Organic Agricultural Co Ltd - Quarter Report: 2019 June (Form 10-Q)

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

ORGANIC AGRICULTURAL COMPANY LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2019 AND MARCH 31, 2019

(EXPRESSED IN US DOLLARS)

The accompanying notes are an integral part of these condensed consolidated financial statements.

ORGANIC AGRICULTURAL COMPANY LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

FOR THE THREE MONTHS ENDED JUNE 30, 2019 AND 2018

(EXPRESSED IN US DOLLARS)

The accompanying notes are an integral part of these unaudited consolidated financial statements

ORGANIC AGRICULTURAL COMPANY LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED JUNE 30, 2019 AND 2018

(AMOUNTS IN USD, EXCEPT SHARES)

The accompanying notes are an integral part of these unaudited consolidated financial statements

ORGANIC AGRICULTURAL COMPANY LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED JUNE 30, 2019 AND 2018

(EXPRESSED IN US DOLLARS)

The accompanying notes are an integral part of these condensed consolidated financial statements.

ORGANIC AGRICULTURAL COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(AMOUNTS IN US DOLLARS)

NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Organic Agricultural Company Limited (“Organic Agricultural”, the “Company”, “we” or “us”) was incorporated in the State of Nevada on April 17, 2018.

The Company, through its subsidiaries with headquarters in Harbin, China, sells paddy and selenium-enriched paddy products, rice and other agricultural products. The Company’s subsidiaries include: 

Reorganization

On May 16, 2018, the Company completed a corporate reorganization to combine several controlled entities (now referred to as the “subsidiaries”) into Organic Agricultural. The specific transactions related to this reorganization are as follows:

On March 31, 2017, Hao Shuping and the shareholders of Lvxin signed an Equity Transfer Agreement, whereby shareholders of Lvxin transferred 51% of the controlling interest in Lvxin to Hao Shuping. Hao Shuping agreed to pay the Lvxin shareholders RMB 2,029,586 (US$305,472) in cash and cause the company that would become Organic Agricultural to issue to them 152,736 shares (valued at US$152,736). Hao Shuping and the shareholders of Lvxin also signed an irrevocable supplemental agreement that gave Hao Shuping voting and managerial control over Lvxin. By June 22, 2018, Tianci Liangtian paid all of the consideration to Lvxin’s former shareholders.

On January 1, 2018, pursuant to the Equity Transfer Agreement between Hao Shuping and Tianci Liangtian, Hao Shuping transferred his 51% controlling interest in Lvxin to Tianci Liangtian. As control of both entities resided with Hao Shuping, we have accounted for the combination of Lvxin with Tianci Liangtian as a transaction between entities under common control.

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)

As a result of the Share Exchange, Hao Shuping acquired 48.8% of the Company’s outstanding shares. Prior to the Share Exchange, Hao Shuping controlled Lvxin and Tianci Liangtian. Therefore, the Share Exchange was accounted for as a business combination of entities under common control in accordance with ASC 805-50-30-5. Accordingly, the assets and liabilities of the Company and its subsidiaries are presented at their carrying values at the date of the transaction; the Company’s historical stockholders’ equity was retroactively restated to the first period presented, as the acquisition of Organic Agricultural Samoa, Organic Agricultural HK, Tianci Liangtian and Lvxin was treated as a combination of entities under common control.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Item Regulation S-X, Rule 10-01(c) Interim Financial Statements, and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders’ equity in conformity with generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the three months ended June 30, 2019 are not necessarily indicative of the results that can be expected for the year ended March 31, 2020.

The Company’s consolidated financial statements are expressed in U.S. Dollars and are presented in accordance with Accounting Principles Generally Accepted in the United States of America (“U.S. GAAP”).

