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 selenium-enriched products and other agricultural products. At December 31, 2020, the Company’s
subsidiaries were:
|
●
|
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.
|
|
●
|
Heilongjiang Yuxinqi Agricultural Technology Development Company Limited (“Yuxinqi”), a company incorporated in Heilongjiang, China on February 5, 2018, is wholly owned by Tianci Liangtian. Yuxinqi sells agricultural products, including paddy and other crops, to customers.
|
|
|
|
|
●
|
Tianci Wanguan (Xiamen) Digital Technology Company Limited (“Tianci Wanguan”), a company incorporated in Xiamen, China on November 5, 2020, is 51% owned by Organic Agricultural HK.
|
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 Baoqing County Lvxin Paddy Rice Plant Specialized Cooperative (“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 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 shareholders’ 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 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION (Continued)
On April 24, 2020 Tianci Liangtian entered into an Equity Transfer
Agreement providing for the transfer to Lou Zhengui of Tianci’s 51% interest in the equity of Baoqing County Lvxin Paddy
Rice Plant Specialized Cooperative. The Agreement transferred the equity to Lou Zhengui as of April 30, 2020. Tianci Liangtian
retained responsibility for the liabilities incurred by Lvxin prior to April 30, 2020, including debt of 257,731 RMB (approx. US$36,380)
owed by Lvxin to Yuxingqi. Tianci Liangtian also waived a repayment of 3,672,002 RMB (approx. US$518,321) owed by Lvxin to Tianci
Liangtian.
In exchange for the 51% interest in Lvxin, Lou Zhengui assumed
the obligation to satisfy a debt of 300,000 RMB (approx. US$42,350) owed by Tianci Liangtian to Hao Shuping, a member of the Company’s
Board of Directors.
The business of Lvxin was growing paddy rice. The divestment
of Lvxin by Tianci will enable Tianci to focus on its other business: processing and marketing food stuffs.
In accordance with U.S. GAAP, the financial position and results
of operations of Lvxin are presented as discontinued operations and, as such, have been excluded from continuing operations for
all periods presented. The restated historical financial statements reflecting the divestment are unaudited, but the March 31,
2020 balance sheet information has been derived from the Company’s historical audited annual reports. The sum of the individual
earnings per share amounts from continuing operations and discontinued operations may not equal the total Company earnings per
share amounts due to rounding. The comprehensive income related to Lvxin have not been segregated and are included in the Condensed
Consolidated Statements of Comprehensive Income for all periods presented. With the exception of Note 3, the Notes to the Unaudited
Condensed Consolidated Financial Statements reflect the continuing operations of the Company. See Note 3 - Discontinued Operations
below for additional information regarding discontinued operations.
Certain amounts in the prior year’s condensed consolidated
financial statements and related footnotes thereto have been reclassified to conform with the current year’s presentation
as a result of the divestment of Lvxin.
On November 6, 2020 Organic Agricultural
entered into a Cooperation Agreement with Unbounded IOT Block Chain Limited (“Unbounded”), an entity with offices in
Xiamen City, Fujian Province. The purpose of the Cooperation Agreement is to promote the use of blockchain technology in agriculture,
specifically the development of tracing systems for agricultural products, the development of a blockchain-based shopping mall
for agricultural products, and related improvements to the agricultural sector of the economy. To accomplish those purposes, Tianci
Wanguan (Xiamen) Digital Technology Co., Ltd. incorporated in Xiamen, China on November 5, 2020, is 51% owned by Organic Agricultural
HK and 49% owned by Chen Zewu on behalf of Unbounded. Each party will provide capital resources to Tianci Wanguan in proportion
to its ownership percentage. The Cooperation Agreement provides that Organic Agricultural will issue shares of its common stock
to Unbounded if certain technological goals specified in the Cooperation Agreement are achieved and the revenue goals and other
targets that Organic Agricultural and Unbounded set for Tianci Wanguan are met. Within sixty days after these conditions are satisfied,
Organic Agricultural will implement a 4.9-for-1 stock split, following which it will issue 20 million common shares to Unbounded.
Tianci Wanguan does not have any assets, liabilities or operations since its inception.
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 any adjustments that might result from the outcome of this uncertainty.
The Company’s operations have been
financed primarily by proceeds from sales of shares. The Company received $46,400 during the nine months ended December 31, 2020.
These funds were used for working capital. Hao Shuping, Shen Zhenai, Xun Jianjun were the primary sources of financing for the
early operations of the entity and will continue to provide support in the future if there is any need for capital.
