UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2017

 

or

 

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______to______.

 

Commission File Number: 000-54510

 

CHINA MODERN AGRICULTURAL INFORMATION, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		27-2776002
(State or other jurisdiction of incorporation or organization)		(IRS Employee Identification No.)

 

No. A09, Wuzhou Sun Town

Limin Avenue, Limin Development District

Harbin, Heilongjiang, China

(Address of principal executive offices, Zip Code)

 

(86) 0451-84800733

(Registrant’s telephone number, including area code)

  

Not Applicable.

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ    No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	þ
(Do not check if a smaller reporting company)		Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No þ

 

The registrant had 53,100,000 shares of its common stock, par value $0.001 per share, outstanding at May 15, 2017.

 

 

 

CHINA MODERN AGRICULTURAL INFORMATION, INC.

 

QUARTERLY REPORT ON FORM 10-Q

March 31, 2017

 

TABLE OF CONTENTS

 

		PAGE
PART 1 - FINANCIAL INFORMATION		1
Item 1.	Financial Statements (Unaudited)	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	53
PART II - OTHER INFORMATION		55
Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults Upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	55
SIGNATURES		56

 

 

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

 

This Quarterly Report on Form 10-Q contains “forward-looking statements”. Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “anticipate,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

 

We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Quarterly Report on Form 10-Q and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.

 

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of the Quarterly Report on Form 10-Q. All subsequent written and oral forward-looking statements concerning other matters addressed in this Quarterly Report on Form 10-Q and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Quarterly Report on Form 10-Q.

 

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

 

 

CERTAIN TERMS USED IN THIS QUARTERLY REPORT ON FORM 10-Q

 

When this report uses the words “we,” “us,” “our,” and the “Company,” they refer to China Modern Agricultural Information, Inc. and its consolidated subsidiaries Hope Diary, China Dairy, Value Development Holding, Value Development Group and Jiasheng Consulting, its variable interest entity Zhongxian Information, Xinhua Cattle and Yulong Cattle, the subsidiaries of Zhongxian Information.

 

In addition, unless the context otherwise requires and for the purposes of this report only:

 

	●	“China Dairy” refers to China Dairy Corporation Ltd., a Hong Kong company;
	●	“Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
	●	“Hope Diary” refers to Hope Diary Holdings Ltd., a British Virgin Islands company;
	●	“Jiasheng Consulting” refers to Jiasheng Consulting Managerial Co., Ltd., a PRC company;
	●	“Operating Company or Operating Companies” refers to Value Development Holding, Value Development Group, Jiasheng Consulting, Zhongxian Information, Xinhua Cattle, and Yulong Cattle;
	●	“PRC,” “China,” and “Chinese,” refer to the People’s Republic of China;
	●	“Renminbi” and “RMB” refer to the legal currency of China;
	●	“SEC” refers to the United States Securities and Exchange Commission;
	●	“Securities Act” refers to the Securities Act of 1933, as amended;
	●	“Yulong Cattle” refers to Shangzhi Yulong Cattle Co., Ltd., a PRC company;
	●	“U.S. dollars,” “dollars” and “$” refer to the legal currency of the United States;
	●	“Value Development Holding” refers to Value Development Holding Limited., a British Virgin Islands company;
	●	“Value Development Group” refers to Value Development Group Limited, a Hong Kong company;
	●	“Xinhua Cattle” refers to Heilongjiang Xinhua Cattle Industry Co., Ltd., a PRC company;
	●	“Yulong Cattle” refers to Shangzhi Yulong Cattle Co., Ltd., a PRC company; and
	●	“Zhongxian Information” refers to Heilongjiang Zhongxian Information Co., Ltd., a PRC company.

 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

The following unaudited interim financial statements of China Modern Agricultural Information, Inc. are included in this quarterly report on Form 10-Q:

 

China Modern Agricultural Information, Inc.

 

March 31, 2017 and 2016

 

Index to the Consolidated Financial Statements

 

		Page
Consolidated Balance Sheets at March 31, 2017 (unaudited) and June 30, 2016			1
Unaudited Consolidated Statements of Operations and Other Comprehensive Income (Loss) for the Three and Nine Months Ended March 31, 2017 and 2016			3
Unaudited Consolidated Statements of Change’s in Stockholders’ Equity for the Nine Months Ended March 31, 2017			6
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2017 and 2016			7
Notes to Unaudited Consolidated Financial Statements			9

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

CONSOLIDATED BALANCE SHEETS (IN U.S. $)

MARCH 31, 2017 AND June 30, 2016

 

ASSETS		March 31, 2017				June 30, 2016
		(Unaudited)
Current assets
Cash		$	36,957,482			$	30,780,198
Accounts receivable			24,697,889				24,783,720
Inventories			852,253				1,122,843
Prepaid expenses			710,043				1,216,963
Interest receivable			1,101,147				474,803
Notes receivable, current portion			3,859,089				2,097,363
Total current assets			68,177,903				60,475,890
Property, plant and equipment, net			33,720,556				34,327,757
Other assets
Notes receivable			17,247,903				4,943,622
Equipment deposits			1,715,082				-
Prepaid leases and construction			42,603,638				45,483,513
Biological assets, net			68,766,790				64,136,851
Total other assets			130,333,413				114,563,986
TOTAL ASSETS		$	232,231,872			$	209,367,633

 

See accompanying notes to the consolidated financial statements.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN U.S. $)

MARCH 31, 2017 AND JUNE 30, 2016

 

LIABILITIES AND stockholders’ EQUITY		March 31, 2017				June 30, 2016
		(Unaudited)
Current liabilities
Accrued expenses and other payables		$	458,429				528,430
Dividend payable			1,687,779				1,462,794
Stockholder loans			1,854,922				1,672,707
Total current liabilities			4,001,130				3,663,931
Deferred income taxes			39,414,937				40,876,903
Total liabilities			43,416,067				44,540,834
Commitments and contingencies
Stockholders’ equity
Common stock, $0.001 par value; 75,000,000 shares authorized; 53,100,000 shares issued and outstanding			53,100				53,100
Additional paid-in capital			49,709,237				49,709,237
Retained earnings			57,171,390				42,410,980
Statutory reserve fund			420,406				420,406
Other comprehensive (loss)			(12,470,295	)			(6,881,547	)
Sub-total			94,883,838				85,712,176
Noncontrolling interests			93,931,967				79,114,623
Total stockholders’ equity			188,815,805				164,826,799
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	232,231,872			$	209,367,633

 

See accompanying notes to the consolidated financial statements.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS) (IN U.S. $)

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2017 AND 2016 (UNAUDITED) (IN U.S. $)

 

		Three Months Ended March 31,								Nine Months Ended March 31,
		2017				2016				2017				2016
Revenues
Milk sales		$	24,571,384			$	21,492,079			$	75,854,589			$	56,576,754
Sales commission			4,775,473				4,844,348				13,108,802				15,051,808
Total revenues			29,346,857				26,336,427				88,963,391				71,628,562
Cost of goods sold			(17,920,642	)			(15,821,031	)			(55,481,417	)			(39,112,813	)
Gross profit			11,426,215				10,515,396				33,481,974				32,515,749
Operating expenses
Research and development			214,896				-				653,568				-
Selling and marketing			246,601				557,155				831,318				1,517,054
General and administrative			818,509				1,070,527				2,627,772				39,987,718
Total operating expenses			1,280,006				1,627,682				4,112,658				41,504,772
Operating income (loss)		$	10,146,209			$	8,887,714			$	29,369,316			$	(8,989,023	)

 

See accompanying notes to the consolidated financial statements.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS) (CONTINUED) (IN U.S. $)

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2017 AND 2016 (UNAUDITED) (IN U.S. $)

 