Principles of consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements include the assets, liabilities, and net income or loss of these subsidiaries. The Company’s subsidiaries are listed as follows:

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)

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 and cash equivalents

Cash consists of cash on hand and bank deposits, which are unrestricted as to withdrawal and use. All highly liquid investments with original stated maturities of three months or less are classified as cash and cash equivalents. The Company’s cash and cash equivalents consist of cash on hand and cash in bank, as of June 30, 2019 and March 31, 2019.

Revenue recognition

Effective April 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Section ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products and contracts by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied.

The Company recognizes revenue when the amount of revenue can be reliably measured, it is probable that economic benefits will flow to the entity, and specific criteria have been met for each of the Company’s activities as described below.

The Company sells paddy and selenium-enriched paddy products, rice and other agricultural products. All revenue is recognized when it is both earned and realized. The Company’s policy is to recognize the sale when the products, ownership and risk of loss have transferred to the purchasers, and collection of the sales proceeds is reasonably assured, all of which generally occur when the customer receives the products. 

Given the nature of this revenue source of the Company’s business and the applicable rules guiding revenue recognition, the revenue recognition practices for the sale do not contain estimates that materially affect results of operations nor does the Company have any policy for return of products.

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)

Fair Value Measurements

The Company applies the provisions of FASB ASC 820, Fair Value Measurements for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements. ASC 820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.

Fair value is defined as the price that would be received when selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining the fair value for the assets and liabilities required or permitted to be recorded, the Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability.

ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices, other than those in Level 1, in markets that are not active or for similar assets and liabilities, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

There were no transfers between level 1, level 2 or level 3 measurements during the three months ended June 30, 2019 and 2018.

Financial assets and liabilities of the Company primarily consists of cash, prepayments and deferred expenses, inventories, other receivables, right of use asset, accounts payable and accrued liabilities, customer deposits, due to related parties, and other payables. As at June 30, 2019 and March 31, 2019, the carrying values of these financial instruments approximated their fair values due to the short-term nature of these instruments.

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.

ORGANIC AGRICULTURAL COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(UNAUDITED)

(AMOUNTS IN US DOLLARS)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The financial statements of the Company, which are prepared using the RMB, 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:

Income taxes

The Company follows FASB ASC Topic 740, Income Taxes, which requires the recognition of deferred income taxes for the differences between the basis of assets and liabilities for financial statements and income tax purposes. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are also recognized for operating losses and for tax credit carryforwards. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

ASC 740-10-30 requires income tax positions to meet a more-likely-than-not recognition threshold to be recognized in the financial statements. Under ASC 740-10-30, tax positions that previously failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Under ASC 740-10-40, previously recognized tax positions that no longer meet the more-likely-than-not threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities or the deferred tax asset valuation allowance.

Lvxin products sales and services have been exempt from enterprise income tax. According to the “PRC Income Tax Law” Article 27 (1), income from agricultural, forestry, animal husbandry and the fisheries industries shall be exempt from business tax.

According to the “PRC Income Tax Law”, Tianci Liantian and Yuxinqi are subject to a 25% standard enterprise income tax in the PRC.

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)

Earnings (loss) per share

The Company computes earnings (loss) per share (“EPS”) in accordance with 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 has follows the provisions of 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 months ended June 30, 2019 and no compensation expense is required to be recognized under provisions of ASC 718 with respect to employees. During the three months ended June 30, 2018, specifically on June 13, 2018, the Company granted a total of 290,000 shares with a fair value on the grant date of $1.30 per share to 8 employees, and $377,000 compensation expense was recognized under the provisions of ASC 718. These shares were fully vested when issued.

Segment Information and Geographic Data

The Company is operating in one segment in accordance with the accounting guidance FASB ASC Topic 280, Segment Reporting. The Company’s revenues are from customers in the People’s Republic of China (“PRC”). All assets of the Company are located in the PRC.

Concentration of Credit Risk

The Company maintains cash balances in four banks in China. In China, the insurance coverage of each bank is RMB500,000 (approximately USD$75,000). As of June 30, 2019, the Company did not have any balance that exceeded the insurance amounts.

