ORGANIC AGRICULTURAL COMPANY LIMITED 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 inthe 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 and nine months ended
Results of Operations
The following table shows key components of the unaudited results of operations
during the three and nine months ended
For the Three Months
Ended
December 31, Change
2021 2020 $ %
Revenue $ 164,876 $ 20,273 $ 144,603 713 %
Cost of Sales 119,572 14,597 104,975 719 %
Gross Profit 45,304 5,676 39,628 698 %
Total operating costs and expenses 165,570 56,544 109,026 193 % (Loss) from operations before other income (loss) and income taxes (120,266 ) (50868 ) (69,398 ) 136 % Other income (loss) 234 (3,736 ) (3,736 ) (106 %) (Loss) from operations before income taxes (120,032 ) (54,604 ) (65,428 ) 120 % Income taxes - - - N/A Net (loss) from continuing operations (120,032 ) (54,604 ) (65,428 ) 120 % Less: net (loss) attributable to non-controlling interests (32,566 ) - (32,566 ) N/A Net (loss) attributable to common shareholders'$ (87,466 ) $ (54,604 ) $ (32,862 ) 60 % For the Nine months Ended December 31, Change 2021 2020 $ % Revenue$ 242,922 $ 119,789 $ 123,133 103 % Cost of Sales 171,827 82,387 89,440 109 % Gross Profit 71,095 37,402 33,693 90 %
Total operating costs and expenses 1,079,935 137,128 942,807 688 % (Loss) from operations before other income (loss) and income taxes (1,008,840 ) (99,726 ) (909,114 ) 912 % Other income (loss) 236 (2,322 ) 2,558 (110 %) (Loss) from operations before income taxes (1,008,604 ) (102,048 ) (906,556 ) 888 % Income taxes - - - N/A Net (loss) from continuing operations (1,008,604 ) (102,048 ) (906,556 ) 888 % (Loss) on the sale of discontinued operations, net of income taxes - (713,722 ) 713,722 (100 %) Net income from discontinued operations, net of income taxes - 743 (743 ) (100 %) Total net (loss) from discontinued operations - (712,979 ) 712,979 (100 %) Net (loss) (1,008,604 ) (815,027 ) (193,577 ) 24 % Less: net (loss) income attributable to non-controlling interests (47,328 ) 364 (47,692 ) (13,102 %) Net (loss) attributable to common shareholders'$ (961,276 ) $ (815,391 ) $ (145,885 ) 18 % 1 Yuxinqi is a marketing enterprise with a focus on milled rice and other agricultural products. Incorporated onFebruary 5, 2018 , with a short operating history, Yuxinqi's sales are erratic, since a stable customer base has not been established yet. Sales by Yuxinqi during the three and nine months endedDecember 31, 2021 were 713% and 103% greater than during the three and nine months endedDecember 31, 2020 , respectively. The increase in revenue occurred primarily because our principal customer, Jiufu Zhenyuan, increased its orders. For the periods endedDecember 31, 2021 and 2020, our revenue was attributable to the sales of milled rice and other foodstuffs. The cost of sales of$119,572 and$14,597 for the three months, and$171,827 and$82,387 for the nine months, respectively. Those operations yielded a gross profit for the three months periods of$45,304 and$5,676 with a gross margin of 27.5% and 28.0%, and a gross profit for the nine months periods of$71,095 and$37,402 with a gross margin of 29.3% and 31.2%, respectively. UntilApril 2020 the Company's operations were focused on the production of paddy rice by its subsidiary, Lvxin. To re-focus operations toward the sale of value-added processed products, the Company's subsidiary, Tianci Liangtian, completed the spin-off of its ownership interest in Lvxin onApril 30, 2020 . During the nine months endedDecember 31, 2020 , the Company incurred$713,722 of investment loss due to the divestment of Lvxin. InApril 2021 , in order to boost sales, the Company granted a total of 345,000 fully vested shares with a fair value on the grant date of$2.20 per share to 25 individuals for sales promotion services. As a result,$759,000 in compensation expense was recognized as advertising and promotion expenses for the nine months endedDecember 31, 2021 . That represented the primary component of the Company's operating expenses, which totaled$165,570 and$56,544 during the three months endedDecember 31, 2021 and 2020, and$1,079,935 