		Three Months Ended March 31,								Nine Months Ended March 31,
		2017				2016				2017				2016
Other income (expense)
Interest income on notes receivable		$	296,627			$	140,404			$	663,660			$	486,312
(Loss) gain on sale of cows			(396,452	)			-				1,193,809				(103,913	)
Other non-operating income			32,023				24,389				98,029				123,266
Total other (expenses) income			(67,802	)			164,793				1,955,498				505,665
Income (loss) before income taxes			10,078,407				9,052,507				31,324,814				(8,483,358	)
Provision for income taxes			-				-				-				2,415,816
Net income (loss) before noncontrolling interests			10,078,407				9,052,507				31,324,814				(10,899,174	)
Noncontrolling interests			(4,785,844	)			(5,637,682	)			(14,872,859	)			(12,771,911	)
Net income (loss) attributable to common stockholders		$	5,292,563			$	3,414,825			$	16,451,955			$	(23,671,085	)

 

See accompanying notes to the consolidated financial statements.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2017 AND 2016 (Unaudited) (IN U.S. $)

 

		Three Months Ended March 31,								Nine Months Ended March 31,
		2017				2016				2017				2016
Other comprehensive income (loss)
Foreign currency translation adjustment		$	1,899,898			$	1,029,227			$	(5,588,748	)		$	(6,556,665	)
Total comprehensive income (loss) before noncontrolling interests			11,978,305				10,081,734				25,736,066				(17,455,839	)
Comprehensive income attributable to noncontrolling interests			(4,785,844	)			(5,637,682	)			(14,872,859	)			(12,771,911	)
Net Comprehensive income attributable to common stockholders			7,192,461				4,444,052				10,863,207				(30,227,750	)
Earnings (loss) per common share, basic and diluted		$	0.10			$	0.06			$	0.31			$	(0.45	)
Weighted average shares outstanding, basic and diluted			53,100,000				53,100,000				53,100,000				53,100,000

 

See accompanying notes to the consolidated financial statements.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

CONSOLIDATED STATEMENTS OF changes in Stockholders’ EQUITY (IN U.S. $)

FOR THE Nine MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

		Common Stock				Additional Paid-in Capital				Retained Earnings				Statutory Reserve Fund				Noncontrolling Interests				Other Comprehensive (Loss)				Total
Balance, June 30, 2016		$	53,100			$	49,709,237			$	42,410,980			$	420,406			$	79,114,623			$	(6,881,547	)		$	164,826,799
Net income			-				-				16,451,955				-				14,872,859				-				31,324,814
Dividend declared											(1,691,545	)															(1,691,545	)
Profit contribution to minority shareholder			-				-				-				-				(55,515	)			-				(55,515	)
Other comprehensive (loss)			-				-				-				-				-				(5,588,748	)			(5,588,748	)
Balance March 31, 2017 (unaudited)		$	53,100			$	49,709,237			$	57,171,390			$	420,406			$	93,931,967			$	(12,470,295	)		$	188,815,805

 

See accompanying notes to the consolidated financial statements.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (IN U.S. $)

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND 2016

(UNAUDITED)

 

		2017				2016
Cash flows from operating activities
Net income (loss)		$	31,324,814			$	(10,899,174	)
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation			5,445,626				3,334,363
Amortization for prepaid land lease			1,271,289				1,348,534
Deferred income taxes			-				2,415,816
Loss (gain) from disposal from biological assets			(1,193,809	)			104,755
Stock compensation for shareholder and consultants			-				37,762,400
Change in operating assets and liabilities
(Increase) in accounts receivable			(859,458	)			(16,343,276	)
Decrease in inventories			270,590				63,563
Decrease in prepaid expenses			470,102				383,409
(Increase) in interest receivable			(652,636	)			(211,869	)
Increase in accrued expenses and other payables			58,595				6,036
Net cash provided by operating activities			36,135,113				17,964,557
Cash flows from investing activities
Collection of notes receivable			1,972,099				1,154,760
Proceeds from sales of biological assets			5,533,256				178,454
Purchase of property, plant and equipment			(2,442,342	)			(23,454,798	)
Increase in biological assets			(12,369,308	)			(13,176,885	)
Purchase of biological property			(17,664,000	)			(10,700,655	)
Equipment deposits			(1,740,552	)			(1,957,968	)
Net cash (used in) investing activities			(26,710,847	)			(47,957,092	)
Cash flows from financing activities
Proceeds from sales of common stock by subsidiary			-				13,021,267
Dividend payment of subsidiary			(1,397,543	)			-
Proceeds from stockholder loans			84,179				114,155
Net cash (used in) provided by financing activities			(1,313,364	)			13,135,422

 

See accompanying notes to the consolidated financial statements.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN U.S. $)

FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND 2016 (UNAUDITED)

 

		2017				2016
Effect of exchange rate changes on cash			(1,933,618	)			(2,043,572	)
Net (decrease) in cash			6,177,284				(18,900,685	)
Cash, beginning of year			30,780,198				54,145,781
Cash, end of year		$	36,957,482			$	35,245,096
Supplemental disclosure of cash flow information:
Cash paid for income taxes		$	-			$	-
Cash paid for interest		$	-			$	-
Supplemental disclosure of non-cash activities:
Payment of accrued expenses by shareholder		$	115,000			$	220,921
Construction in process transferred from prepayment		$	-			$	2,696,426
Construction in process not paid		$	-			$	249,206

 

See accompanying notes to the consolidated financial statements.

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

1.	ORGANIZATION

 

China Modern Agricultural Information, Inc. (the “Company”), formerly known as Trade Link Wholesalers, Inc. (“Trade Link”), was incorporated on December 22, 2008 under the laws of the State of Nevada. On April 4, 2011, the Board of Directors of Trade Link filed an amendment to the Certificate of Incorporation with the State of Nevada to effect the name change from Trade Link to China Modern Agricultural Information, Inc.

 

On January 28, 2011, Trade Link entered into a Share Exchange Agreement (the “Exchange Agreement”) by and among (i) Value Development Holdings, Ltd. (“Value Development”), a British Virgin Islands company, (“BVI”) (ii) Value Development’s stockholders, (iii) Trade Link, and (iv) Trade Link’s principal stockholders. Pursuant to the terms of the Exchange Agreement, Value Development and the Value Development stockholders transferred to Trade Link all of the shares of Value Development in exchange for the issuance of 35,998,000 shares of Trade Link’s common stock as set forth in the Exchange Agreement, so that the Value Development stockholders owned 87.80% of Trade Link’s outstanding shares (the “Share Exchange”).

 

On January 28, 2011, Value Development through its wholly subsidiaries, Value Development Group Limited completed the acquisition of Harbin Jiasheng Consulting Managerial Co. Ltd. (“Jiasheng Consulting” or “WFOE”), a holding company. Jiasheng Consulting has Variable Interest Entity (“VIE”) agreements with Mr. Liu Zhengxin, the Company’s Chief HR Officer, and Mr. Wang Youliang, the Company’s Chief Executive Officer, as well as with Heilongjiang Zhongxian Information Co., Ltd. (“Zhongxian Information”). Mr. Zhengxin holds a 62% equity interest in Zhongxian Information and Mr. Youliang holds a 38% equity interest in Zhongxian Information. Pursuant to the VIE agreement signed by Mr. Zhengxin and Mr. Youliang, Jiasheng Consulting now controls and performs all management responsibilities for Zhongxian Information. The contractual arrangements are comprised of a series of agreements, including a shareholder voting rights proxy agreement, exclusive consulting and service agreement, exclusive call option agreement and equity pledge agreement, through which Jiasheng Consulting has the right to provide exclusive and complete business support and technical and consulting services to Zhongxian Information for an annual fee in the amount of Zhongxian Information’s yearly net profits after tax. Additionally, Zhongxian Information’s stockholders have pledged their rights, title and equity interests in Zhongxian Information as security for the collection of consulting and service fees provided through the Equity Pledge Agreement.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

1.	ORGANIZATION (CONTINUED)

 

In order to further reinforce Jiasheng Consulting’s rights to control and operate Zhongxian Information, the stockholders of Zhongxian Information have granted Jiasheng Consulting the exclusive right and option to acquire all of their equity interests in Zhongxian Information through an Exclusive Option Agreement.