As of June 30, 2019 and March 31, 2019, the Company has customer deposits of $139,638 and $164,362. As of June 30, 2019, Shouhang Commerce and Trade represented 68.9% of total customer deposits. As of March 31, 2019, Shouhang Commerce and Trade represented 76.2% of total customer deposits. During the three months ended June 30, 2019, major customer Li Jiaxu generated 81% of revenue.

As of June 30, 2019 and March 31, 2019, the Company has prepayments and deferred expenses of $25,857 and $121,257, respectively. As of June 30, 2019, Taole Agricultural Means of Production, Fengnian and Heifengyuan represented 0%, 44% and 46% of total prepayments, respectively. For the three months ended June 30, 2019, the Company’s purchases from these vendors totaled $186,834, nil and $1,896, respectively.

ORGANIC AGRICULTURAL COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(UNAUDITED)

(AMOUNTS IN US DOLLARS)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Adopted Accounting Standards

In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides an additional, optional transition method related to implementing the new leases standard. ASU 2018-11 provides that companies can initially apply the new lease standard at adoption and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted the guidance as of April 1, 2019. See Note 9 - Leases for further details.

We do not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, statements of operations and cash flows.

NOTE 3. PREPAYMENTS AND DEFERRED EXPENSES

Prepayments and deferred expenses include prepaid paddy planting production materials, prepayment of rice processing charges, and prepayment for products to be purchased. As of June 30, 2019 and March 31, 2019, prepayments and deferred expenses were $25,857 and $121,257, respectively.

NOTE 4. LONG-TERM LEASE PREPAYMENTS

Long-term lease prepayments include land rent prepayment over one year. As of March 31, 2019, long-term lease prepayments were $273,275. As a result of the adoption of the new accounting standards applicable to leases, all the amount of long-term lease prepayments reduced the lease liability as of June 30, 2019.

NOTE 5. INVENTORIES

Inventories are generally kept for a short period of time. Inventories are comprised of growing costs, harvesting costs, raw materials, and finished goods (including harvesting agricultural produce paddy and processed rice and other agricultural products).

Growing costs, also referred to as agricultural costs, consist of seeds, cultivation, fertilization, labor costs and soil improvement, pest control and irrigation.

Harvest costs are comprised of labor and equipment expenses incurred to harvest and deliver crops to the packinghouses.

Raw materials include all costs of materials purchased to be used in production of the Company’s products.

ORGANIC AGRICULTURAL COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(UNAUDITED)

(AMOUNTS IN US DOLLARS)

NOTE 5. INVENTORIES (continued)

Agricultural produce paddy is grown in Lvxin’s planting base. This crop has distinct growing, harvest, and selling periods, each of which lasts approximately four to six months. During the growing period, agricultural costs are capitalized, as they are associated with benefiting and preparing the crops for the harvest and selling period. During the harvest and selling period, harvest costs and cultural costs are capitalized as inventories, then amortized as a cost of sales in accordance with FIFO recognition of historical costs when the inventories is sold.

Most agricultural costs, including amortization of capitalized agricultural costs and certain other costs, such as indirect labor including farm supervision and management and irrigation that benefit multiple crops, are allocated to crops on a per-kilogram basis.

The cost of harvesting agricultural produce paddy includes all relevant expenditures incurred before and during the entire cultivation period and after harvesting, mainly including seed, fertilizer and other production materials, land rent, labor, and other related costs, subject to impairment if the cost of inventory exceeds net realizable value.

Manufactured goods rice and other products includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition.