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
are opening new marketing channels and hope to build a stable base of customers.
In this manner, Management hopes to generate
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 need.
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)
Basis of presentation
The
accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all
adjustments of a normal and recurring nature considered necessary for a fair presentation have been included in the accompanying
condensed consolidated financial statements. The results of operations for the interim period are not necessarily indicative of
the results that will be realized for the entire fiscal year. These condensed consolidated financial statements should be read in
conjunction with Organic Agricultural Company’s audited financial statements and accompanying notes thereto as of and for
the year ended March 31, 2020 included in Company’s current report on Form 10-K as filed with the SEC on August 14, 2020.
Principles of consolidation
The 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 consolidated financial statements include the assets, liabilities, and net income or loss of these subsidiaries.
The Company’s subsidiaries as of
December 31, 2020 are listed as follows:
Name
|
|
Place of
Incorporation
|
|
Attributable
equity interest
%
|
|
Organic Agricultural (Samoa) Co., Ltd.
|
|
Samoa
|
|
|
100
|
|
Organic Agricultural Company Limited (Hong Kong)
|
|
Hong Kong
|
|
|
100
|
|
Heilongjiang Tianci Liangtian Agricultural Technology Development Company Limited
|
|
China
|
|
|
100
|
|
Heilongjiang Yuxinqi Agricultural Technology Development Company Limited
|
|
China
|
|
|
100
|
|
Tianci Wanguan (Xiamen) Digital Technology Company Limited
|
|
China
|
|
|
51
|
|
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.
Cash
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. The Company’s cash consist of cash on hand and cash in bank, as of December 31, 2020
and March 31, 2020.
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)
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, if not prepaid, is reasonably assured, all of which generally occur when the customer receives the products. Accordingly,
revenue is recognized at the point in time when delivery is made.
Given the nature of this revenue generated
by the Company’s business and the applicable rules guiding revenue recognition, the Company's revenue recognition practices
do not include 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 are to 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).
Financial assets and liabilities of the Company primarily consists
of cash, accounts receivable, prepaid expenses, inventories, due from related parties, other receivables, accounts payable and
accrued liabilities, customer deposits, due to related parties, and other payables. As at December 31, 2020 and March 31, 2020,
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 three months ended
December 31,
|
|
March 31,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
|
|
|
(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
|
|
6.5326/7.7527
|
|
6.9680/7.7876
|
|
7.0896/7.7529
|
Revenue and expenses
|
|
period average
|
|
6.6228/7.7517
|
|
7.0435/7.8251
|
|
N/A
|
|
|
|
|
For the nine months ended
December 31,
|
|
March 31,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
|
|
|
(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
|
|
6.5326/7.7527
|
|
6.9680/7.7876
|
|
7.0896/7.7529
|
Revenue and expenses
|
|
period average
|
|
6.8757/7.7512
|
|
6.9612/7.8315
|
|
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 740-10-40, 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.
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.
China
According to the “PRC Income Tax
Law”, Tianci Liantian, Tianci Wanguan and Yuxinqi are subject to a 25% standard enterprise income tax in the PRC.
United States
The Company is subject to the U.S. corporation
tax rate of 21%.
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)
Samoa
Organic Agricultural (Samoa) Co., Ltd was
incorporated in Samoa and, under the current laws of Samoa, it is not subject to income tax.
Hong Kong
Organic Agricultural Company Limited (Hong
Kong) was incorporated in Hong Kong and is subject to Hong Kong profits tax. Organic Agricultural Company Limited (Hong Kong) is
subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong. The
applicable statutory tax rate is 16.5%.
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
three and nine months ended December 31, 2020 and 2019, and no compensation expense has been recognized.
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 to 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
two banks in China. In China, the insurance coverage of each bank is RMB500,000 (approximately USD$73,000). As of December 31,
2020, the Company had approximately RMB49,000 (approximately USD$7,000) in excess of the insurance amounts.
During the three months ended December
31, 2020, major customers Huiye and Jiufu Zhenyuan generated 54% and 20% of revenue, respectively. During the three months ended
December 31, 2019, Huiye and Jiufu Zhenyuan generated 72% and 25% of revenue.
During the nine months ended December 31, 2020, major customers
Shouhang Commerce & Trade, Jiufu Zhenyuan and Huiye generated 26%, 30% and 21% of revenue, respectively. During the nine months
ended December 31, 2019, major customers Shouhang Commerce & Trade, Jiufu Zhenyuan and Huiye generated 15%, 28% and 52% of
revenue, respectively.