 

The exchange agreement transaction constituted a reverse takeover transaction. Accordingly, reverse takeover accounting was adopted for the preparation of the consolidated financial statements. As a result, the consolidated financial statements are issued under the name of China Modern Agricultural Information, Inc. (the legal acquirer), but are a continuation of the consolidated financial statements of Value Development (the accounting acquirer), its subsidiaries and its VIE, Zhongxian Information. Before and after the Share Exchange, Value Development, Value Development Group Limited (a wholly-owned subsidiary of Value Development), Jiasheng Consulting, Zhongxian Information and their 99% owned subsidiary, Heilongjiang Xinhua Cattle Industry Co., Ltd. (“Xinhua Cattle”) were under common control. Therefore, the reorganization was effectively a legal recapitalization accounted for as transactions between entities under common control at the carry over basis, in a manner similar to pooling-of-interests accounting.

 

Zhongxian Information and Xinhua Cattle are engaged in the acquisition, breeding and rearing of dairy cows, and production and sale of fresh milk to manufacturing and distribution companies. Zhongxian Information was established in China in January 2005 with registered capital of 10 million Renminbi (“RMB”). In February 2006, it acquired 99% of the registered capital of Xinhua Cattle, which was established in China in December 2005 with registered capital of three million RMB. Xinhua Cattle had no significant activities and its cost approximated the fair value at the date of acquisition.

 

On November 23, 2011, Zhongxian Information acquired 100% of the equity interest of Shangzhi Yulong Co., Ltd. (“Yulong”) from Yulong’s original stockholders for consideration of 9,000,000 shares of the Company’s common stock and cash consideration of $4,396,000.

 

Yulong was a privately held company in China engaged in the acquisition, breeding and rearing of dairy cows, and production and sale of fresh milk to manufacturing and distribution companies.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

1.	ORGANIZATION (CONTINUED)

 

Our corporate structure pre-resturcture is set forth below:

 

 

On July 16, 2015, the Company, transferred 100% of the issued and outstanding shares of Value Development Holdings, Ltd. (“Value Development”) to China Dairy Corporation Ltd. (“China Dairy,” a Hong Kong company), which is 60% owned indirectly by the Company through the Company’s wholly-owned subsidiary, Hope Diary Holdings Ltd. (“Hope Diary,” a British Virgin Islands company). China Dairy was newly incorporated in January 2015 and did not have any significant assets or liabilities, or business operations, which was 100% owned by Company’s PRC corporate advisor, who formed China Dairy on behalf of the Company. Further, the sole shareholder transferred 60% of the total outstanding shares of China Dairy to Hope Diary and 40% to various shareholders and consultants of the Company (as described below) for nominal consideration.

 

These transactions involved no consideration received or paid as Value Development and China Dairy are under common control by the Company and this transaction was a restriction to the Company’s interests in Value Development.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

1.	ORGANIZATION (CONTINUED)

 

The 40% of the 10,000 shares of China Dairy were transferred from the sole shareholder of China Dairy to the following entities for nominal consideration, which has direct or indirect relationship with the shareholder and consultants of the Company: 3% to Beijing Ruihua Future, 4% to Donghe Group, 3% to Integral Capital, 20% to Dingxi Shanghai Fund and 10% to Zhiyuan International. Immediately after the transfer, a stock split of 65,000 shares for each outstanding share were issued as follows:

 

			Original Shares				Shares after stock split
	Hope Diary Holdings Ltd.			6,000				390,000,000
	Beijing Ruihua Future Investment Management Co. Ltd.			300				19,500,000
	Donghe Group Limited			400				26,000,000
	Integral Capital Group Pty Ltd.			300				19,500,000
	Dingxi (Shanghai ) Equity Investment Fund			2,000				130,000,000
	Zhiyuan International Holding Co. Limited			1,000				65,000,000
	Total			10,000				650,000,000

 

Value Development is the sole owner of Value Development Group Limited, which is the sole owner of Harbin Jiasheng Consulting Managerial Co. Ltd., which is the Company’s subsidiary in China, with respect to which the operating company, Heilongjiang Zhongxian Information Co. Ltd., is a variable interest entity. The effect of this transaction was to reduce the interest of the Company in its operating company by 40%. The Company used China Dairy’s offering price for its Australia IPO to approximate the fair value of the 40% stock granted to the shareholder and consultants. The Company recognized stock compensation to the shareholder and consultants of approximately $32,098,000 and $5,664,000, respectively, during the three months ended September 30, 2015 in general and administrative expense.

 

On September 16, 2015 the Company’s 60%-owned subsidiary, Jiasheng Consulting exercised its option to purchase all of the registered equity of the Company’s operating subsidiary, Zhongxian Information from its stockholders Zhengxin Liu and Youliang Wang, who are also the members of the Company’s Board of Directors, for RMB10,000 (approximately $1,554).

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

1.	ORGANIZATION (CONTINUED)

 

Prior to the acquisition, Jiasheng Consulting controlled Zhongxian Information through a series of contractual agreements, which made Zhongxian Information a variable interest entity, the effect of which was to cause the balance sheet and operating results of Zhongxian Information to be consolidated with those of Jiasheng Consulting in the Company’s financial statements. As a result of the acquisition by Jiasheng Consulting of the registered ownership of Zhongxian Information, the balance sheet and operating results of Zhongxian Information will hereafter continue to be consolidated with those of Jiasheng Consulting as its 100% owned subsidiary.

 

On April 8, 2016, the Company’s 60% owned subsidiary, China Dairy Corporation Limited issued 84,906,541 CDI shares at AUD $0.20 per share in an IPO on the ASX and raised AUD $16,981,308 (USD $13,021,267). After the IPO, the Company’s ownership was diluted to 53.07%.

 

As a result of the entry into the foregoing agreements, the Company has a corporate structure as set forth below:

 

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Accounting and Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the financial statements of China Modern Agricultural Information, Inc. and its subsidiaries, Hope Dairy, China Dairy (Hope Dairy’s 53.07% owned subsidiary), and the following subsidiaries owned by China Dairy: Value Development, Value Development Group Limited, Jiasheng Consulting, and, Zhongxian Information and Zhongxian Information’s 99% owned subsidiary, Xinhua Cattle and its 100% owned subsidiary, Yulong. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The unaudited consolidated financial statements of the Company as of March 31, 2017 and for the three and nine months ended March 31, 2017 and 2016, have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the SEC which apply to interim financial statements.

 

Accordingly, they do not include all of the information and footnotes normally required by accounting principles generally accepted in the United States of America for annual financial statements. The interim consolidated financial information should be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company’s Form 10-K for the year ended June 30, 2016, previously filed with the SEC. In the opinion of management, the interim information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. The results of operations for the three and nine months ended March 31, 2017 are not necessarily indicative of the results to be expected for future quarters or for the year ending June 30, 2017.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Foreign Currency Translations

 

All Company assets are located in the People’s Republic of China (“PRC”). The functional currency for the majority of the Company’s operations is the Renminbi (“RMB”). The Company uses the United States dollar (“US Dollar” or “US$” or “$”) for financial reporting purposes. The consolidated financial statements of the Company have been translated into US dollars in accordance with FASB ASC 830, “Foreign Currency Matters.” All asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transactions occurred. Statements of income (loss) and other comprehensive income (loss) amounts have been translated using the average exchange rate for the periods presented. Adjustments resulting from the translation of the Company’s consolidated financial statements are recorded as other comprehensive income (“OCI”).

 

The exchange rates used to translate amounts in RMB and Australian dollars (the “AUS Dollar”,“AUD$” or “A$”) into US dollars for preparing the consolidated financial statements are as follows:

 

			March 31, 2017								June 30, 2016								March 31, 2016
			RMB				A$				RMB				A$				RMB				A$
	Balance sheet items, except for stockholders’ equity, as of period end			0.1451				0.7646				0.1505				0.7441				0.1550				0.7668
	Amounts included in the statements of income (loss), statement of changes in stockholders’ equity and statements of cash flows for the period			0.1472				0.7548				0.1554				0.7283				0.1561				0.7225

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Foreign Currency Translations (continued)

 

Foreign currency translation adjustments of $1,899,898 and $1,029,227, respectively, $(5,588,748) and $(6,556,665), respectively, for the three and nine months ended March 31, 2017 and 2016, have been reported as other comprehensive income (loss) in the consolidated statements of income and other comprehensive income (loss). Other comprehensive income (loss) of the Company consists entirely of foreign currency translation adjustments. Pursuant to ASC 740-30-25-17, “Exceptions to Comprehensive Recognition of Deferred Income Taxes,” the Company does not recognize deferred U.S. taxes related to the undistributed earnings of its foreign subsidiaries and, accordingly, recognizes no income tax expense or benefit from foreign currency translation adjustments.