The Company values inventory on its balance sheet at the lower of cost or net realizable value. Based on recent sales experience, the Company determined that the net realizable value of its inventory was less than the costs incurred in producing the inventory. Therefore an impairment charge was made. At June 30, 2019 and March 31, 2019, inventories consisted of the following:

ORGANIC AGRICULTURAL COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(UNAUDITED)

(AMOUNTS IN US DOLLARS)

NOTE 6. INCOME TAXES

A reconciliation of loss before income taxes for domestic and foreign locations for the three months ended June 30, 2019, and 2018 is as follows:

The difference between the U.S. federal statutory income tax rate and the Company’s effective tax rate was as follows:

The Company did not recognize deferred taxes since it is not likely to realize such deferred taxes. The deferred tax would apply to the Company in the U.S. and the companies, Yuxinqi and Tianci Liangtian, in China.

As of June 30, 2019, the Yuxinqi and Tianci Liangtian have total net operating loss carry forwards of $(468,886) in the PRC that expire in 2024. As a result, the Company provided a 100% allowance on all deferred tax assets of approximately $117,000 and $102,000 related to its operations in the PRC as of June 30, 2019 and March 31, 2019, respectively.

The Company has incurred losses from its United States operations during all periods presented of approximately $230,000. Accordingly, management provided a 100% valuation allowance of approximately $48,000 and $43,000 against the deferred tax assets related to the Company’s United States operations as of June 30, 2019 and March 31, 2019, respectively, because the deferred tax benefits of the net operating loss carry forwards in the United States will not likely be utilized. The valuation allowance has increased by approximately $5,000 and $2,000 for the three months ended June 30, 2019 and 2018, respectively.

The Company is subject to examination by the Internal Revenue Service (IRS) in the United States as well as by the taxing authorities in China, where the firm has significant business operations. The tax years under examination vary by jurisdiction. The table below presents the earliest tax year that remain subject to examination by major jurisdiction.

ORGANIC AGRICULTURAL COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(UNAUDITED)

(AMOUNTS IN US DOLLARS)

NOTE 6. INCOME TAX (Continued)

United States

On December 22, 2017, the “Tax Cuts and Jobs Act” (“The Act”) was enacted. Under the provisions of the Act, the U.S. corporate tax rate decreased from 34% to 21%. Accordingly, we have remeasured our deferred tax assets on our net operating loss carryforwards in the U.S at the lower enacted tax rate of 21%. However, this remeasurement had no effect on our income tax expense as we have provided a 100% valuation allowance on our deferred tax assets previously.

Additionally, the Tax Act imposes a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries, and future foreign earnings are subject to U.S. taxation. The transition tax, if applicable, is a one-time income tax which, if elected, can be paid over 8 years. However, this one-time transition tax had no effect on our income tax expense as we have no undistributed foreign earnings prior to December 22, 2017 since we have cumulative foreign losses.

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 months ended June 30, 2019 and 2018.

Lvxin products sales and services are exempt from enterprise income tax, according to the “PRC Income Tax Law” Article 27 (1), which states that income from agricultural, forestry, animal husbandries and the fisheries Industries shall be exempt from business income tax.

NOTE 7. OTHER PAYABLES

Other payables consisted of the following as of the periods indicated:

As of March 31, 2019, the Company had received an advance of $53,300 for the sale of 41,000 shares to be issued. The shares were subsequently issued on June 21, 2019. 

ORGANIC AGRICULTURAL COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(UNAUDITED)

(AMOUNTS IN US DOLLARS)

NOTE 8. RELATED PARTY TRANSACTIONS

Amount due to related parties

Amount due to related parties consisted of the following as of the periods indicated:

Hao Shuping is the main shareholder of the Company, and Shen Zhenai is the President, Chairman of the Board, director 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.

As of June 30, 2019 and March 31, 2019, the Company has a balance due to Lou Zhengui of $177,498 and $34,866, respectively, which was recorded as Due to Related Parties. It represents advances for expenses paid to suppliers by Lou Zhengui, who is the nominee appointed by the minority shareholders of Lvxin to represent their interests. The balance is non-interest bearing and due on demand.

