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
The discussion and analysis of the Company's financial condition and results of operations is based upon its condensed consolidated financial statements, which have been prepared in accordance withUnited States generally accepted accounting principles. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate. In connection with the preparation of our financial statements for the three months endedJune 30, 2022 , there was one accounting estimate we made that was subject to a high degree of uncertainty and was critical to our results, as
follows: Valuation of Unvested Shares: OnNovember 23, 2021 the Company issued 10 million common shares to Chen Zewu as agent forUnbounded IOT Block Chain Limited , which owns the minority interest in Tianci Wanguan and is responsible for managing that company. Our agreement with Unbounded provides that the shares will vest only if Tianci Wanguan generates a profit of five million Renminbi during the twelve months followingNovember 23, 2021 . Upon vesting of the shares, the Company would record a compensation expense of$1,938,000 . As ofJune 30, 2022 , the Company had suspended the operations of Tianci Wanguan and onAugust 19, 2022 , completed the divestment. Accordingly, Unbounded did not meet the performance requirement and the 10,000,000 shares previously issued onNovember 23, 2021 , were returned and cancelled with no compensation expense recognized. Results of Operations
The following table shows key components of the unaudited results of operations
during the three months ended
For the Three Months Ended
June 30, Change
2022 2021 $ %
Revenue $ 38,984 $ 30,091 $ 8,893 30 %
Cost of Sales 31,272 20,680 10,592 51 %
Gross Profit 7,712 9,411 (1,699 ) (18 )%
Total operating costs and expenses 225,870 800,123 (574,253 ) (72 )% (Loss) from operations before other income and income taxes (218,158 ) (790,712 ) 572,554 (72 )% Other income 1,017 13 1,004 7,723 % (Loss) from operations before income taxes (217,141 ) (790,699 ) 573,558 (73 )% Income taxes - - - N/A Net (loss) from operations (217,141 ) (790,699 ) 573,558 (73 )% Less: net (loss) attributable to non-controlling interests - - - N/A Net (loss) attributable to common shareholders'$ (217,141 ) $ (790,699 ) $ 573,558 (73 )% 2
All of our revenue during the three months endedJune 30, 2022 and 2021 was generated by our subsidiary Yuxinqi. Yuxinqi is a marketing enterprise with a focus on milled rice and other agricultural products. Incorporated onFebruary 5, 2018 , Yuxinqi's sales are erratic, since a stable customer base has not been established yet. Sales by Yuxinqi during the three months endedJune 30, 2022 were 30% greater than during the three months endedJune 30, 2021 . The increase in revenue occurred primarily because of orders from a new customer, Chuangyi Agriculture. For the three months endedJune 30, 2022 and 2021, our revenue was attributable to the sales of milled rice and other foodstuffs. The cost of sales were$31,272 and$20,680 for the three months endedJune 30, 2022 and 2021, respectively. Those operations yielded gross profit for the three months periods of$7,712 and$9,411 with gross margin of 19.8% and 31.3%, respectively. The decrease in gross margin during the three months endedJune 30, 2022 , compared to the same period of the previous year was primarily attributable to below-cost sales of a new product, Guxiaole series products, to attract a new customer, Qingdao Huadao. 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 (the market value of the shares on date of grant) in compensation expense was recognized as advertising and promotion expenses for the three months endedJune 30, 2021 , representing the primary component of the Company's operating expenses during the three months endedJune 30, 2021 . The Company incurred operating expenses totaling$225,870 and$800,123 during the three months endedJune 30, 2022 and 2021, respectively. The components of operating expenses (unaudited) were:
Three Months Ended
June 30
2022 2021
Salaries and benefits $ 46,318 $ 33,014
Office expense 26,678 14,302
Rentals and leases 4,742 6,202
Professional fees 17,723 18,110
Exchange (gain) loss 127,543 (33,345 )Advertising and promotion expenses 2,866 761,840 Total operating expenses
$ 225,870 $ 800,123
Salaries and benefits and office expenses increased in the three months ended
The Company's operating expenses for the three months endedJune 30, 2022 included$127,543 of loss on exchange. This represented the decrease in the USD value of Tianci's debt toOrganic Agricultural , which increased as a result of the appreciation in the USD to CNY exchange rate from 6.3431 to 6.6977. By comparison, the Company's operating expenses during the three months endedJune 30, 2021 were partially offset by$33,345 of an exchange gain. 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 6.4579.
The Company's operations produced a net loss of
3
On November 6, 2020 Organic Agricultural entered into a Cooperation Agreement
with Unbounded 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 on November 5, 2020 .
Tianci Wanguan is 51% owned by Organic Agricultural HK and 49% owned by Chen
Zewu on behalf of Unbounded. On July 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 Chen Zewu to be held for the benefit of Unbounded. 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.
As of
The assets and liabilities of Tianci Wanguan will be shown separately and the
results of operations and cash flows of Tianci Wanguan will be shown as
discontinued operations in the Company's financial statements for the three
months ending
4
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 three months endedJune 30, 2021 . As ofJune 30, 2022 , our working capital was$197,567 , a decrease of$106,308 during the three months endedJune 30, 2022 , primarily due to the net loss from operations. The largest components of working capital atJune 30, 2022 were cash of$308,012 and inventories of$173,870 , which were offset by$299,089 in customer deposits against future sales. Cash Flows
The following unaudited table summarizes our cash flows for the three months
ended
For the Three Months Ended
June 30, Change
2022 2021 $Net cash (used in) operating activities$ (215,745 ) $ (84,086 ) $ (131,659 ) Net cash provided by financing activities - 920,000 (920,000 ) Effect of exchange rate fluctuation on cash and cash equivalents 115,294 (22,109 ) 137,403 Net (decrease) increase in cash and cash equivalents (100,451 ) 813,805 (914,256 ) Cash and cash equivalents, beginning of year 408,463 70,506 337,957 Cash and cash equivalents, end of period$ 308,012 $
884,311$ (576,299 ) During the three months endedJune 30, 2022 , our operations used net cash of$215,745 . The Company incurred a cash use from operations primarily because it recorded a net loss of$217,141 . During the three months endedJune 30, 2021 , the Company recorded$84,086 of cash used in operating activities, primarily because of its net loss of$790,699 . 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 an increase in account receivable by$17,140 and a$15,052 increase in inventories.
The Company had no investing activities during the three months ended
The Company had no financing activities during the three months ended
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 is expanding its product offerings to include more products, our marketing personnel are developing new customers and the Company is building a stable base of customers. 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. As ofJune 30, 2022 , a stable customer base has not been established yet. 5
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. Recently, there has been an increasing number of COVID-19 cases, including cases involving theCOVID-19 Delta and Omicron variants, in multiple cities inChina . The Chinese local authorities have reinstated certain measures to keep COVID-19 in check, including compulsory quarantine arrangements, travel restrictions and stay-at-home orders. The reinstatement of these restrictions in early 2022 have adversely affected our operations by, for example, making it more difficult to conduct our sales and marketing and promotional efforts. The COVID-19 global pandemic has resulted in, and may intensify, global economic distress, and the duration and extent of the impact of COVID-19 outbreak is highly uncertain at this time. We are unable to predict the extent to which the pandemic and related impacts will continue to adversely impact our business operations, financial performance, results of operations, financial position and the achievement
of our strategic objectives. 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
There were no recent accounting pronouncements that we expect to have a material effect on the Company's financial position or results of operations. Please refer to Note 2 of our condensed consolidated financial statements included in this quarterly report.
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