 

Although government regulations now allow convertibility of the RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representations that the RMB could be converted into US dollars at that rate or any other rate.

 

The value of the RMB against the US dollar and the AUS dollar may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of the RMB could materially affect the Company’s consolidated financial condition in terms of US dollar reporting.

 

Revenue Recognition

 

The Company’s primary sources of revenues are derived from (a) sale of fresh milk to Chinese manufacturing and distribution companies of dairy products and (b) commissions from local farmers on their monthly milk sales. The Company’s revenue recognition policies comply with FASB ASC 605, “Revenue Recognition.” Revenues from the sale of goods are recognized when the goods are delivered and the title is transferred, the risks and rewards of ownership have been transferred to the customer, the price is fixed and determinable and collection of the related receivable is reasonably assured.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Revenue Recognition (continued)

 

Milk sales revenue is recognized when the title has been passed to the customers, which is when the milk is delivered to designated locations and accepted by the customers and the previously discussed requirements are met. Fresh milk is delivered on a daily basis. The customers’ acceptance occurs upon inspection of the quality and measurement of quantity at the time of delivery. The Company does not provide the customer with the right of return. Sales commission revenue is recognized on a monthly basis based on monthly sales reports received.

 

Vulnerability Due to Operations in PRC

 

The Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than twenty years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Fair Value of Financial Instruments

 

FASB ASC 820, “Fair Value Measurement” specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based on market data obtained from independent sources (observable inputs). In accordance with ASC 820, the following summarizes the fair value hierarchy:

 

	Level 1 Inputs –	Unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.
	Level 2 Inputs –	Inputs other than the quoted prices in active markets that are observable either directly or indirectly.
	Level 3 Inputs –	Inputs based on valuation techniques that are both unobservable and significant to the overall fair value measurements.

 

ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurements. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

 

The Company did not identify any assets or liabilities that are required to be presented at fair value on a recurring basis. Carrying values of non-derivative financial instruments, including cash, accounts receivable, interest receivable, notes receivable, prepayments, , equipment deposits, accrued expenses and other payables, dividend payable and stockholder loans, approximated their fair values due to the short maturity of these financial instruments. The carrying value of notes receivable is valued at their net realizable value which approximates the fair value. There were no changes in methods or assumptions during the periods presented.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Advertising Costs

 

Advertising costs are charged to operating when incurred. Advertising costs were $18,847 and $35,025, respectively, and $143,367 and $45,282, respectively, for the three and nine months ended March 31, 2017 and 2016.

 

Cash and Cash Equivalents

 

The Company considers all demand and time deposits and all highly liquid investments with an original maturity of three months or less to be cash equivalents.

 

Accounts Receivable

 

Accounts receivable is stated at cost, net of an allowance for doubtful accounts if required. Receivables outstanding longer than the payment terms are considered past due. The Company maintains an allowance for doubtful accounts for estimated losses when necessary resulting from the failure of customers to make required payments. The Company reviews the accounts receivable on a periodic basis and makes allowances where there is doubt as to the collectability of individual balances.

 

In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, the customer’s payment history, its current credit-worthiness and current economic trends. The Company has 60 days’ credit terms for its milk sales and usually receives the payment in the following month.    The Company considers all accounts receivable at March 31, 2017 and June 30, 2016, to be fully collectible and, therefore, did not provide an allowance for doubtful accounts. For the periods presented, the Company did not write off any accounts receivable as bad debts.

 

Inventories

 

Inventories, comprised principally of livestock feed, are valued at the lower of cost or market value. The value of inventories is determined using the weighted average cost method.

 

The Company estimates an inventory allowance for excessive or unusable inventories. Inventory amounts are reported net of such allowances if any. There was no allowance for excessive or unusable inventories as of March 31, 2017 and June 30, 2016.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Prepaid Expenses and Equipment Deposits

 

Prepaid expenses as of March 31, 2017 and June 30, 2016 mainly represent the prepayments of approximately $644,000and $1,217,000, respectively for prepaid cow insurance expense. Prepaid expenses as of March 31, 2017 also included the prepayment of approximately $66,000 for prepaid heating expenses. Equipment deposits as of March 31, 2017 represents the down payment for the purchase of machine of approximately $1,643,000 and the advance for construction of approximately $72,000, respectively..

 

Prepaid Leases

 

Prepaid leases represent the prepayment for grassland rental (see Note 7).

 

Property, Plant and Equipment

 

Property, plant and equipment are recorded at cost, less accumulated depreciation. Cost includes the price paid to acquire or construct the asset, including capitalized interest during the construction period, and any expenditures that substantially increase the assets value or extends the useful life of an existing asset. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the periods benefited. Maintenance and repairs are generally expensed as incurred.

 

The estimated useful lives for property, plant and equipment categories are as follows:

 

	Machinery and equipment	3 to 10 years
	Automobiles	4 to 10 years
	Building and building improvements	10 to 20 years

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Impairment of Long-lived Assets

 

The Company utilizes FASB ASC 360, “Property, Plant and Equipment” (“ASC 360”), which addresses the financial accounting and reporting for the recognition and measurement of impairment losses for long-lived assets. In accordance with ASC 360, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company may recognize an impairment of a long-lived asset in the event the net book value of such asset exceeds the estimated future undiscounted cash flows attributable to the asset. No impairment of long-lived assets was recognized for the three and nine months ended March 31, 2017 and 2016.

 

Biological Assets

 

Biological assets consist of dairy cows for milking purposes and breeding.

 

Immature Biological Assets

 

Immature biological assets are recorded at cost, including acquisition costs, transportation costs, insurance, and feeding costs, incurred in raising the cows. Once the cow is able to produce milk, the cost of the immature biological asset is transferred to mature biological assets using the weighted average cost method.

 

Mature Biological Assets

 

Mature biological assets are recorded at their original purchase price or the weighted average immature biological asset transfer cost. Depreciation is provided over the estimated useful life of eight years using the straight-line method. The estimated residual value is 10%. Feeding and management costs incurred on mature biological assets are included as cost of goods sold. When biological assets, including male cows, are retired or otherwise disposed of in the normal course of business, the cost and accumulated depreciation will be removed from the accounts and any resulting gain or loss will be included in the results of operations for the respective period.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Biological Assets (continued)

 

The Company reviews the carrying value of its biological assets for impairment at least annually or whenever events and circumstances indicate that their carrying value may not be recoverable from the estimated future cash flows expected from their use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss will be recognized equal to an amount by which the carrying value exceeds the fair value of the asset. The factors considered by management in performing this assessment include current health status and production capacity. There were no impairment losses recorded during the three and nine months ended March 31, 2017 and 2016.

 

Income Taxes

 

The Company accounts for income taxes in accordance with FASB ASC 740, “Income Taxes” (“ASC 740”), which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. The differences relate principally to the undistributed earnings of the Company’s subsidiary under PRC law. Deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. At March 31, 2017 and June 30, 2016, undistributed earnings allocated to Zhongxian Information were approximately $214,100,000 and $192,800,000, respectively.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Income Taxes (Continued)

 

ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with uncertain tax positions. As of March 31, 2017 and June 30, 2016, the Company does not have a liability for any uncertain tax positions.

 

The income tax laws of various jurisdictions in which the Company and its subsidiaries operate are summarized as follows:

 

United States

 

The Company is subject to United States tax at graduated rates from 15% to 35%. No provision for income tax in the United States has been made as the Company had no U.S. taxable income for the three and nine months ended March 31, 2017 and 2016.

 

BVI

 

Value Development and Hope Diary are incorporated in the BVI and are governed by the income tax laws of the BVI. According to current BVI income tax law, the applicable income tax rate for the Company is 0%.