NOTE 9. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES

On April 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) Topic 842, “Leases” (“new lease standard”). The new lease standard was adopted using the optional transition method approach that allows for the cumulative effect adjustment to be recorded without restating prior periods. The Company has elected the practical expedient package related to the identification, classification and accounting for initial direct costs whereby prior conclusions do not have to be reassessed for leases that commenced before the effective date. As the Company will not reassess such conclusions, the Company has not adopted the practical expedient to use hindsight to determine the likelihood of whether a lease will be extended or terminated or whether a purchase option will be exercised.

Operating lease

In November 2017, Tianci Liangtian leased office space from November 20, 2017 to December 5, 2018 under an operating lease agreement (approximately 666 square meters). Under the terms of the lease, Tianci Liangtian paid approximately $1,592 in lease deposits and is committed to make annual lease payments. In December 2018, Yuxingqi renewed the lease agreement. Under the terms, Yuxingqi committed to make annual lease payments of CNY¥ 290,000 (approximately US$42,000) for the period from December 6, 2018 to December 5, 2019.

In April 2018, Lvxin leased office space of approximately 177 square meters under a one-year lease agreement. Lvxin paid approximately US$4,532 (RMB30,000) as rent. The office contains our administrative functions, sales, e-commerce operations and marketing functions.

ORGANIC AGRICULTURAL COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(UNAUDITED)

(AMOUNTS IN US DOLLARS)

NOTE 9. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES (Continued)

The Company leases 1,228 acres of land for cultivating pursuant to more than 300 lease agreements with individual farmers. Some of the leases are paid annually, some of the leases are paid in advance for periods from 12 to 22 years. The Company accounts for the land rental costs as a cost of production of the growing paddy annually.

The Company’s adoption of the new lease standard included new processes and controls regarding asset financing transactions, financial reporting and a system-related implementation required for the new lease standard. The impact of the adoption of the new lease standard included the recognition of right-of-use (“ROU”) assets and lease liabilities. The adoption of the new lease standard resulted in additional net lease assets and net lease liabilities of approximately $2.2 million, respectively, as of April 1, 2019. For the three months end of June 30, 2019, the amortization was 375,309.

Operating leases are reflected on our balance sheet within operating lease ROU assets and the related current and non-current operating lease liabilities. ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from lease agreement. Operating lease 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 June 30, 2019, the Company has the following amounts recorded on the Company’s unaudited condensed consolidated balance sheet:

The components of lease expense were as follows:

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)

Supplemental cash flow information related to leases was as follows:

Future annual minimum lease payments for non-cancellable operating leases are as follows:

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 June 30, 2019 or March 31, 2019 and through the date of this report. 

ORGANIC AGRICULTURAL COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(UNAUDITED)

(AMOUNTS IN US DOLLARS)

NOTE 11. NON-CONTROLLING INTERESTS

Lvxin is the Company’s majority-owned subsidiary which is consolidated in the Company’s financial statements with a non-controlling interest (NCI) recognized. The Company holds a 51% interest of Lvxin as of June 30, 2019 and March 31, 2019.

As of June 30, 2019 and March 31, 2019, the NCI in the condensed consolidated balance sheet was $ (2,887) and $3,759, respectively.

NOTE 12. SUBSEQUENT EVENTS

During the period from October 1, 2019 to the date of filing this report, the Company received an advance of $531,820 for the sale of 353,547 shares to be issued.

The Management of the Company determined that there were no other reportable subsequent events to be adjusted for and/or disclosed as of the date of filing this report.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of such financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. On an ongoing basis, we evaluate these estimates, including those related to useful lives of real estate assets, bad debts, impairment, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates.

