NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
China Modern Agricultural Information,
Inc. (the “Company”), formerly known as Trade Link Wholesalers, Inc. (“Trade Link”), was incorporated on
December 22, 2008 under the laws of the State of Nevada. On April 4, 2011, the Board of Directors of Trade Link filed an amendment
to the Certificate of Incorporation with the State of Nevada to effect the name change from Trade Link to China Modern Agricultural
Information, Inc.
On January 28, 2011, Trade Link
entered into a Share Exchange Agreement (the “Exchange Agreement”) by and among (i) Value Development Holdings, Ltd.
(“Value Development”), a British Virgin Islands company, (“BVI”) (ii) Value Development’s stockholders,
(iii) Trade Link, and (iv) Trade Link’s principal stockholders. Pursuant to the terms of the Exchange Agreement, Value Development
and the Value Development stockholders transferred to Trade Link all of the shares of Value Development in exchange for the issuance
of 35,998,000 shares of Trade Link’s common stock as set forth in the Exchange Agreement, so that the Value Development stockholders
owned 87.80% of Trade Link’s outstanding shares (the “Share Exchange”).
On January 28, 2011, Value Development
through its wholly subsidiaries, Value Development Group Limited completed the acquisition of Harbin Jiasheng Consulting Managerial
Co. Ltd. (“Jiasheng Consulting” or “WFOE”), a holding company. Jiasheng Consulting has Variable Interest
Entity (“VIE”) agreements with Mr. Liu Zhengxin, the Company’s Chief HR Officer, and Mr. Wang Youliang, the Company’s
Chief Executive Officer, as well as with Heilongjiang Zhongxian Information Co., Ltd. (“Zhongxian Information”). Mr.
Zhengxin holds a 62% equity interest in Zhongxian Information and Mr. Youliang holds a 38% equity interest in Zhongxian Information.
Pursuant to the VIE agreement signed by Mr. Zhengxin and Mr. Youliang, Jiasheng Consulting now controls and performs all management
responsibilities for Zhongxian Information. The contractual arrangements are comprised of a series of agreements, including a shareholder
voting rights proxy agreement, exclusive consulting and service agreement, exclusive call option agreement and equity pledge agreement,
through which Jiasheng Consulting has the right to provide exclusive and complete business support and technical and consulting
services to Zhongxian Information for an annual fee in the amount of Zhongxian Information’s yearly net profits after tax.
Additionally, Zhongxian Information’s stockholders have pledged their rights, title and equity interests in Zhongxian Information
as security for the collection of consulting and service fees provided through an Equity Pledge Agreement.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
1.
|
ORGANIZATION (CONTINUED)
|
In order to further reinforce
Jiasheng Consulting’s rights to control and operate Zhongxian Information, the stockholders of Zhongxian Information have
granted Jiasheng Consulting the exclusive right and option to acquire all of their equity interests in Zhongxian Information through
an Exclusive Option Agreement.
The exchange agreement transaction
constituted a reverse takeover transaction. Accordingly, reverse takeover accounting was adopted for the preparation of the consolidated
financial statements. As a result, the consolidated financial statements are issued under the name of China Modern Agricultural
Information, Inc. (the legal acquirer), but are a continuation of the consolidated financial statements of Value Development (the
accounting acquirer) and the VIE its subsidiaries. Before and after the Share Exchange, Value Development, Value Development Group
Limited (a wholly-owned subsidiary of Value Development), Jiasheng Consulting, and Zhongxian Information and their 99% owned subsidiary,
Heilongjiang Xinhua Cattle Industry Co., Ltd. (“Xinhua Cattle”) were under common control. Therefore, the reorganization
was effectively a legal recapitalization accounted for as transactions between entities under common control at the carry over
basis, in a manner similar to pooling-of-interests accounting.
Zhongxian Information and Xinhua
Cattle are engaged in the acquisition, breeding and rearing of dairy cows, and production and sale of fresh milk to manufacturing
and distribution companies. Zhongxian Information was established in China in January 2005 with registered capital of 10 million
Renminbi (“RMB”). In February 2006, it acquired 99% of the registered capital of Xinhua Cattle, which was established
in China in December 2005 with registered capital of three million RMB. Xinhua Cattle had no significant activities and its cost
approximated the fair value at the date of acquisition.
On November 23, 2011, Zhongxian
Information acquired 100% of the equity interest of Shangzhi Yulong Co., Ltd. (“Yulong”) from Yulong’s original
stockholders for consideration of 9,000,000 shares of the Company’s common stock and cash consideration of $4,396,000.
Yulong was a privately held company
in China engaged in the acquisition, breeding and rearing of dairy cows, and production and sale of fresh milk to manufacturing
and distribution companies.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
1.
|
ORGANIZATION (CONTINUED)
|
Our corporate structure
pre-restructure is set forth below:
On July 16, 2015, the Company,
transferred 100% of the issued and outstanding shares of Value Development Holdings, Ltd. (“Value Development”) to
China Dairy Corporation Ltd. (“China Dairy,” a Hong Kong company), which is 60% owned indirectly by the Company through
the Company’s wholly-owned subsidiary, Hope Dairy Holdings Ltd. (“Hope Diary,” a British Virgin Islands company).
China Dairy was newly incorporated in January 2015 and did not have any significant assets or liabilities, or business operations,
which was 100% owned by Company’s PRC corporate advisor, who formed China Diary on behalf of the Company. Further, the sole
shareholder transferred 60% of the total outstanding shares of China Dairy to Hope Diary and 40% to various shareholders and consultants
of the Company (as described below) for nominal consideration.