 

Hong Kong

 

Value Development Group Limited and China Dairy are incorporated in Hong Kong. Pursuant to the income tax laws of Hong Kong, the Company is not subject to tax on non-Hong Kong source income.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Income Taxes (Continued)

 

PRC

 

Xinhua Cattle and Yulong are entitled to a tax exemption for the full Enterprise Income Tax in China due to a government tax preferential policy for the dairy farming industry. In January 2015, Zhongxian obtained an income tax exemption notice from the tax authority to exempt the income tax on its investment income from its subsidiaries Xinhua Cattle and Yulong.

 

Net Income (Loss) Per Share

 

The Company computes net income (loss) per common share in accordance with FASB ASC 260, “Earnings Per Share” (“ASC 260”). Under the provisions of ASC 260, basic net income (loss) per common share is computed by dividing the amount available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted income per common share is computed by dividing the amount available to common stockholders by the weighted average number of shares of common stock outstanding plus the effect of any dilutive shares outstanding during the period. Accordingly, the number of weighted average shares outstanding as well as the amount of net income per share are presented for basic and diluted per share calculations for all periods reflected in the accompanying consolidated statements of income and other comprehensive income. There were no dilutive shares outstanding during the three and nine months ended March 31, 2017 and 2016.

 

Statutory Reserve Fund

 

Pursuant to the corporate law of the PRC, Jiasheng Consulting, Zhongxian Information and its two subsidiaries are required to transfer 10% of their net income, as determined under PRC accounting rules and regulations, to a statutory reserve fund until such reserve balance reaches 50% of its registered capital. The statutory reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or used to increase registered capital, provided that the remaining reserve balance after such use is not less than 25% of the registered capital. As of March 31, 2017 and June 30, 2016, the required statutory reserves have been fully funded.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

RECLASSIFICATION

 

Certain amounts in the previous periods presented have been reclassified to conform to the current year financial statement presentation.

 

3.	RECENTLY ISSUED ACCOUNTING STANDARDS

 

In August 2016, the FASB issued new guidance which clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company is evaluating the impact of adopting this new accounting guidance on our consolidated financial statements.

 

In June 2016, the FASB issued new authoritative accounting guidance on credit losses on financial instruments which replaces the incurred-loss impairment methodology. The new guidance requires immediate recognition of estimated credit losses expected to occur for most financial assets and certain other instruments. The standard is effective for the Company in the first quarter of 2020; however early adoption is permitted beginning in the first quarter of 2019. The Company is currently evaluating whether this standard will have a material impact on its financial statements.

 

In April 2016, the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers. In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606).'' This guidance supersedes current guidance on revenue recognition in Topic 605, "Revenue Recognition.'' In addition, there are disclosure requirements related to the nature, amount, timing, and uncertainty of revenue recognition. In August 2015, the FASB issued ASU No.2015-14 to defer the effective date of ASU No. 2014-09 for all entities by one year. For public business entities that follow U.S. GAAP, the deferral results in the new revenue standard are being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted for interim and annual periods beginning after December 15, 2016. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

3.	RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at or entered into after, the beginning of the earliest comparative

 

period presented in the financial statements, with certain practical expedients available. This accounting standard update is not expected to have a material impact on the Company’s financial statements.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The update to the standard is effective for the Company beginning June 1, 2018. The Company is currently evaluating the effect the guidance will have on the Consolidated Financial Statements.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

4.	PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment are summarized as follows:

 

			March 31, 2017				June 30, 2016
			(Unaudited)
	Machinery and equipment		$	3,728,329			$	3,866,619
	Automobiles			2,173,224				2,253,832
	Building and building improvements			25,905,129				26,865,993
				31,806,682				32,986,444
	Less: accumulated depreciation			(5,021,761	)			(3,354,779	)
	Construction in process			6,935,635				4,696,092
	Property, plant and equipment, net		$	33,720,556			$	34,327,757

 

Construction in Progress (“CIP”) contains amounts paid and accrued for completed new construction which has not been placed into service as of March 31, 2017 and June 30, 2016. No depreciation has been taken on CIP as of March 31, 2017 and June 30, 2016. Depreciation expense charged to operations for the three and nine months ended March 31, 2017 and 2016 were $596,036 and $581,328, respectively, and $1,852,380 and $1,339,239, respectively.

 

On January 20, 2016, the Company signed an agreement with Harbin Dongan Architecture Co., Ltd to construct a new forage production plant. The total agreement amount is RMB 45,615,000 (US$ 6,568,560). As of March 31, 2017 and June 30, 2016, the Company paid RMB 48,295,000 (US$ 6,935,635) and RMB 28,321,000 (US$ 4,261,801), respectively. As of March 31, 2017, all payments have been made.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

5.	BIOLOGICAL ASSETS

 

Biological assets consist of the following:

 

			March 31, 2017				June 30, 2016
			(Unaudited)
	Immature biological assets		$	34,198,674			$	32,518,050
	Mature biological assets			40,826,478				36,660,416
				75,025,152				69,178,466
	Less: accumulated depreciation			(6,258,362	)			(5,041,615	)
	Biological assets, net		$	68,766,790			$	64,136,851

 

On November 1, 2016, Xinhua Cattle purchased 3,000 adult cows at a total price of RMB 45,000,000 (US $6,480,000).

 

Xinhua Cattle sold a total of 5,070 female calves to outside parties at a total price of RMB 22,273,500 (US $3,278,659) in the nine months ended March 31, 2017. The net value of these female calves was approximately RMB 31,103,000 (US $4,578,000).  

 

On November 1, 2016, Xinhua Cattle sold 2,000 newly purchased adult cows to 6 local farmers at a total price of RMB 34,000,000 (US $5,004,800) with a net value of RMB 30,000,000 (US $4,416,000). On November 3, 2016, Xinhua Cattle sold 2,000 adult cows to another 6 local farmers at a total price of RMB 24,000,000 (US $3,532,800) with a net residual value of RMB 14,609,375 (US $2,150,500). On December 1, 2016, Xinhua Cattle sold 130 adult cows to one local farmer at a total price of RMB 1,040,000 (US $153,088) with a net residual value of RMB 704,556 (US $103,711). Local farmers started to pay principal payment for the above disposal in the three months ended March 31, 2017. On November 4, 2016, Xinhua Cattle also sold 1,542 adult cows to an outside party at a total price of RMB 6,915,550 (US $1,017,969) with a net residual value of RMB 7,705,937 (US $1,134,314).

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

5.	BIOLOGICAL ASSETS (CONTINUED)

 

On November 2, 2016, Yulong Cattle purchased 5,000 adult cows at a total price of RMB 75,000,000 (US $10,882,500).

 

Yulong Cattle sold 1,657 female calves to outside parties at a total price of RMB 7,272,000 (US $1,070,438) in the nine months ended March 31, 2017. The net value of these female calves was approximately RMB 6,884,000 (US $1,013,000).

 

On November 1, 2016, Yulong Cattle sold 2,317 adult cows to 8 local farmers at a total price of RMB 19,033,000 (US $2,801,658) with a net value of RMB 17,724,914 (US $2,609,107). On November 2, 2016, Yulong Cattle sold 2,000 new purchased adult cows to another 8 local farmers at a total price of RMB 34,000,000 (US $5,004,800) with a net residual value of RMB 30,000,000 (US $4,416,000). Local farmers started to pay principle payment for the above disposal sinche the three months ended March 31, 2017. On November 2, 2016, Yulong Cattle sold 142 adult cows to an outside party at a total price of RMB 994,000 (US $146,317) with a net residual value of RMB 1,114,344 (US $164,031).

 

Depreciation expense for the three and nine months ended March 31, 2017 and 2016 was $1,121,171 and $982,220, respectively, and $3,593,246 and $2,200,288, respectively, all of which was included in cost of goods sold in the consolidated statements of operations and other comprehensive income (loss).

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

6.	NOTES RECEIVABLE

 

Notes receivable are related to sales of cows (mature biological assets) to local farmers.