and$137,128 during the nine months endedDecember 31, 2021 and 2020, respectively. The components of operating expenses were: Three Months Ended Nine months Ended Sept. 30 Sept. 30 2021 2020 2021 2020 Salaries and benefits$ 114,424 $ 25,974 $ 229,706 $ 72,610 Office Expense 31,535 10,669 62,814 30,724 Rentals and leases 11,138 10,309 23,530 29,843 Professional fees 22,624 20,132 59,044 87,463 Exchange (gain) loss (24,163 ) (56,642 ) (70,061 ) (137,896 ) Advertising and promotion expenses 10,012 45,349 774,902 52,203 Depreciation and amortization - 753 - 2,181 Total operating expenses$ 165,570 $ 56,544 $ 1,079,935 $ 137,128 The Company's operating expenses were partially offset by$24,163 and$56,642 of gain on exchange realized during the three months endedDecember 31, 2021 and 2020, and$70,061 and$137,896 of gain on exchange realized during the nine months endedDecember 31, 2021 and 2020. This represented the increase in the USD value of Tianci's debt toOrganic Agricultural , which increased as a result of the decline in the USD to CNY exchange rate from 6.5565 to 6.3614.
The Company's continuing operations produced a net loss of
OnNovember 6, 2020 Organic Agricultural entered into a Cooperation Agreement withUnbounded IOT Block Chain Limited ("Unbounded"). The purpose of the Cooperation Agreement was 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 in this agreement,Tianci Wanguan (Xiamen) Digital Technology Co., Ltd. ("Tianci Wanguan") was incorporated onNovember 5, 2020 . Tianci Wanguan is 51% owned by Organic Agricultural HK and 49% owned by Chen Zewu on behalf of Unbounded. OnJuly 19, 2021 the parties executed a supplement to the Cooperation Agreement.
The Supplementary Agreement sets forth performance criteria for Unbounded's management of Tianci Wanguan: specifically that within 12 months after the shares mentioned below are issued to Unbounded, Tianci Wanguan must generate a profit of five million Renminbi (approximatelyUS$774,000 ) from the business described in the Cooperation Agreement or any other business approved byOrganic Agricultural . OnNovember 23, 2021 ,Organic Agricultural issued 10 million shares of its common stock to Unbounded and held by Chen Zewu. If Unbounded fails to satisfy the criteria described above, the 10 million shares must be returned toOrganic Agricultural . If Unbounded does satisfy the criteria, then it will have unrestricted ownership of the 10 million shares, andOrganic Agricultural will issue an additional 10 million shares to Unbounded. According to FASB ASC 505-50-S99-1 and 2, as the 10,000,000 shares issued onNovember 23, 2021 are unvested and forfeitable, these shares are treated as unissued until they vest when the target described above is met. The share-based compensation will be measured at grant date, based on the fair value of the award and recognized over its vesting period once it determined that the target will more likely than not be met. After the criteria described above is satisfied, the Company will grant a total of 20,000,000 shares, including the 10,000,000 shares issued onNovember 23, 2021 , with a fair value on the grant date, which isJuly 19, 2021 , of$0.0969 per share to Unbounded. If the target described above is satisfied,$1,938,000 in compensation expense will be recognized under the provisions of ASC 718. As ofDecember 31, 2021 , Tianci Wanguan had begun its operations and had a net loss of$67,000 for the three months endedDecember 31, 2021 . Based on the current net loss of Tianci Wanguan, it is currently not likely that they will meet the performance condition. Accordingly, no compensation expense has been recognized as ofDecember 31, 2021 for these shares. 2
Liquidity and Capital Resources
The Company's operations have been financed primarily by proceeds from the sale of shares. The Company received$920,000 from the sale of 21,256,620 shares to a single investor during the nine months endedDecember 31, 2021 . As ofDecember 31, 2021 , our working capital was$490,930 , an increase of$636,068 during the nine months endedDecember 31, 2021 , primarily due to the cash received from the sale of the 21,256,620 shares.