These transactions involve no
consideration received or paid as Value Development and China Dairy are under common control by the Company and this transaction
is a restriction to the Company’s interests in Value Development.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
1.
|
ORGANIZATION (CONTINUED)
|
The 40% of the 10,000 shares of
China Dairy were transferred from the sole shareholder of China Diary to the following entities for nominal consideration, which
has direct or indirect relationship with the shareholder and consultants of the Company: 3% to Beijing Ruihua Future, 4% to Donghe
Group, 3% to Integral Capital, 20% to Dingxi Shanghai Fund and 10% to Zhiyuan International. Immediately after the transfer, 65,000
bonus shares were issued at no consideration for every existing share held by the following entities.:
|
|
|
Original
Shares
|
|
|
After bonus shares issued
|
|
|
|
|
|
|
|
|
|
|
Hope Diary Holdings Ltd.
|
|
|
6,000
|
|
|
|
390,000,000
|
|
|
Beijing Ruihua Future Investment Management Co. Ltd.
|
|
|
300
|
|
|
|
19,500,000
|
|
|
Donghe Group Limited
|
|
|
400
|
|
|
|
26,000,000
|
|
|
Integral Capital Group Pty Ltd.
|
|
|
300
|
|
|
|
19,500,000
|
|
|
Dingxi (Shanghai ) Equity Investment Fund
|
|
|
2,000
|
|
|
|
130,000,000
|
|
|
Zhiyuan International Holding Co. Limited
|
|
|
1,000
|
|
|
|
65,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,000
|
|
|
|
650,000,000
|
|
Value Development is the sole
owner of Value Development Group Limited, which is the sole owner of Harbin Jiasheng Consulting Managerial Co. Ltd., which is the
Company’s subsidiary in China, with respect to which the operating company, Heilongjiang Zhongxian Information Co. Ltd.,
is a variable interest entity. The effect of this transaction was to reduce the interest of the Company in its operating company
by 40%. The Company uses the China Diary’s offering price for IPO to approximate the fair value of the 40% stock granted
to the shareholder and consultants. The Company recognized a stock compensation to the shareholder and consultants of approximately
$32,098,000 and $5,664,000, respectively, during the three months ended September 30, 2015 in general and administrative expense.
On September 16, 2015 the Company’s
60%-owned subsidiary, Harbin Jiasheng Consulting Management Co., Ltd. (“Jiasheng Consulting”), exercised its option to
purchase all of the registered equity of the Company’s operating subsidiary, Heilongjiang
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
1.
|
ORGANIZATION (CONTINUED)
|
Zhongxian Information Co., Ltd.
(“Zhongxian Information”) from its stockholders Zhengxin Liu and Youliang Wang, who are also the members of the Company’s
Board of Directors, for RMB10,000 (approximately $1,554).
Prior to the acquisition, Jiasheng
Consulting controlled Zhongxian Information through a series of contractual agreements, which made Zhongxian Information a variable
interest entity, the effect of which was to cause the balance sheet and operating results of Zhongxian Information to be consolidated
with those of Jiasheng Consulting in the Company’s financial statements. As a result of the acquisition by Jiasheng Consulting
of the registered ownership of Zhongxian Information, the balance sheet and operating results of Zhongxian Information will hereafter
continue to be consolidated with those of Jiasheng Consulting as its 100% owned subsidiary.
On April 8, 2016, the Company’s
60% owned subsidiary, China Dairy Corporation Limited issued 84,906,541 CDI shares at AUD $0.2 per share on ASX and raised total
fund of AUD $16,981,308 (USD $13,021,267). After the IPO, the Company’s ownership was diluted to 53.07%.
As a result of the entry into
the foregoing agreements, the Company has a corporate structure as set forth below:
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
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
and include the financial statements of China Modern Agricultural Information, Inc. and its subsidiaries, Hope Diary, China Dairy
(Hope Diary’s 53.07% owned subsidiary), Value Development, Value Development Group Limited, Jiasheng Consulting, and, Zhongxian
Information and Zhongxian Information’s 99% owned subsidiary, Xinhua Cattle and its 100% owned subsidiary, Yulong. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The unaudited consolidated financial
statements of the Company as of September 30, 2017 and for the three months ended September 30, 2017 and 2016, have been prepared
in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the
SEC which apply to interim financial statements.
Accordingly, they do not include
all of the information and footnotes normally required by accounting principles generally accepted in the United States of America
for annual financial statements. The interim 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 year ended June 30, 2017, previously
filed with the SEC. In the opinion of management, the interim information contains all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the periods presented. The results of operations for the three
months ended September 30, 2017 are not necessarily indicative of the results to be expected for future quarters or for the year
ending June 30, 2018.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Variable
Interest Entity
Pursuant to Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810,
“Consolidation”
(“ASC 810”), the Company is required to include in its consolidated financial statements the financial statements
of its VIE’s. ASC 810 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk
of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which
a company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the
entity, and therefore the company is the primary beneficiary of the entity.
Zhongxian Information and its
subsidiaries (collectively, the “Chinese VIE”) have no assets that are collateral for or restricted solely to settle
their obligations. The creditors of the Chinese VIE and its subsidiaries do not have recourse to the Company’s general credit.