 

In December 2016, November 2016, September 2011, August 2011 and June 2011, Xinhua Cattle sold 130, 4,000, 3,787, 5,635, and 2,000 respectively of its cows to local farmers. 2,000 of the cows sold were purchased from outside parties for $4,446,000. The remaining cows sold were raised by Xinhua.

 

In November 2016, November 2014 and December 2014, Yulong sold 4,317, 3,714 and 2,955 cows respectively, to local farmers. 5,500 of the cows sold were purchased from outside parties for $8,996,000. The remaining cows sold were raised by Yulong.

 

The company had agreements with local farmers entered into June 2011, for their purchase of cows to be collected over five years, with a minimum payment of 20% of the sales price to be paid each year. The notes were recorded at their present value with a discount rate of 12%, which was commensurate with interest rates for notes with similar risk. The Company also entered into agreements with these local farmers for a 30% commission of their monthly milk sales generated by the cows sold in exchange for the Company’s assistance in arranging for the sale of the milk. As of March 31, 2017, the farmers had fully repaid the principal payments.

 

Pursuant to agreements for the sale of cows signed in August 2011, September 2011, November 2014, and December 2014, the sales price will be collected in monthly installments plus interest at 7% on the outstanding balance, over the remaining useful lives of the cows, which range from one to eight years. Local farmers are required to pay 30% of monthly milk sales generated from the cows purchased by the farmers. The 30% monthly payments are to be applied first to the monthly installment of principal for the cows sold and the balance as commission income for the Company’s assistance in arranging for the sale of the milk. While the 30% rate and the amount applied to monthly installments for the purchase price of the cows remain the same, the amount of sales commission income will vary depending on total monthly milk sales and the progress of repayments towards the purchase price.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

6.	NOTES RECEIVABLE (CONTINUED)

 

Pursuant to the agreements signed in November 2016 and December 2016, the sales price will be collected in monthly installments plus interest at 5% on the outstanding balance, over the remaining useful lives of the cows, which range from one to eight years. Local farmers are required to pay a 20% of monthly milk sales generated from the cows sold. The 20% monthly payments are to be applied first to the monthly installment of principal for the cows sold and the balance as commission income for the Company’s assistance in arranging for the sale of the milk. While the 20% rate and the amount applied to monthly installments for the purchase price of the cows remain the same, the amount of sales commission income will vary depending on total monthly milk sales and the progress of repayments towards the purchase price.

 

During the three and nine months ended March 31, 2017 and 2016, the Company received principal and interest payments of $828,097 and $464,590, respectively, $1,983,108 and $1,683,445, respectively. Commission income for the three and nine months ended March 31, 2017 and 2016, was $4,775,473 and $4,844,348, respectively, and $13,108,802 and $15,051,808, respectively, under these agreements.

 

Notes receivable at March 31, 2017 and June 30, 2016 consists of the following:

 

			March 31, 2017				June 30, 2016
			(Unaudited)
	Notes receivable		$	21,106,992			$	7,052,255
	Less: discount for interest			-				(11,270	)
				21,106,992				7,040,985
	Less: current portion			(3,859,089	)			(2,097,363	)
	Non-current portion		$	17,247,903			$	4,943,622

 

The related commission receivable of $7,221,278 and $6,962,080 at March 31, 2017 and June 30, 2016, respectively, is included in accounts receivable in the consolidated balance sheets.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

6.	NOTES RECEIVABLE (CONTINUED)

 

Future maturities of notes receivable as of March 31, 2017 are as follows:

 

	Year Ending June 30,
	2017		$	906,000
	2018			3,859,000
	2019			3,468,000
	2020			2,793,000
	2021			2,709,000
	Thereafter			7,372,000
			$	21,107,000

  

The Company considers these notes to be fully collectible and, therefore, did not provide an allowance for doubtful accounts. The Company will continue to review the notes receivable on a periodic basis and where there is doubt as to the collectability of individual balances, it will provide an allowance, if necessary.

 

7.

LEASES

 

All land in China is government owned and cannot be sold to any individual or company. The Company obtained a “land use right” for a track of land of 250,000 square meters at no cost through December 1, 2015. On May 10, 2013, the Company entered into an agreement with the municipality of Qiqihaer for the “land use right” from May 1, 2013 to April 30, 2063. The Company recorded the prepayment of RMB 37,500,000 (US$6,060,000) as prepaid land lease. The prepaid lease is being amortized over the land use term of 50 years using the straight-line method. The unamortized balance of $5,015,019 and $5,285,680 is included in prepaid land lease in the consolidated balance sheets as of March 31, 2017 and June 30, 2016, respectively. The lease provides for renewal options.

 

On October 9, 2011, the Company entered into an operating lease, from October 9, 2011 to October 8, 2021, with the municipality of Heilongjiang to lease 16,666,750 square meters of land. The lease required the Company to prepay the ten-year rental of RMB 30,000,000 (US$4,686,000). The unamortized balance of $1,958,850 and $2,370,092 is included in prepaid land lease in the consolidated balance sheets as of March 31, 2017 and June 30, 2016, respectively. The lease provides for renewal options.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

7.	LEASES (CONTINUED)

 

On February 25, 2013, the Company obtained another “land use right” for 427,572 square meters of land, from March 1, 2013 to February 28, 2063. The Company recorded the prepayment of RMB 77,040,000 (US$12,450,000) as prepaid land lease. The prepaid lease is being amortized over the land use term of 50 years using the straight-line method.  The unamortized balance of $10,265,593 and $10,820,258 is included in prepaid land lease in the consolidated balance sheets as of March 31, 2017 and June 30, 2016, respectively. The lease provides for renewal options.

 

On May 7, 2015, the Company obtained another “land use right” for 250,000 square meters of land, from May 7, 2015 to May 6, 2045. In addition, the Company also leased buildings on the land which includes cowsheds, an office building and a flat building. The lease period for these buildings is the same as the land. The Company recorded the prepayment of RMB 74,847,600 (US$12,058,000) as prepaid leases. The prepaid lease is being amortized over the lease term of 30 years using the straight-line method. The unamortized balance of $10,166,529 and $10,825,203 is included in prepaid leases in the consolidated balance sheets as of March 31, 2017 and June 30, 2016, respectively.

 

On May 14, 2015, the Company obtained another “land use right” for 283,335 square meters of land, from May 14, 2015 to May 13, 2045. In addition, the Company also leased buildings on the land which includes cowsheds, an office building and a flat building. The lease period for buildings is the same as the land. The Company recorded the prepayment of RMB 111,887,500 (US$18,260,000) as prepaid leases. The prepaid lease is being amortized over the lease term of 30 years using the straight-line method. The unamortized balance of $15,197,648 and $16,182,280 is included in prepaid leases in the consolidated balance sheets as of March 31, 2017 and June 30, 2016, respectively.

 

Rent expense charged to operations for the three and nine months ended March 31, 2017 and 2016 was $418,006 and $439,977, respectively, $1,271,290 and $1,348,534, respectively.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

8.	EMPLOYMENT AGREEMENTS

 

The Company had Employment Agreements with its executive officers and directors for a one-year period with renewal options after expiration, with the current agreements expiring in June and August, 2017. For the three and nine months ended March 31, 2017 and 2016, compensation under these agreements was $70,326 and $19,262, respectively, and $206,322 and $58,502, respectively.

 

At March 31, 2017, the future commitment under these agreements is approximately $63,000.

 

9.	RELATED PARTY TRANSACTIONS

 

In July 2016, Xinhua Cattle contributed net profit of $6,225,856 and $99,923, respectively, to Zhongxian Information and the 1% owned minority shareholder. The total represents the net profit of Xinhua Cattle for the years ended June 30, 2008 and 2007.

 

In March 2015, Zhongxian Information and the Executive Chairman of the Company entered into a loan agreement pursuant to which the Executive Chairman provides a loan facility to Zhongxian Information, which is non-interest bearing and due on demand. The maximum amount of the loan is RMB 50,000,000 (US $7,845,000). The loans outstanding were $1,854,922 and $1,672,707 as of March 31, 2017 and June 30, 2016, respectively.