The largest components of working capital at
Cash Flows The following table summarizes our cash flows for the nine months endedDecember 31, 2021 and 2020. For the Nine months Ended December 31, Change 2021 2020 $ Net cash (used in) operating activities$ (413,930 ) $ (25,363 ) $ (388,567 ) Net cash (used in) investing activities - (1,343 ) 1,343 Net cash provided by financing activities 920,000 46,400 873,600 Effect of exchange rate fluctuation on cash and cash equivalents (9,870 ) (138,026 ) 128,156 Net increase in cash and cash equivalents 496,200 118,332 614,532 Cash and cash equivalents, beginning of year 70,506 242,174 (171,668 ) Cash and cash equivalents, end of year$ 566,706 $ 123,842 $ 442,864 During the nine months endedDecember 31, 2021 , our operations used net cash of$413,930 . The Company incurred a cash use from operations primarily because it recorded a net loss of$1,008,604 . The difference between net loss and cash used was primarily attributable to the non-cash expense of$759,000 for stock we issued as compensation. Our cash uses included a reduction in the balance due to related parties by$110,668 , a$77,407 increase in prepaid expenses and a$69,824 increase in inventories. During the nine months endedDecember 31, 2020 , the Company recorded$25,363 of cash used in operating activities, primarily because of its net loss, plus an increase in inventories of$58,457 and a decrease in accounts payable and accrued expenses of$29,864 . The Company had no investing activity during the nine months endedDecember 31, 2021 . The Company's only investing activity during the nine months endedDecember 31, 2020 was the distribution of$1,343 of cash in connection with the sale of the discontinued operations. Our financing activities during the nine months endedDecember 31, 2021 generated$920,000 from the sale of common stock. During the nine months endedDecember 31, 2020 , our financing activities generated$46,400 from the sale
of common stock.
Trends, Events and Uncertainties
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. 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. Our marketing personnel will endeavor to expand awareness of our brand, open new marketing channels, and educate the nation about the health benefits of selenium-enriched rice. In this manner, the Company hopes to increase sales to support the future operations and development of the Company. There is no guarantee that the Company's new strategy will
be
successful.
3
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, which have increased the Company's 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 pandemic 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 outbreaks interrupt the economic recovery. TheU.S. government, including theSEC , has made statements and taken actions that have led to changes in relations between theU.S. andChina , and will impact companies with connections tothe United States orChina . Those actions by theU.S. government included imposing several rounds of tariffs affecting certain products manufactured inChina and imposing sanctions and restrictions in relation toChina . Actions by theSEC included issuing statements indicating that it would make enhanced review of companies with significantChina -based operations. It is unknown whether and to what extent new legislation, executive orders, tariffs, laws or regulations will be adopted, or the effect that any such actions would have onU.S. -domiciled companies with significant connections toChina , our industry or on us. Any unfavorable government policies on cross-border relations, including increased scrutiny on companies with significantChina -based operations, capital controls or tariffs, may affect our ability to raise capital and the market price of our shares. If any new legislation, executive orders, tariffs, laws and/or regulations are implemented, if existing trade agreements are renegotiated or if theU.S. or Chinese governments take retaliatory actions due to the recentU.S. -China tensions, such changes could have an adverse effect on our business, financial condition and results of operations, our ability to raise capital and the market price of our shares. Changes inUnited States andChina relations and/or regulations may adversely impact our business, our operating results, our ability to raise capital and the market price of our shares.
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 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.
© Edgar Online, source