Because Value Development, Value Development Group Limited and Jiasheng Consulting are established for the sole purpose of holding
ownership interest and do not have any operations, the financial statement amounts and balances are principally those of the Chinese
VIE and its subsidiaries.
Under ASC 810, an enterprise has
a controlling financial interest in a VIE, and must consolidate that VIE, if the enterprise has both of the following characteristics:
(a) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance; and (b)
the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE. The Company’s
determination of whether it has this power is not affected by the existence of kick-out rights or participating rights, unless
a single enterprise, including its related parties and de facto agents, has the unilateral ability to exercise those rights. The
Chinese VIE’s actual stockholders do not hold any kick-out rights that will affect the consolidation determination.
On September 16, 2015 the VIE
structure was terminated when Jiasheng Consulting exercised its option to purchase all of the registered equity of Zhongxian Information.
Jiasheng Consulting became the sole owner of Zhongxian Information.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Foreign Currency Translations
All Company assets are located
in the People’s Republic of China (“PRC”). The functional currency for the majority of the Company’s operations
is the Renminbi (“RMB”). The Company uses the United States dollar (“US Dollar” or “US$” or
“$”) for financial reporting purposes. The consolidated financial statements of the Company have been translated into
US dollars in accordance with FASB ASC 830,
“Foreign Currency Matters.”
All asset and liability accounts have
been translated using the exchange rate in effect at the balance sheet date. Equity accounts have been translated at their historical
exchange rates when the capital transactions occurred. Statements of income and other comprehensive income amounts have been translated
using the average exchange rate for the periods presented. Adjustments resulting from the translation of the Company’s consolidated
financial statements are recorded as other comprehensive income (“OCI”). The exchange rates used to translate amounts
in RMB and Australian dollars (the “A$”) into US dollars for preparing the consolidated financial statements are as
follows:
|
|
|
September 30,
2017
|
|
|
June 30,
2017
|
|
|
September 30,
2016
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
RMB
|
|
|
A$
|
|
|
RMB
|
|
|
A$
|
|
|
RMB
|
|
|
A$
|
|
|
Balance sheet items, except for stockholders’ equity, as of period end
|
|
|
0.1503
|
|
|
|
0.7844
|
|
|
|
0.1469
|
|
|
|
0.7538
|
|
|
|
0.1499
|
|
|
|
0.7634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in the statements of income, statement of changes in stockholders’ equity and statements of cash flows for the period
|
|
|
0.1500
|
|
|
|
0.7896
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
0.1500
|
|
|
|
0.7577
|
|
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Foreign Currency Translations (continued)
Foreign currency translation adjustments
of $3,830,708 and $(248,988), respectively, for the three months ended September 30, 2017 and 2016, have been reported as other
comprehensive income (loss) in the consolidated statements of income and other comprehensive income (loss). Other comprehensive
income (loss) of the Company consists entirely of foreign currency translation adjustments. Pursuant to ASC 740-30-25-17,
“Exceptions
to Comprehensive Recognition of Deferred Income Taxes,”
the Company does not recognize deferred U.S. taxes related to
the undistributed earnings of its foreign subsidiaries and, accordingly, recognizes no income tax expense or benefit from foreign
currency translation adjustments.
Although 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 China’s political and economic
conditions. Any significant revaluation of the RMB could materially affect the Company’s consolidated financial condition
in terms of US dollar reporting.
Revenue
Recognition
The Company’s primary sources
of revenues are derived from (a) sale of fresh milk to Chinese manufacturing and distribution companies of dairy products and (b)
commissions from local farmers on their monthly milk sales. The Company’s revenue recognition policies comply with FASB ASC
605,
“Revenue Recognition.”
Revenues from the sale of goods are recognized when the goods are delivered and
the title is transferred, the risks and rewards of ownership have been transferred to the customer, the price is fixed and determinable
and collection of the related receivable is reasonably assured.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Revenue
Recognition (continued)
Milk sales revenue is recognized
when the title has been passed to the customers, which is the date when the milk is delivered to designated locations and accepted
by the customers and the previously discussed requirements are met. Fresh milk is delivered to its customers on a daily basis.
The customers’ acceptance occurs upon inspection of the quality and measurement of quantity at the time of delivery. The
Company does not provide the customer with the right of return. Sales commission revenue is recognized on a monthly basis based
on monthly sales reports received.
Vulnerability Due to Operations
in PRC
The Company’s operations
may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has
been pursuing economic reform policies for more than twenty years, no assurance can be given that the PRC government will continue
to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership,
social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions.
There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.
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 disclosures 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.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Fair Value of Financial Instruments
FASB ASC 820,
“Fair Value
Measurement”
specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques
reflect assumptions other market participants would use based on market data obtained from independent sources (observable inputs).
In accordance with ASC 820, the following summarizes the fair value hierarchy:
|
Level 1 Inputs –
|
Unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has
the ability to access.
|
|
Level 2 Inputs –
|
Inputs other than the quoted prices in active markets that are observable either directly or indirectly.
|
|
Level 3 Inputs –
|
Inputs based on valuation techniques that are both unobservable
and significant
to the overall fair value measurements.
|
ASC 820 requires the use of observable
market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels
of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant
to the fair value measurements. Valuation techniques used need to maximize the use of observable inputs and minimize the use of
unobservable inputs.