Risks and uncertainties
The COVID-19 pandemic has had a significant adverse impact and
created many uncertainties related to our business, and we expect that it will continue to do so. The Company is experiencing challenges
in sales and has suffered a significant decrease in revenues which has increased financial uncertainty. Our future business outlook
and expectations are very uncertain due to the impact of the COVID-19 pandemic and are very difficult to quantify. It is difficult
to assess or predict the impact of this unprecedented event on our business, financial results or financial condition. Factors
that will impact the extent to which the COVID-19 affects our business, financial results and financial condition include: the
duration, spread and severity of the pandemic; the actions taken to contain the virus or treat its impact, including government
actions to mitigate the economic impact of the pandemic; and how quickly and to what extent normal economic and operating conditions
can resume, including whether any future outbreak interrupts the economic recovery.
Recently adopted accounting standards
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 lease 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 was 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.
ORGANIC AGRICULTURAL COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(AMOUNTS IN US DOLLARS)
NOTE 3. DISCONTINUED OPERATIONS
As discussed in Note 1. Basis of Presentation above, on April
30, 2020, the Company completed the divestment of Lvxin and the requirements for the presentation of Lvxin as a discontinued operation
were met on that date. Accordingly, Lvxin’s historical financial information and results are reflected in the Company’s
unaudited condensed consolidated financial statements as discontinued operations. The Company did not allocate any general corporate
overhead or interest expense to discontinued operations.
The financial results of Lvxin are presented
as income (loss) from discontinued operations, net of income taxes in the unaudited Condensed Consolidated Statements of Operations.
The following table presents the financial results of Lvxin for the reporting periods prior to April 30, 2020.
|
|
Three months ended
December 31,
|
|
|
Nine months ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
642,158
|
|
|
$
|
37,317
|
|
|
$
|
755,481
|
|
Cost of sales
|
|
|
-
|
|
|
|
582,025
|
|
|
|
36,574
|
|
|
|
702,679
|
|
Gross profit
|
|
|
-
|
|
|
|
60,133
|
|
|
|
743
|
|
|
|
52,802
|
|
Selling, general and administrative expenses
|
|
|
-
|
|
|
|
51
|
|
|
|
-
|
|
|
|
441
|
|
Operating income
|
|
|
-
|
|
|
|
60,082
|
|
|
|
743
|
|
|
|
52,361
|
|
Other income (loss)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
434
|
|
Income before income taxes
|
|
|
-
|
|
|
|
60,081
|
|
|
|
743
|
|
|
|
52,795
|
|
Income tax (expense) benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income from discontinued operations, net of income taxes
|
|
|
-
|
|
|
|
60,081
|
|
|
|
743
|
|
|
|
52,795
|
|
Less: Net income attributable to non-controlling interest
|
|
|
-
|
|
|
|
29,440
|
|
|
|
364
|
|
|
|
25,870
|
|
Net income from discontinued operations attributable to controlling interest
|
|
$
|
-
|
|
|
$
|
30,641
|
|
|
$
|
379
|
|
|
$
|
26,925
|
|
The following table summarizes the carrying
value of major classes of assets and liabilities of Lvxin, reclassified as assets and liabilities of discontinued operations at
March 31, 2020.
|
|
March 31,
2020
|
|
ASSETS
|
|
|
|
Cash
|
|
$
|
1,340
|
|
Inventories, net
|
|
|
557,085
|
|
Total current assets, discontinued operations
|
|
|
558,425
|
|
Lease right-of-use assets
|
|
|
1,981,547
|
|
Total assets, discontinued operations
|
|
$
|
2,539,972
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Due to related parties
|
|
$
|
37,146
|
|
Lease liabilities (current)
|
|
|
298,259
|
|
Total current liabilities, discontinued operations
|
|
|
335,405
|
|
Lease liabilities (non-current)
|
|
|
1,424,600
|
|
Total liabilities, discontinued operations
|
|
$
|
1,760,005
|
|
ORGANIC AGRICULTURAL COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(AMOUNTS IN US DOLLARS)
NOTE 4. PREPAID EXPENSES
Prepaid expenses include prepayments for expenses, and prepayments
of processing charges and products to be purchased. As of December 31, 2020 and March 31, 2020, prepayments and deferred expenses
were as follows:
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2020
|
|
|
|
(Unaudited)
|
|
|
|
|
Prepayments for expenses
|
|
$
|
208
|
|
|
$
|
32,882
|
|
Prepayments of processing charges and products to be purchased:
|
|
|
|
|
|
|
|
|
Baoqing County Fengnian Agricultural Product Purchase and Sale Ltd.
|
|
|
5,736
|
|
|
|
5,643
|
|
Heilongjiang Yaohe County Heifengyuan Apiculture Ltd.
|
|
|
5,438
|
|
|
|
10,264
|
|
Total
|
|
$
|
11,382
|
|
|
$
|
48,789
|
|
NOTE 5. INVENTORIES
Inventories are comprised of raw materials,
and finished goods (including processed rice and other agricultural products).