Application of Critical Accounting Policies

In preparing our financial statements, we are required to formulate working policies regarding valuation of our assets and liabilities and to develop estimates of those values. In our preparation of the financial statements for the three months ended June 30, 2019, there was one estimate made which was (a) subject to a high degree of uncertainty and (b) material to our results:

Results of Operations for the three months Ended June 30, 2019 and 2018

The following table shows key components of the results of operations during the three months ended June 30, 2019 and 2018: 

Our modest revenue results for the three months ended June 30, 2019 were primarily the result of the nature of paddy production and sale:

As our results during the three months ended June 30, 2018 indicate, the sale of paddy is extremely seasonal. This occurs because the period from April through September is the planting and growing season, during which we sell very little paddy; revenue from paddy sales is generally recognized in the period from October through March.

Our development of Yuxinqi as a marketing enterprise with focus on milled rice and other production is largely caused by the higher margins. Incorporated on February 5, 2018, with a short operating history, Yuxingqi’s sales is erratic, since a stable customer base has not been established yet.

The costs incurred in planting and growing paddy are capitalized as additions to inventory until the harvest season, when the capitalized costs are amortized against sales. Costs of sales of $122,401 were attributable to paddy sales during the three months ended June 30, 2019, resulting in gross loss of $7,437 and a gross loss of (6.5%) from the sale of paddy. The lower market price of the paddy, and the 27.2% increase in average unit cost, caused by reduced production, are the major factors of the loss . The remainder of our cost of sales, $15,050, was attributable to the sales of milled rice and other foodstuffs, resulting in gross profit of $12,327 and a gross margin of 45.0%. The higher margin on our non-paddy lines makes our expansion in this market attractive. However, we also expect that increased advertising of the health benefits of consuming selenium-enriched rice will increase demand for our paddy products and lead to higher sales and improved margins. We intend to devote resources to that advertising effort as they become available. There was no Costs of sales due to seasonal sales during the three months ended June 30, 2018.

During the three months ended June 30, 2019 and 2018, the Company incurred $123,959 and $548,496, respectively, in operating expenses, the greater portion of which was attributable to administration - i.e. salaries and office expenses. Salaries and benefits expense was $378,134 less during the three months ended June 30, 2019 than in the prior period during the three months ended June 30, 2018 due to the fact that the Company granted a total of 290,000 shares to 8 employees, which resulted in $377,000 of stock compensation expense, representing the fair value of those shares on the date issued.

The Company’s operations produced a net loss of $118,629 and $548,493 for the three months ended June 30, 2019 and 2018, respectively. However, because we own only 51% of the equity in Lvxin, U.S. GAAP directs us to record all of the revenue and expenses attributable to the operations of Lvxin, but to then offset the portion of net income or net loss attributable to the noncontrolling interest. Therefore, we eliminated $3,626 and $1,138 of the net loss attributable to Lvxin’ minority shareholders during the three months ended June 30, 2019 and 2018. As a result, the net loss attributable to the Company’s common shareholders was $115,007 and $547,355 for the three months ended June 30, 2019 and 2018, respectively.

Liquidity and Capital Resources

The Company’s operations have been financed primarily by loans from related parties. The shareholders of Lvxin financed the operations of that entity, Hao Shuping has been the primary source of financing for Tianci Liangtian and Yuxinqi. As a result, at June 30, 2019, the Company’s loans payable to related parties totaled $265,567 (an increase of $173,260 from March 31, 2019), which was owed to members of the Company’s management. Working capital is totaled $292,519. Working capital increased by $4,356 during the three months ended June 30, 2019, primarily due to an increase in inventory of $565,049 offset by the current portion of the lease liability and an increase in due to related parties.

The largest component of working capital at June 30, 2019 is inventory of 1,081,453. It is noteworthy that Lvxin and Yuxingqi had no accounts receivable at either June 30, 2019 or March 31, 2019. This occurs because the payment terms given by Lvxin and Yuxingqi to its customers are very constricted: most sales are made with COD (cash on delivery) or prepayment terms, with no customer having more than three days to complete payment.

Cash Flows

The following table summarizes our cash flows for the three months ended June 30, 2019 and 2018.