The Company did not identify any
assets or liabilities that are required to be presented at fair value on a recurring basis. Carrying values of non-derivative financial
instruments, including cash, accounts receivable, interest receivable, accrued expenses, and other payables, and stockholder loans,
approximated their fair values due to the short maturity of these financial instruments. The carrying value of notes receivable
is valued at their net realizable value which approximates the fair value. There were no changes in methods or assumptions during
the periods presented.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Advertising Costs
Advertising costs are charged
to operations when incurred. Advertising costs are $44,358 and $120,788, respectively, for the three months ended September 30,
2017 and 2016.
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.
Inventories
Inventories, comprised principally
of livestock feed, are valued at the lower of cost or market value. The value of inventories is determined using the weighted average
cost method.
The Company estimates an inventory
allowance for excessive or unusable inventories. Inventory amounts are reported net of such allowances if any. There was no allowance
for excessive or unusable inventories as of September 30, 2017 and June 30, 2017.
Prepaid
Expenses
Prepaid expenses as of September
30, 2017 mainly represent the prepayments of approximately $6,512,000 for prepaid cow insurance expenses and R&D expenses.
Prepaid expenses as of June 30, 2017 mainly represent the prepayment of approximately $1,375,000 for prepaid cow insurance expenses.
Prepaid
Land Leases
Prepaid land leases represent
the prepayment for grassland rental (see Note 7).
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Accounts Receivable
Accounts receivable is stated
at cost, net of an allowance for doubtful accounts if required. Receivables outstanding longer than the payment terms are considered
past due. The Company maintains an allowance for doubtful accounts for estimated losses when necessary resulting from the failure
of customers to make required payments. The Company reviews the accounts receivable on a periodic basis and makes allowances where
there is doubt as to the collectability of individual balances.
In evaluating the collectability
of individual receivable balances, the Company considers many factors, including the age of the balance, the customer’s payment
history, its current credit-worthiness and current economic trends. The Company has 30 days credit term for its milk sales and
usually receives the payment in the following month. The Company considers all accounts receivable at September 30, 2017 and June
30, 2017, to be fully collectible and, therefore, did not provide an allowance for doubtful accounts. For the periods presented,
the Company did not write off any accounts receivable as bad debts.
On June 29, 2017, Xinhua Cattle
entered into agreement with Longing Xiandai Farm (“Longing”) to purchase 4,000 adult cows at RMB 15,000 (approximately
$2,255) per cow for a total price of RMB 60,000,000 (approximately $9,018,000). The purchase price was fully paid on the date
of the delivery of the cows. Xinha Cattle immediately transfers all the cows to the 13 local farmers that entered agreement with
prior for a total consideration of RMB68,000,000 (approximately $10,220,400). In October 2017, the sales of cows to the 13 farmers
was terminated and all the cows were returned to Xinhua Cattle due to omasum impaction. As a result, Xinha Cattle will have to
pay a total of RMB27,600,000 (approximately $4,140,000) as reimbursement to farmers. Xinhua Cattle then entered into agreement
with Longing, the seller of the cows, to return all the cows to Longing for a return of the full purchase amount of RMB60,000,000
(approximately $9,018,000) that was paid by Xinhua Cattle. The transactions, as well as the reimbursement that payable to farmers
had been properly reflected on the accompanying consolidated financial statements. (Also see Note 12).
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Property, Plant and Equipment
Property, plant and equipment
are recorded at cost, less accumulated depreciation. Cost includes the price paid to acquire or construct the asset, including
capitalized interest during the construction period, and any expenditures that substantially increase the assets value or extends
the useful life of an existing asset. Depreciation is computed using the straight-line method over the estimated useful lives of
the assets. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized
and depreciated over the periods benefited. Maintenance and repairs are generally expensed as incurred.
The estimated useful lives for
property, plant and equipment categories are as follows:
|
Machinery and equipment
|
3 to 10 years
|
|
Automobiles
|
4 to 10 years
|
|
Building and building improvements
|
10 to 20 years
|
|
Leasehold improvements
|
Lesser of the remaining term or useful life
|
Impairment of Long-lived Assets
The Company utilizes FASB ASC
360,
“Property, Plant and Equipment”
(“ASC 360”), which addresses the financial accounting and reporting
for the recognition and measurement of impairment losses for long-lived assets. In accordance with ASC 360, long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
The Company may recognize an impairment of a long-lived asset in the event the net book value of such asset exceeds the estimated
future undiscounted cash flows attributable to the asset. No impairment of long-lived assets was recognized for the three months
ended September 30, 2017 and 2016.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Biological Assets
Biological assets consist of dairy
cows for milking purposes and breeding.
Immature Biological Assets
Immature biological assets are
recorded at cost, including acquisition costs, transportation costs, insurance expenses, and feeding costs, incurred in raising
the cows. Once the cow is able to produce milk, the cost of the immature biological asset is transferred to mature biological assets
using the weighted average cost method.