Raw materials include all costs of materials purchased to process the Company’s
products.
Processed 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. Inventories consisted of the following:
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2020
|
|
|
|
(Unaudited)
|
|
|
|
|
Rice and other products
|
|
$
|
113,009
|
|
|
$
|
41,153
|
|
Packing and other materials
|
|
|
9,954
|
|
|
|
15,457
|
|
Total inventories at cost
|
|
$
|
122,963
|
|
|
$
|
56,610
|
|
NOTE 6. INCOME TAXES
A reconciliation of income (loss) before
income taxes for domestic and foreign locations for the three and nine months ended December 31, 2020 and 2019 is as follows:
|
|
For
the three months ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
United States
|
|
$
|
(19,373
|
)
|
|
$
|
(58,029
|
)
|
Foreign
|
|
|
(35,231
|
)
|
|
|
(73,529
|
)
|
(Loss) before income taxes
|
|
$
|
(54,604
|
)
|
|
$
|
(131,558
|
)
|
|
|
For
the nine months ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
United States
|
|
$
|
(86,741
|
)
|
|
$
|
(131,884
|
)
|
Foreign
|
|
|
(15,307
|
)
|
|
|
(268,417
|
)
|
(Loss) before income taxes
|
|
$
|
(102,048
|
)
|
|
$
|
(400,301
|
)
|
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,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
U.S. federal statutory income tax rate
|
|
|
21
|
%
|
|
|
21
|
%
|
U.S. Valuation allowance
|
|
|
(21
|
)%
|
|
|
(21
|
)%
|
Rates for Tianci Liangtian and Yuxinqi, 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 to
Yuxinqi and Tianci Liangtian in China.
As of December 31, 2020, Yuxinqi and Tianci
Liangtian have total net operating loss carry forwards of approximately $707,000 in the PRC that expire in 2024. Due to the uncertainty
of utilizing these carry forwards, the Company provided a 100% valuation allowance on all deferred tax assets of approximately
$177,000 and $166,000 related to its operations in the PRC as of December 31, 2020 and March 31, 2020, respectively. The PRC valuation
allowance has increased by approximately $11,000 and $65,000 for the nine months ended December 31, 2020 and 2019, respectively.
The Company has incurred losses from its United States operations
during all periods presented of approximately $483,000. The Company’s United States operations consist solely of ownership
of its foreign subsidiaries, and the losses arise from administrative expenses. Accordingly, management provided a 100% valuation
allowance of approximately $101,000 and $83,000 against the deferred tax assets related to the Company’s United States operations
as of December 31, 2020 and March 31, 2020, respectively, because the deferred tax benefits of the net operating loss carry forwards
in the United States will not likely be realized. The US valuation allowance has increased by approximately $18,000 and $28,000
for the nine months ended December 31, 2020 and 2019, 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 Company has its operations. The tax
years subject to examination vary by jurisdiction. The table below presents the earliest tax years that remain subject to examination
by major jurisdiction.
|
|
The year as of
|
U.S. Federal
|
|
March 31, 2019
|
|
|
|
China
|
|
December 31, 2017
|
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, 2020 and 2019.
NOTE 7. OTHER PAYABLES
Other payables consisted of the following as of the periods
indicated:
|
|
December 31,
|
|
|
March
31,
|
|
|
|
2020
|
|
|
2020
|
|
|
|
(Unaudited)
|
|
|
|
|
Advances for purchase of shares
|
|
$
|
-
|
|
|
$
|
8,167
|
|
Other
|
|
|
898
|
|
|
|
244
|
|
|
|
$
|
898
|
|
|
$
|
8,411
|
|
As of March 31, 2020, the Company had received $8,167 as an
advance for the purchase of common shares, of which $7,500 was refunded on April 3, 2020. The Company had received $114,000 as
an advance for the purchase of common shares during the nine months ended December 31, 2020 which was refunded in December 2020.