 

In 2012, CMCI issued 9,000,000 shares of common stock, valued at $0.34 per share, for a total of RMB 19,428,571 (US $3,060,000) to the shareholder of Yulong on behalf Zhongxian Information for the acquisition of Yulong. Zhongxian Information recorded the value of these shares as due to CMCI. China Dairy paid CMCI on June 29, 2016.

 

10.	INTERIM DIVIDEND

 

In July 2016, the Company paid the dividend declared at AUD $0.0057 per share, total of AUD $1,965,967 (approximately US $1,398,000) to its minority shareholders.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

11.	INCOME TAXES

 

The provision for income taxes consisted of the following for the three and nine months ended March 31:

 

			Three Months Ended March 31,								Nine Months Ended March 31,
			2017				2016				2017				2016
			(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
	Current		$	-			$	-			$	-			$	-
	Deferred			-				-				-				2,415,816
			$	-			$	-			$	-			$	2,415,816

 

The following table reconciles the effective income tax rates with the statutory rates for the nine months ended March 31:

 

			2017				2016
			(Unaudited)				(Unaudited)
	Statutory rate			25.00	%			25.00	%
	Allowance			0.08	%			0.32	%
	Other			(25.08	)%			(53.80	)%
	Effective income tax rate			-				(28.48	)%

 

Deferred tax assets and liabilities are recognized for expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effects for the year in which the differences are expected to reverse.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

11.	INCOME TAXES (CONTINUED)

 

The tax laws of China permit the carry forward of net operating losses for a period of five years. Undistributed earnings from Xinhua Cattle and Yulong are not taxable until such earnings are actually distributed to Jiasheng Consulting. A deferred tax liability was provided for the tax to be paid when these earnings are distributed. On September 16, 2015 due to the termination of VIE structure, Jiasheng Consulting would not be taxable in the future undistributed earnings from Xinhua Cattle and Yulong under the Enterprise Income Tax Law that a Chinese resident enterprise has an exemption of dividend income received from another Chinese resident enterprise.

 

Deferred tax assets (liabilities) are comprised of the following:

 

			March 31, 2017				June 30, 2016
			(Unaudited)
	Net operating loss carryforwards		$	504,380			$	497,542
	Bargain purchase gain			(1,430,399	)			(1,430,399	)
	Undistributed earnings of subsidiaries under PRC law upon VIE structure terminated			(37,984,538	)			(39,446,504	)
				(38,910,557	)			(40,379,361	)
	Less valuation allowance			(504,380	)			(497,542	)
	Net deferred tax (liabilities)		$	(39,414,937	)		$	(40,876,903	)

 

At March 31, 2017 and June 30, 2016, Zhongxian Information had unused operating loss carry-forwards of approximately $2,018,000 and $1,990,000, respectively, expiring in various years through 2020. The Company has established a valuation allowance of approximately $504,000 and $498,000 against the deferred tax asset related to the net operating loss carry forward at March 31, 2017 and June 30, 2016, due to the uncertainty of realizing the benefit.

 

The Company’s tax filings are subject to examination by the tax authorities. The tax years from 2009 to 2015 remain open to examination by tax authorities in the PRC. The Company’s U.S. tax returns are subject to examination by the tax authorities for tax years 2014, 2015 and 2016.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

12.	CONCENTRATION OF CREDIT RISK

 

Substantially all of the Company’s bank accounts are located in The People’s Republic of China and are not covered by protection similar to that provided by the FDIC on funds held in United States banks.

 

In November 2015, the Company entered milk sale agreements with another three customers and terminated the contracts with the original four customers. In February 2016, the Company entered into a new milk sale agreement with one customer after terminating the contract with the original customer.

 

Three customers accounted for approximately 98% and 97% of milk sales for the three months ended March 31, 2017 and 2016, respectively. Three customers accounted for approximately 98% and four customers accounted for approximately 70% of milk sales for the nine months ended March 31, 2017 and 2016, respectively. Three customers also accounted for approximately 70% and 71% of accounts receivable at March 31, 2017 and June 30, 2016, respectively.

 

Eighty-seven farmers and seventy-six farmers accounted for the notes receivable at March 31, 2017 and June 30, 2016, respectively.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

13.	PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

 

The following is the condensed financial information of China Modern Agricultural Information, Inc. only, the US parent’s, balance sheet as of June 30, 2016, and the statements of income and statements of cash flows for the year ended June 30, 2016:

 

Condensed Balance Sheet

 

	ASSETS		June 30, 2016
	Stockholder loans		$	3,067,131
	Investment in subsidiaries			90,778,893
	TOTAL ASSETS		$	93,846,024
	LIABILITIES AND stockholders’ EQUITY
	Stockholder loans		$	1,672,707
	Stockholders’ equity:
	Common stock, $0.001 par value; 75,000,000 shares authorized; 53,100,000 shares issued and outstanding			53,100
	Additional paid-in capital			49,709,237
	Retained earnings			42,410,980
	TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	93,846,024

 

Condensed Statement of Income

 

			For The Year Ended June 30,
			2016
	Revenues:
	Share of earnings from investment in   subsidiaries and VIE		$	18,935,506
	Operating expenses:
	General and administrative			37,781,000
	Net (loss)		$	(18,845,494	)

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

13.	PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (CONTINUED)

 

Condensed Statement of Cash Flows

 

			For the year ended June 30,
			2016
	Cash flows from operating activities
	Net (loss)		$	(18,845,494	)
	Adjustments to reconcile net income to net cash provided by (used in) operating activities
	Share of earnings from investment in subsidiaries and VIE			(18,935,506	)
	Stock compensation for shareholder and consultants			37,781,000
	Decrease in loan receivable			3,208,151
	Net cash provided by operating activities			3,208,151
	Effect of exchange rate changes on cash			(141,020	)
	Net change in cash			3,067,131
	Cash, beginning of period			-
	Cash, end of period		$	3,067,131

 

Basis of Presentation

 

The Company records its investment in its subsidiaries under the equity method of accounting. Such investments are presented as “Investment in subsidiaries” on the condensed balance sheet and the subsidiaries and VIE profits upon September 16, 2015 (the date of VIE structure dissolved - Note 1)) are presented as “Share of earnings from the investment in subsidiaries” in the condensed statement of income.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

13.	PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (CONTINUED)

 

Basis of Presentation (continued)

 

Certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted. The parent-only financial information has been derived from the Company’s consolidated financial statements and should be read in conjunction with the Company’s consolidated financial statements.

 

There were no cash transactions in the US parent company during the year ended June 30, 2016.

 

Restricted Net Assets

 

Under PRC laws and regulations, the Company’s PRC subsidiaries are restricted in their ability to transfer certain of their net assets to the Company in the form of dividend payments, loans or advances. The restricted net assets of the Company’s PRC subsidiaries were $ 92,173,317 as of June 30, 2016.

 

The Company’s operations and revenues are conducted and generated in the PRC, and all of the Company’s revenues being earned and currency received are denominated in RMB. RMB is subject to the foreign exchange control regulation in China, and, as a result, the Company may be unable to distribute any dividends outside of China due to PRC foreign exchange control regulations that restrict the Company’s ability to convert RMB into US Dollars.

 

 

China Modern Agricultural Information, Inc.

and subsidiaries

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. $)

FOR THE THREE and NINE MONTHS ended MARCH 31, 2017 AND 2016

(UNAUDITED)

 

13.	PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (CONTINUED)

 

Restricted Net Assets (continued)

 

Schedule I of Article 5-04 of Regulation S-X requires the condensed financial information of the parent company to be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above test, restricted net assets of consolidated subsidiaries shall mean that amount of the Company’s proportionate share of net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company by its subsidiaries in the form of loans, ds or cash dividends without the consent of a third party. The condensed parent company only financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of the Company’s PRC subsidiaries exceed 25% of the consolidated net assets of the Company.

 

14.	SUBSEQUENT EVENT

 

On March 31, 2017, the Company’s subsidiary declared the dividends at AUD $0.0064 per share, total of AUD $4,703,402 to all its shareholders and fully paid in April 21, 2017. 