Mature Biological
Assets
Mature biological assets are recorded
at their original purchase price or the weighted average immature biological asset transfer cost. Depreciation is provided over
the estimated useful life of eight years using the straight-line method. The estimated residual value is 10%. Feeding and management
costs incurred on mature biological assets are included as cost of goods sold. When biological assets, including male cows, are
retired or otherwise disposed of in the normal course of business, the cost and accumulated depreciation will be removed from the
accounts and any resulting gain or loss will be included in the results of operations for the respective period. For the three
months ended September 30, 2017, a loss of $330,992, on the sale of the adult cows is included in non-operating income (expenses)
in the accompanying consolidated statements of income and other comprehensive income. (See Note 5)
The Company reviews the carrying
value of its biological assets for impairment at least annually or whenever events and circumstances indicate that their carrying
value may not be recoverable from the estimated future cash flows expected from their use and eventual disposition. In cases where
undiscounted expected future cash flows are less than the carrying value, an impairment loss will be recognized equal to an amount
by which the carrying value exceeds the fair value of the asset. The factors considered by management in performing this assessment
include current health status and production capacity. There were no impairment losses recorded during the three months ended September
30, 2017 and 2016.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Income Taxes
The Company accounts for income
taxes in accordance with FASB ASC 740,
“Income Taxes”
(“ASC 740”), which requires the recognition
of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes.
The differences relate principally to the undistributed earnings of the Company’s subsidiary under PRC law. Deferred tax
assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when
the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available
to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount
expected to be realized. At September 30, 2017 and June 30, 2017, undistributed earnings allocated to Zhongxian Information were
approximately $241,900,000 and $224,700,000, respectively.
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 uncertain tax positions. As of September 30, 2017 and June 30, 2017, the Company does not have a liability for
any uncertain tax positions.
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 provision for income tax in the United States has been made as the Company had
no U.S. taxable income for the three months ended September 30, 2017 and 2016.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Income Taxes (Continued)
BVI
Value Development and Hope Diary
are 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
Value Development Group Limited
and China Dairy are 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.
PRC
Xinhua Cattle and Yulong are entitled
to a tax exemption for the full Enterprise Income Tax in China due to a government tax preferential policy for the dairy farming
industry. In January 2015, Zhongxian obtained an income tax exemption notice from the tax authority to exempt the income tax on
its investment income from its subsidiaries Xinhua Cattle and Yulong.
Net Income (Loss) Per Share
The Company computes net income
(loss) per common share in accordance with FASB ASC 260,
“Earnings Per Share”
(“ASC 260”). Under
the provisions of ASC 260, basic net income (loss) per common share is computed by dividing the amount available to common stockholders
by the weighted average number of shares of common stock outstanding during the period. Diluted income per common share is computed
by dividing the amount available to common stockholders by the weighted average number of shares of common stock outstanding plus
the effect of any dilutive shares outstanding during the period. Accordingly, the number of weighted average shares outstanding
as well as the amount of net income per share are presented for basic and diluted per share calculations for all periods reflected
in the accompanying consolidated statements of income and other comprehensive income. There were no dilutive shares outstanding
during the three months ended September 30, 2017 and 2016.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Statutory Reserve
Fund
Pursuant to the corporate law
of the PRC, Jiasheng Consulting and the Company’s Chinese VIE and its subsidiaries are required to transfer 10% of their
net income, as determined under PRC accounting rules and regulations, to a statutory reserve fund until such reserve balance reaches
50% of its 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 such use is not less than 25% of the registered capital. As of September 30, 2017 and
June 30, 2017, the required statutory reserve funds have been fully funded.
3.
|
Recently Issued Accounting Standards
|
In August 2016, the FASB issued
new guidance which clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including
debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance
settlement proceeds, and distributions from certain equity method investees. The new standard is effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company is evaluating
the impact of adopting this new accounting guidance on our consolidated financial statements.
In June 2016, the FASB issued
new authoritative accounting guidance on credit losses on financial instruments which replaces the incurred-loss impairment methodology.
The new guidance requires immediate recognition of estimated credit losses expected to occur for most financial assets and certain
other instruments. The standard is effective for the Company in the first quarter of 2020; however early adoption is permitted
beginning in the first quarter of 2019. The Company is currently evaluating whether this standard will have a material impact
on its financial statements.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
3.
|
Recently Issued Accounting Standards
(CONTINUED)
|
In April 2016, the FASB issued
Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers. In May 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers (Topic 606).’’ This guidance supersedes current guidance on revenue recognition in
Topic 605, “Revenue Recognition.’’ In addition, there are disclosure requirements related to the nature, amount, timing, and
uncertainty of revenue recognition. In August 2015, the FASB issued ASU No.2015-14 to defer the effective date of ASU No. 2014-09
for all entities by one year. For public business entities that follow U.S. GAAP, the deferral results in the new revenue standard
are being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with
early adoption permitted for interim and annual periods beginning after December 15, 2016. The Company is currently evaluating
the impact of adopting this standard on its consolidated financial statements.
In February 2016, the FASB issued
Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (“ROU”) model that requires
a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases
will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income
statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those
fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at
or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical
expedients available. This
accounting standard update is
not expected to have a material impact on the Company’s financial statements.
In January 2016, the FASB issued
ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities. The updated guidance enhances the reporting model for financial instruments, which includes amendments to address
aspects of recognition, measurement, presentation and disclosure. The update to the standard is effective for the Company
beginning June 1, 2018. The Company is currently evaluating the effect the guidance will have on the Consolidated Financial Statements.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
3.
|
Recently Issued Accounting Standards
(CONTINUED)
|
In September 2015, the FASB issued
Accounting Standards Update (“ASU”) 2015-16: Simplifying the Accounting for Measurement-Period Adjustments (“ASU
2015-16”), which eliminates the requirement to restate prior period financial statements for measurement period adjustments.
The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods)
be recognized in the reporting period in which the adjustment is identified. ASU 2015-16 is effective for interim and annual periods
beginning after December 15, 2015. Early adoption is permitted. This accounting standard update is not expected to have a material
impact on the Company’s consolidated financial statements.