ORGANIC AGRICULTURAL COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(AMOUNTS IN US DOLLARS)
NOTE 8. RELATED PARTY TRANSACTIONS
Amounts due to related parties consisted of the following as
of the periods indicated:
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2020
|
|
|
|
(Unaudited)
|
|
|
|
|
Hao Shuping
|
|
$
|
-
|
|
|
$
|
38,874
|
|
Shen Zhenai
|
|
|
61,143
|
|
|
|
37,647
|
|
Xun Jianjun
|
|
|
8,428
|
|
|
|
7,767
|
|
|
|
$
|
69,571
|
|
|
$
|
84,288
|
|
Hao Shuping is the largest 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.
Amounts due from related parties consisted of the following
as of the periods indicated:
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2020
|
|
|
|
(Unaudited)
|
|
|
|
|
Hao Shuping
|
|
$
|
3,442
|
|
|
$
|
-
|
|
It is non-interest bearing and due on demand.
During the nine months ended December 31,
2020, Hao Shuping purchased agricultural products from the Company which generated $8,652 of revenue.
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.
Tianci Liangtian has an operating
lease for office space (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 renewed terms, annual lease payments were RMB290,000 (approximately US$42,000) for the period from December 6, 2018
to December 5, 2019. On December 20, 2019, the lease was renewed. Under the renewed terms, annual lease payments are
RMB290,000 (approximately US$42,000, including VAT tax) for the period from December 20, 2019 to December 19, 2020.
RMB150,000 (approximately US$22,000) payment was made on December 23, 2019. On December 20, 2020, the term of the contract
expired. Because of the COVID-19 re-emergence in Heilongjiang province, the renewed contract is delayed. As of December 31,
2020 and March 31, 2020, US$23,708 and $18,630 were accounted as lease liabilities (current), $0 and $25,727 were accounted
as lease right-of-use asset, respectively. Due to the COVID-19 pandemic, the Company has not made the required residual lease
payments for the period from December 20, 2019 to December 19, 2020 as of December 31,2020.
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”) asset and lease liabilities. For the nine months ended December 31, 2020 and 2019, the amortization
was $29,843 and $29,835, respectively.
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)
Operating leases are reflected on our balance
sheet within ROU assets and the related 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, 2020, the Company has
the following amounts recorded on the Company’s unaudited condensed consolidated balance sheet:
|
|
As of December 31,
2020
|
|
|
|
(Unaudited)
|
|
Assets
|
|
|
|
|
Right-of-use asset (non-current)
|
|
$
|
-
|
|
Total
|
|
$
|
-
|
|
Liabilities
|
|
|
|
|
Lease liability (current)
|
|
$
|
23,708
|
|
Total
|
|
$
|
23,708
|
|
Office lease:
|
|
|
|
Remaining Lease Term
|
|
1 year, renewal option
|
|
Incremental borrowing rate
|
|
|
4.9
|
%
|
The components of lease expense were as
follows:
|
|
For the nine months ended
December 31,
2020
|
|
|
|
(Unaudited)
|
|
Amortization of ROU Asset
|
|
|
|
|
Office Lease
|
|
$
|
29,843
|
|
Interest expense
|
|
|
-
|
|
Total lease expense
|
|
$
|
29,843
|
|
Future annual minimum lease payments for
non-cancellable operating leases are as follows:
Year Ending March 31
|
|
Operating Leases
|
|
|
|
|
|
2021
|
|
$
|
23,708
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
|
23,708
|
|
Less: imputed interest
|
|
|
-
|
|
Total
|
|
$
|
23,708
|
|
|
|
|
|
|
Reconciliation to lease liabilities:
|
|
|
|
|
Lease liabilities - current
|
|
$
|
23,708
|
|
Lease Liabilities
|
|
$
|
23,708
|
|
ORGANIC AGRICULTURAL COMPANY LIMITED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(AMOUNTS IN US DOLLARS)
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, 2020 or March 31, 2020 and through the date of this report.
NOTE 11. SUBSEQUENT EVENTS
The Management of the Company determined that there were no other
reportable subsequent events to be adjusted for and/or disclosed as of February 12, 2021 except as follows:.
The COVID-19 pandemic has had a significant
adverse impact and created many uncertainties related to our business, and we expect that it will continue to do so. The Company
is experiencing challenges in sales and has suffered a significant decrease in revenues which has increased financial uncertainty.
Our future business outlook and expectations are very uncertain due to the impact of the COVID-19 pandemic and are very difficult
to quantify. It is difficult to assess or predict the impact of this unprecedented event on our business, financial results or
financial condition.