During the three months ended June 30, 2019, our operations used net cash of $51,294. The use of cash in operations was less than the net loss for the three months ended June 30,2019, as the $582,418 expansion of our inventory was offset by our amortization of $362,155 in prepayments plus borrowings of $169,501 from related parties.

The Company recorded $388,510 of cash use in operating activities during the three months ended June 30, 2018. The use of cash in operations was less than the net loss for the three months primarily because the net loss included a non-cash expense of $377,000 attributable to the market value of shares issued to employees in June 2018.

No cash was used in investing activities for the three months ended June 30, 2019. $244,404 of cash was used in our investing activities during the three months ended June 30, 2018. The use of cash in 2018’s investing activities consisted of:

Our financing activities during the three months ended June 30, 2019 generated $52,218. Financing activities consisted of $20,012 in proceeds from sales of common stock, and $32,206 in borrowings from related parties. During the three months ended June 30, 2018, our financing activities generated $351,922 from sales of common stock.

Trends, Events and Uncertainties

Our business is seasonal, as our sales occur generally during the harvest season, which occurs from October to March of the following year. Our sales are typically the lowest from April to September, which is the planting and growing and harvesting period. Accordingly, we experience significant seasonal fluctuations in our revenues and our operating costs.

In addition, adverse weather conditions and other natural disasters may affect our planting and harvesting activities and cause a reduction and loss of agricultural production or a delay in realization of revenues.

As resources become available, the Company intends to expand its 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. In this manner, the Company hopes to alleviate the seasonality of its revenues, by having products available for sale year-round.

The cost of our inventories primarily consists of the growing costs of crops, both in the field and harvested, as well as the cost of harvesting crops that remain unsold. U.S. GAAP mandates that we record the value of our inventory at the lower of cost or net realizable value. Our determination to record the inventories at net realizable value was based on our determination that the paddy in inventory, including paddy in the field, was sold for an amount below its cost in May 2019.

The Company’s operations have been financed primarily by loans from related parties and proceeds from sales of shares. The shareholders of Lvxin financed the operations of that entity, Hao Shuping has been the primary source of financing for Tianci Liangtian and Yuxinqi. The company has received $20,012 during this quarter, and $531,820 from July 01, 2019 to November 21, 2019, for the sales of shares. These funds may support the company to meet its needs especially during seasonal downtime.

Other than the factors listed above we do not know of any trends, events or uncertainties that have had or are reasonably expected to have a material impact on our net sales or revenues or income from continuing operations.

Off-Balance Sheet Arrangements

We do not currently have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.

Recent Accounting Pronouncements

New accounting rules and disclosure requirements can significantly impact the comparability of our financial statements. Please refer to Note 2 of our condensed consolidated financial statements included in this quarterly report.

There were no recent accounting pronouncements that we expect to have a material effect on the Company’s financial position or results of operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management maintains disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that the material information required to be disclosed by us in our periodic reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management team, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of June 30, 2019. Based on this evaluation, we concluded that our disclosure controls and procedures have the following material weaknesses:

Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s system of disclosure controls and procedures was not effective as of June 30, 2019 for the purposes described in this paragraph.

Changes in Internal Control over Financial Reporting

No changes in the Company’s internal control over financial reporting has come to management’s attention during the Company’s last quarter that have materially affected, or are likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

Item 1A. Risk Factors.

There have been no material changes from the risk factors included in the Company’s Registration Statement on Form S-1 (File No. 333-226810).

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds.

From April 1, 2019 to June 30, 2019, the Company sold 56,000 restricted shares of common stock for US$72,800 under Regulation S to 7 non-US persons. This transaction should be deemed exempt for registration under Rule 902(1)(i) in accordance with Regulation S.

Item 3. Defaults upon Senior Securities.

Not applicable

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits

INDEX TO EXHIBITS

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ORGANIC AGRICULTURAL COMPANY LIMITED

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