In August 2015, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-14, Revenue from Contracts
with Customers (Topic 606): Deferral of the Effective Date. The amendment is effective for all entities for fiscal years and interim
periods within those fiscal years, beginning after December 15, 2017. Earlier application is permitted only as of annual reporting
periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is evaluating
the impact of this standard on its Consolidated Financial Statements.
4.
|
Property, plant and equipment
|
Property, plant and equipment
are summarized as follows:
|
|
|
September 30,
2017
|
|
|
June 30,
2017
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
3,861,942
|
|
|
$
|
3,789,997
|
|
|
Automobiles
|
|
|
2,251,106
|
|
|
|
2,209,169
|
|
|
Building and building improvements
|
|
|
26,986,806
|
|
|
|
26,333,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,099,854
|
|
|
|
32,332,774
|
|
|
Less: accumulated depreciation
|
|
|
(6,436,105
|
)
|
|
|
(5,710,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
26,663,749
|
|
|
$
|
26,622,562
|
|
Depreciation expense charged to operations for the
three months ended September 30, 2017 and 2016 was $616,264 and $615,674, respectively.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
Biological
assets consist of the following:
|
|
|
September 30,
2017
|
|
|
June 30,
2017
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Immature biological assets
|
|
$
|
31,899,882
|
|
|
$
|
33,409,704
|
|
|
Mature biological assets
|
|
|
50,521,673
|
|
|
|
45,460,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,421,555
|
|
|
|
78,870,222
|
|
|
Less: accumulated depreciation
|
|
|
(7,208,357
|
)
|
|
|
(5,758,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Biological assets, net
|
|
$
|
75,213,198
|
|
|
$
|
73,112,101
|
|
Xinhua Cattle sold a total of
1,246 female calves to outside parties at a total price of RMB 4,997,000 (US $749,000) in the three months ended September 30,
2017. The net value of these female calves was approximately RMB 7,604,000 (US $1,150,000).
Yulong Cattle sold 275 female
calves to outside parties at a total price of RMB 1,100,000 (US $165,000) in the three months ended September 30, 2017. The net
value of these female calves was approximately RMB 728,000 (US $109,000).
Depreciation expense for the three
months ended September 30, 2017 and 2016 was $1,338,253 and $1,043,238, respectively, all of which was included in cost of goods
sold in the consolidated statements of income and other comprehensive income.
Notes receivable are related to
sales of cows (mature biological assets) to local farmers.
In June 2017, May 2017, December
2016, November 2016, September 2011, August 2011 and June 2011, Xinhua Cattle sold 4,000, 2,511, 130, 4,000, 3,787, 5,635, and
2,000 respectively of its cows to local farmers. 6,000 of the cows sold were purchased from outside parties for $13,407,000. The
remaining cows sold were raised by Xinhua. In November 2016, November 2014 and December 2014, Yulong sold 4,317, 3,714 and 2,955
cows respectively, to local farmers. 5,500 of the cows sold were purchased from outside parties for $8,996,000. The remaining cows
sold were raised by Yulong.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
6.
|
Notes Receivable (continued)
|
The company had agreements
with local farmers entered into June 2011, for their purchase of cows to be collected over five years, with a minimum payment
of 20% of the sales price to be paid each year. The notes were recorded at their present value with a discount rate of 12%,
which was commensurate with interest rates for notes with similar risk. The Company also entered into agreements with these
local farmers for a 30% commission of their monthly milk sales generated by the cows sold in exchange for the Company’s
assistance in arranging for the sale of the milk. As of September 30, 2017, the farmers had fully repaid the principal
payments.
Pursuant to agreements for the
sale of cows signed in August 2011, September 2011, November 2014, and December 2014, the sales price will be collected in monthly
installments plus interest at 7% on the outstanding balance, over the remaining useful lives of the cows, which range from one
to eight years. Local farmers are required to pay 30% of monthly milk sales generated from the cows purchased by the farmers. The
30% monthly payments are to be applied first to the monthly installment of principal for the cows sold and the balance as commission
income for the Company’s assistance in arranging for the sale of the milk. While the 30% rate and the amount applied to monthly
installments for the purchase price of the cows remain the same, the amount of sales commission income will vary depending on total
monthly milk sales and the progress of repayments towards the purchase price. The Company sign supplemental agreements with the
farmers and reduced the pay rate to 20% since September 1, 2017.
Pursuant to the agreements signed
in November 2016, December 2016 and May 2017, the sales price will be collected in monthly installments plus interest at 5% on
the outstanding balance, over the remaining useful lives of the cows, which range from one to eight years. Local farmers are required
to pay a 20% of monthly milk sales generated from the cows sold.
The 20% monthly payments are to
be applied first to the monthly installment of principal for
the cows sold and the balance
as commission income for the Company’s assistance in arranging for the sale of the milk. While the 20% rate and the amount
applied to monthly installments for the purchase price of the cows remain the same, the amount of sales commission income will
vary depending on total monthly milk sales and the progress of repayments towards the purchase price.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
6.
|
Notes Receivable (continued)
|
During the three months ended
September 30, 2017 and 2016, the Company received principal and interest payments of $1,153,265 and $637,169, respectively. Commission
income for the three months ended September 30, 2017 and 2016, was $4,560,738 and $3,823,005, respectively, under these agreements.
