenai is the President, Chairman of the Board, director and shareholder of the Company, and Xun Jianjun is
the CEO and shareholder of the Company. These advances represent temporary borrowings for operating costs between the Company
and management. They are non-interest bearing and due on demand.
Lou Zhengui is the principal manager of
Lvxin, also a minority shareholder of Lvxin and Organic Agriculture. The balance represents advances for expenses paid to suppliers
by Lou Zhengui. The balance is non-interest bearing and due on demand.
NOTE 9. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES
On April 1, 2019, the Company adopted
FASB ASC 842, “Leases” (“new lease standard”). The new lease standard was adopted using the optional transition
method approach that allows for the cumulative effect adjustment to be recorded without restating prior periods. The Company has
elected the practical expedient package related to the identification, classification and accounting for initial direct costs
whereby prior conclusions do not have to be reassessed for leases that commenced before the effective date. As the Company will
not reassess such conclusions, the Company has not adopted the practical expedient to use hindsight to determine the likelihood
of whether a lease will be extended or terminated or whether a purchase option will be exercised.
Operating lease
In November 2017, Tianci Liangtian leased
office space from November 20, 2017 to December 5, 2018 under an operating lease agreement (approximately 666 square meters).
Under the terms of the lease, Tianci Liangtian paid approximately $1,592 in lease deposits and committed to make annual lease
payments. In December 2018, Yuxingqi renewed the lease agreement. Under the terms, Yuxingqi committed to make annual lease payments
of RMB290,000 (approximately US$42,000) for the period from December 6, 2018 to December 5, 2019. On December 20, 2019, Yuxingqi
renewed the lease agreement. Under the terms, Yuxingqi committed to make annual lease payments of RMB290,000 (approximately US$42,000,
including AVT tax) for the period from December 20, 2019 to December 19, 2020. RMB150,000 (approximately US$22,000) payment was
paid on December 23, 2019. As of December 31, 2019, US$35,991 and US$18,955 was accounted as operating lease right-of-use assets
and operating lease liabilities (current), respectively
In April 2018, Lvxin leased office space
of approximately 177 square meters under a one-year lease agreement. Lvxin paid approximately US$4,500 (RMB30,000) as rent. The
office contained our administrative functions, sales, e-commerce operations and marketing functions. After April 2019, Lvxin did
not renew this office lease agreement.
The Company leases 1,228 acres of land
for cultivating pursuant to more than 300 lease agreements with individual farmers. Some of the leases are paid annually, and
some of the leases are paid in advance for periods from 2 to 22 years. These prepayments reduced the related lease liabilities.
The Company accounts for the land rental costs as a cost of production of paddy.
ORGANIC AGRICULTURAL COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(AMOUNTS IN US DOLLARS)
NOTE 9. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES (Continued)
The Company’s adoption of the new
lease standard included new processes and controls regarding asset financing transactions, financial reporting and a system-related
implementation required for the new lease standard. The impact of the adoption of the new lease standard included the recognition
of right-of-use (“ROU”) assets and lease liabilities. The adoption of the new lease standard resulted in additional
net lease assets and net lease liabilities of approximately $2.2 million, respectively, as of April 1, 2019. For the three and
nine months ended December 31, 2019, the amortization was $9,711 and $397,341, respectively.
Operating leases are reflected on our
balance sheet within ROU assets and the related current and non-current operating lease liabilities. ROU assets represent the
right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising
from the lease agreement. ROU assets and liabilities are recognized at the commencement date, or the date on which the lessor
makes the underlying asset available for use, based upon the present value of the lease payments over the respective lease term.
Lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectation regarding
the terms.
As of December 31, 2019, the Company has
the following amounts recorded on the Company’s unaudited condensed consolidated balance sheet:
|
|
As
of December 31,
2019
|
|
|
|
(Unaudited)
|
|
Assets
|
|
|
|
Right-of-use asset(non-current)
|
|
$
|
2,107,807
|
|
Total
|
|
$
|
2,107,807
|
|
Liabilities
|
|
|
|
|
Lease liability(current)
|
|
$
|
327,169
|
|
Lease liability(non-current)
|
|
|
1,500,402
|
|
Total
|
|
$
|
1,827,571
|
|
Office
lease:
|
|
Remaining Lease
Term
|
1 year, renewal
option
|
Incremental borrowing
rate
|
4.9%
|
|
|
Land lease:
|
|
Remaining Lease
Term
|
From 1 to 10 years,
no renewal option
|
Incremental borrowing
rate
|
4.9%
|
The components of lease expense were as
follows:
|
|
For
the nine months ended
December
31, 2019
|
|
|
|
(Unaudited)
|
|
Amortization of ROU Asset
|
|
|
|
Land lease
|
|
$
|
367,752
|
|
Office Lease
|
|
|
29,589
|
|
Interest expense
|
|
|
-
|
|
Total lease expense
|
|
$
|
397,341
|
|
ORGANIC AGRICULTURAL COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(AMOUNTS IN US DOLLARS)
NOTE 9. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES (Continued)
Future annual minimum lease payments for
non-cancellable operating leases are as follows:
|
|
Operating
Leases
(Unaudited)
|
|
From April 2020 to March 2021
|
|
$
|
415,791
|
|
From April 2021 to March 2022
|
|
|
352,346
|
|
From April 2022 to March 2023
|
|
|
276,845
|
|
From April 2023 to March 2024
|
|
|
198,196
|
|
From April 2024 to March 2025
|
|
|
210,290
|
|
Thereafter
|
|
|
773,791
|
|
Total
|
|
|
2,227,259
|
|
Less: imputed interest
|
|
|
399,688
|
|
Total
|
|
$
|
1,827,571
|
|
|
|
|
|
|
Reconciliation to lease liabilities:
|
|
|
|
|
Lease liabilities - current
|
|
$
|
327,169
|
|
Lease liabilities - long-term
|
|
|
1,500,402
|
|
Total Lease Liabilities
|
|
$
|
1,827,571
|
|
NOTE 10. CONTINGENCIES
Loss contingencies considered to be remote
by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
The Company was not subject to any material
loss contingencies as of December 31, 2019 or March 31, 2019 and through the date of this report.
NOTE
11. NON-CONTROLLING INTERESTS
Lvxin is the Company’s majority-owned
subsidiary which is consolidated in the Company’s financial statements with a non-controlling interest (NCI) recognized.
The Company holds a 51% interest in Lvxin as of December 31, 2019 and March 31, 2019.
As of December 31, 2019 and March 31,
2019, the NCI in the condensed consolidated balance sheet was $ 26,721 and $3,759, respectively.
NOTE 12. SUBSEQUENT EVENTS
During the period from January1, 2020
to the date of filling this report, the Company received an advance of $30,000 for the sale of 20,000 shares to be issued.
The Management of the Company determined
that there were no other reportable subsequent events to be adjusted for and/or disclosed as of the date of filing this report.