The receivable related to the
sales of cows is included in notes receivable in the consolidated balance sheets as of September 30, 2017 and June 30, 2017. The
related commission receivable of $6,925,552 and $7,206,564 at September 30, 2017 and June 30, 2017, respectively, is included in
accounts receivable in the consolidated balance sheets.
Notes receivable at September
30, 2017 and June 30, 2017 consists of the following:
|
|
|
September 30,
2017
|
|
|
June 30,
2017
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
$
|
23,152,393
|
|
|
$
|
23,855,122
|
|
|
Less: discount for interest
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,152,393
|
|
|
|
23,855,122
|
|
|
Less: current portion
|
|
|
(4,669,208
|
)
|
|
|
(4,661,775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
18,483,185
|
|
|
$
|
19,193,347
|
|
Future maturities of notes receivable
as of September 30, 2017 are as follows:
|
Year Ending September 30,
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
4,669,000
|
|
|
2019
|
|
|
4,274,000
|
|
|
2020
|
|
|
3,683,000
|
|
|
2021
|
|
|
3,513,000
|
|
|
2022
|
|
|
2,817,000
|
|
|
Thereafter
|
|
|
4,196,000
|
|
|
|
|
|
|
|
|
|
|
$
|
23,152,000
|
|
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
6.
|
Notes Receivable (continued)
|
The Company considers these notes
to be fully collectible and, therefore, did not provide an allowance for doubtful accounts. The Company will continue to review
the notes receivable on a periodic basis and where there is doubt as to the collectability of individual balances, it will provide
an allowance, if necessary.
All land in China is government
owned and cannot be sold to any individual or company. The Company obtained a “land use right” to use a track of land
of 250,000 square meters at no cost through December 1, 2015. On May 10, 2013, the Company, however, entered into an agreement
with the municipality of Qiqihaer to obtain the “land use right” to use this land from May 1, 2013 to April 30, 2063.
The Company recorded the prepayment of RMB 37,500,000 (US$6,060,000) as prepaid land lease. The prepaid lease is being amortized
over the land use term of 50 years using the straight-line method. On June 22, 2017, the Company subleased 183,335 square meters
land of the 250,000 square meter land to a forage production company at the price of RMB 25,300,000 (US $3,716,570). The remaining
repayment of the 183,335 square meters land is RMB25,254,167 (US $3,709,837). There is a gain of the sublease of RMB 45,833 (US
$6,733). The remaining prepayment of $1,370,235 and $1,352,083 is included in prepaid land lease in the consolidated balance sheets
as of September 30, 2017 and June 30, 2017, respectively. The lease provides for renewal options.
On October 9, 2011, the Company
entered into an operating lease, from October 9, 2011 to October 8, 2021, with the municipality of Heilongjiang to lease 16,666,750
square meters of land. The lease required the Company to prepay the ten year rental of RMB 30,000,000 (US$4,686,000). The related
prepayment of $1,803,600 and $1,880,625 is included in prepaid land lease in the consolidated balance sheets as of September 30,
2017 and June 30, 2017, respectively. The lease provides for renewal options.
On February 25, 2013, the Company
obtained another “land use right” to use 427,572 square meters of land, from March 1, 2013 to February 28, 2063. The
Company recorded the prepayment of RMB 77,040,000 (US$12,450,000) as prepaid land lease. The prepaid lease is being amortized over
the land use term of 50 years using the straight-line method. The remaining prepayment of $10,517,693 and $10,378,572 is
included in prepaid land lease in the consolidated balance sheets as of September 30, 2017 and June 30, 2017, respectively. The
lease provides for renewal options.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
On May 7, 2015, the Company obtained
another “land use right” for 250,000 square meters of land, from May 7, 2015 to May 6, 2045. In addition, the Company
also leased buildings on the land which includes cowsheds, an office building and a flat building. The lease period for these buildings
is the same as the land. The Company recorded the prepayment of RMB 74,847,600 (US$12,058,000) as prepaid leases. The prepaid lease
is being amortized over the lease term of 30 years using the straight-line method. The unamortized balance of $10,343,377 and $10,242,686
is included in prepaid leases in the consolidated balance sheets as of September 30, 2017 and June 30, 2017, respectively.
On May 14, 2015, the Company obtained
another “land use right” to use 283,335 square meters of land, from May 14, 2015 to May 13, 2045. In addition, the
Company also leased all the constructions on the land which includes cowsheds at 42,100 square meters, an office building at 3,000
square meters and a flat building at 3,000 square meters. The lease period of all these constructions is the same as the land.
The Company recorded the prepayment of RMB 111,887,500 (US$18,260,000) as prepaid lease. The prepaid lease is being amortized over
the lease term of 30 years using the straight-line method. The remaining prepayment of $15,462,013 and $15,311,494 is included
in prepaid lease in the consolidated balance sheets as of September 30, 2017 and June 30, 2017, respectively.
Rent expense charged to operations
for the three months ended September 30, 2017 and 2016 was $411,200 and $431,746, respectively.
The Company had Employment Agreements
with its executive officers and directors for a one year period with renewal options after expiration, with the current agreements
expiring on June and August, 2017. For the three months ended September 30, 2017 and 2016, compensation under these agreements
was $54,037 and $66,009, respectively.
At September 30, 2017, the future
commitment under these agreements is approximate $151,452.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
9.
|
Related party transactions
|
In July 2016 and April 2017, Xinhua
Cattle contributed total net profit of $6,491,798 and $92,772, respectively, to Zhongxian Information and the 1% owned minority
shareholder. The total represents the net profit of Xinhua Cattle for the years ended June 30, 2008 and 2007, January 2016 and
February 2016.
In March 2015, Zhongxian Information
and the Executive Chairman of the Company entered into a loan agreement pursuant to which the Executive Chairman provides a loan
facility to Zhongxian Information, which is non-interest bearing and due on demand. The maximum amount of the loan is RMB 50,000,000
(US $7,845,000). The loans outstanding were $2,016,336 and $1,918,341 as of September 30, 2017 and June 30, 2017, respectively.
In 2012, CMCI issued 9,000,000
shares of common stock, valued at $0.34 per share, for a total of RMB 19,428,571 (US $3,060,000) to the shareholder of Yulong on
behalf Zhongxian Information for the acquisition of Yulong. Zhongxian Information recorded the value of these shares as due
to CMCI. China Dairy paid CMCI on June 29, 2016.
The provision for income taxes
consisted of the following for the three months ended September 30:
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
10.
|
Income taxes (continued)
|
The following table reconciles
the effective income tax rates with the statutory rates for the three months ended September 30:
|
|
|
2017
|
|
|
2016
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Statutory rate
|
|
|
25.00
|
%
|
|
|
25.00
|
%
|
|
Allowance
|
|
|
0.49
|
%
|
|
|
(0.02
|
)%
|
|
Other
|
|
|
(25.49
|
)%
|
|
|
(24.98
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
-
|
|
|
|
-
|
|
Deferred tax assets and liabilities
are recognized for expected future tax consequences of differences between the carrying amounts of assets and liabilities and their
respective tax bases using enacted tax rates in effects for the year in which the differences are expected to reverse.
The tax laws of China permit the
carry forward of net operating losses for a period of five years. Undistributed earnings from Xinhua Cattle and Yulong are not
taxable until such earnings are actually distributed to Jiasheng Consulting. A deferred tax liability was provided for the tax
to be paid when these earnings are distributed. On September 16, 2015 due to the termination of VIE structure (Note 1), Jiasheng
Consulting would not be taxable in the future undistributed earnings from Xinhua Cattle and Yulong under the Enterprise Income
Tax Law that Chinese resident enterprise is an exemption of dividend income received from another Chinese resident enterprise.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
10.
|
Income taxes (continued)
|
Deferred tax assets (liabilities)
are comprised of the following:
|
|
|
September 30,
2017
|
|
|
June 30,
2017
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
540,435
|
|
|
$
|
520,965
|
|
|
Bargain purchase gain
|
|
|
(1,430,399
|
)
|
|
|
(1,430,399
|
)
|
|
Undistributed earnings of subsidiaries under PRC law upon VIE structure terminated
|
|
|
(39,397,065
|
)
|
|
|
(38,636,474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,287,029
|
)
|
|
|
(39,545,908
|
)
|
|
Less valuation allowance
|
|
|
(540,435
|
)
|
|
|
(520,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax (liabilities)
|
|
$
|
(40,827,464
|
)
|
|
$
|
(40,066,873
|
)
|
At September 30, 2017 and June
30, 2017, Zhongxian Information had unused operating loss carry-forwards of approximately $2,162,000 and $2,084,000, respectively,
expiring in various years through 2020. The Company has established a valuation allowance of approximately $540,000 and $521,000
against the deferred tax asset related to the net operating loss carry forward at September 30, 2017 and June 30, 2017, due to
the uncertainty of realizing the benefit.
The Company’s tax filings
are subject to examination by the tax authorities. The tax years from 2010 to 2016 remain open to examination by tax authorities
in the PRC. The Company’s U.S. tax returns are subject to examination by the tax authorities for tax years 2014, 2015 and
2016. The year ended June 30, 2013 was examined by the Internal Revenue Service and resulted in no adjustment.
China
Modern Agricultural Information, Inc.
and
subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
THREE MONTHS ended SEPTEMBER 30, 2017 AND 2016 (IN U.S. $)
11.
|
CONCENTRATION OF CREDIT RISK
|
Substantially all of the Company’s
bank accounts are located in The People’s Republic of China and are not covered by protection similar to that provided by
the FDIC on funds held in United States banks.
In November 2015, the Company
entered milk sale agreement with another three customers and terminate the contracts with the original four customers. In February
2016, the Company entered into a new milk sale agreement with one customer after terminating the contract with the original customer.
Three customers accounted for
approximately 99% and 98% of milk sales for the three months ended September 30, 2017 and 2016, respectively. Three and four customers
accounted for approximately 73% and 72% of accounts receivable at September 30, 2017 and June 30, 2017, respectively.
One hundred and two farmers and
ninety-two farmers accounted for the notes receivable at September 30, 2017 and June 30, 2017, respectively.
In October 2017, Xinha Cattle
entered into agreements with the 13 local farmers whom purchased the 4,000 cows that Xinha Cattle purchased from another party
to cancel the sale due to impaction of the cows. As a result, Xinha Cattle will have to pay a total of RMB27,600,000 (approximately
$4,140,000) as reimbursement to the farmers for the consideration of the three months feeding costs for the 4,000 adult cows. Xinhua
Cattle also entered into agreement with Longing, the seller of the 4,000 cows to return all the cows for the return of the total
purchase price paid, totaled RMB60,000,000 (approximately $9,018,000). (Also see Note 2).