 

In April, 7 2017, Xinhua Cattle contributed the net profit of $3,436,497 and $34,712, respectively, to Zhongxian Information and the 1% owned minority shareholder. The total represents the net profit of Xinhua Cattle for the years ended June 30, 2016.

 

 

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

 

The following discussion and analysis of the results of operations and financial condition of the Company for the periods ended March 31, 2017 and 2016. Such discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Quarterly Report.

 

Overview

 

We are a leading producer and distributor of raw fresh milk in China. We have two operating entities with an aggregate fresh milk production capacity of approximately 495 tons per day. We also have 86 exclusive individual partners on March 31, 2017 with an aggregate fresh milk production capacity of approximately 417 tons per day. We have four major customers, one of which is the leading dairy company in China. During the three months ended December 31, 2015, we terminated the contracts with certain customers and entered into contracts with four new customers. 

 

We were incorporated on December 22, 2008 under the laws of the State of Nevada.  We were formerly known as Trade Link. On April 4, 2011, the Board of Directors of Trade Link filed an amendment to the Certificate of Incorporation with the State of Nevada and changed our name from Trade Link to China Modern Agricultural Information, Inc.  

 

On January 28, 2011, we entered into a share exchange agreement by and among (i) Value Development Holding Limited, a British Virgin Islands company (“Value Development”), (ii) Value Development’s shareholders, (iii) us, and (iv) our former principal stockholders. Pursuant to the terms of the agreement, Value Development’s shareholders transferred to us all of the shares of Value Development in exchange for the issuance of 35,998,000 shares of our common stock. The shares issued to Value Development’s shareholders in the Securities Exchange constituted approximately 87.80% of our issued and outstanding shares of common stock as of and immediately after the consummation of the Securities Exchange. As a result of the Securities Exchange, Value Development became our wholly owned subsidiary and Value Development’s former principal shareholders became our principal shareholders.

 

On January 28, 2011, Value Development completed the acquisition of Jiasheng Consulting Managerial Co., Ltd., a PRC company (“Jiasheng Consulting”).  Jiasheng Consulting entered into a series of contractual agreements with Heilongjiang Zhongxian Information Co., Ltd., a PRC company (“Zhongxian Information”), Mr. Zhengxin Liu, our Chief Human Resource Officer and holder of 62% the of equity interest in Zhongxian Information, and Mr. Youliang Wang, our Chief Executive Officer and holder of 38% of the equity interest of Zhongxian Information. Pursuant to the contractual arrangements, Jiasheng Consulting controls all managerial power of Zhongxian Information.    The contractual arrangements include a shareholder voting rights proxy agreement, exclusive consulting and services agreement, exclusive call option agreement and equity pledge agreement, pursuant to which, Jiasheng Consulting shall provide exclusive and complete business support and technical and consulting service to Zhongxian Information in exchange for an annual fee in the amount of Zhongxian Information’s yearly net profits after tax, and Zhongxian Information’s stockholders pledged their rights, title and equity interest in Zhongxian Information as security for the collection of such consulting and service fees provided in the equity pledge agreement.

 

Zhongxian Information was incorporated in China in January 2005 with registered capital of RMB 10,000,000 or $1,206,800 US Dollars.  In February 2006, it acquired 99% of the registered capital of Heilongjiang Xinhua Cattle Industry Co., Ltd., a PRC company (“Xinhua Cattle”), which was incorporated in China in December 2005 with registered capital of RMB 3,000,000 or $371,580 US Dollars. Xinhua Cattle is located in Qiqihar, Heilongjiang Province, in northeast China and is a livestock company that engages in cow breeding and fresh milk production and distribution.

 

 

On November 23, 2011, Zhongxian Information acquired 100% of the equity interest of Shangzhi Yulong Cattle Co., Ltd., a PRC company (“Yulong Cattle”), in exchange for (i) issuance of 9,000,000 shares of our common stock, and (ii) a cash payment of $4,396,000, to Yulong Cattle’s former shareholders. Yulong Cattle was incorporated on December 4, 2007 under the laws of the PRC. Yulong Cattle, located in Harbin, Heilongjiang, in northeast China, is a livestock company that engages in cow breeding and fresh milk distribution, and primarily generates its revenue from the sale of fresh milk.

 

On July 16, 2015, we transferred 100% of the issued and outstanding shares of Value Development to China Dairy Corporation Ltd., a Hong Kong company (“China Dairy”), which is 60% owned indirectly by the Company through the Company’s wholly-owned subsidiary, Hope Diary Holdings Ltd., a British Virgin Islands company (“Hope Diary”). These transactions involve no consideration received or paid as Value Development and China Dairy are under common control with us and this transaction is a restriction to our interests in Value Development.

 

China Dairy was newly incorporated in January 2015 and did not have any significant assets or liabilities, or business operations, which is 100% owned by Company’s PRC corporate advisor. Further, the sole shareholder transferred the 10,000 shares of China Dairy to Value Development 60% and various shareholder and consultants of the Company 40% at HK$1.00 per share.

 

The 40% of the 10,000 shares of China Dairy were transferred from the sole shareholder of China Dairy to the following entities at HK$1.00 per share, which has direct or indirect relationship with the shareholder and consultants of the Company: 3% to Beijing Ruihua Future, 4% to Donghe Group, 3% to Integral Capital, 20% to Dingxi Shanghai Fund and 10% to Zhiyuan International. Immediately after the transfer, 65,000 bonus shares were issued at no consideration for every existing share.

 

Value Development is the sole shareholder of Value Development Group Limited, which is the sole shareholder of Harbin Jiasheng Consulting Managerial Co. Ltd. (“Jiasheng Consulting”), which is our subsidiary in China, with respect to which the operating company, Zhongxian Information, is a variable interest entity. The effect of this transaction was to reduce the interest of ours in its operating company by 40%. We use the China Dairy’s offering price for the Proposed Offering to approximate the fair value of the 40% stock granted to the shareholder and consultants.

 

On September 16, 2015, our 60%-owned subsidiary, Jiasheng Consulting, exercised its option to purchase all of the registered equity of our operating subsidiary, Zhongxian Information from its stockholders Zhengxin Liu and Youliang Wang, who are also the members of our Board of Directors, for RMB10,000 (approximately $1,634). Prior to the acquisition, Jiasheng Consulting controlled Zhongxian Information through a series of contractual agreements, which made Zhongxian Information a variable interest entity, the effect of which was to cause the balance sheet and operating results of Zhongxian Information to be consolidated with those of Jiasheng Consulting in our financial statements. As a result of the acquisition by Jiasheng Consulting of the registered ownership of Zhongxian Information, the balance sheet and operating results of Zhongxian Information hereafter continues to be consolidated with those of Jiasheng Consulting as its 100% owned subsidiary. On April 8, 2016, our 60% owned subsidiary, China Dairy Corporation Limited issued 84,906,541 CDI shares at AUD $0.2 per share on ASX and raised total fund of AUD $16,981,308 (USD $13,021,267). After the IPO, our ownership was diluted to 53.07%.

 

 

Our current structure is set forth below:

 

 

Factors Affecting Our Results of Operations

 

Our operating results are primarily affected by the following present factors: 

 

	●	Dairy Industry Growth. We believe the market for dairy products in China for the long term will grow rapidly, driven by China’s economic growth, improved living quality and increased penetration of infant formula. Accordingly, we believe that the demand of fresh milk will increase rapidly.
	●	Production Capacity. Our revenue largely depends on our production capacity. The production capacity in this industry is determined by the variety, aging and number of adult cows. Accordingly, we acquired Yulong Cattle in November 2011 which increased our number of cows by 3,800 and improved our production capacity by approximately 90 tons per day when acquired.
	●	Raw Material Supplies and Prices. The per unit cost of fresh milk is affected by price volatility of our raw materials and feeding expenses in the China markets.  In response to the increased cost, we leased 16,666,750 square meters of grassland in October 2011, 427,572 square meters grassland in February 2013, and 521,336 square meters of grassland in May 2015. We believe that the hay production of this grassland can satisfy our raw material demand and lower our feeding cost.
	●	Change of operation method. We disposed a large number of adult cows to local farmers, introduced distribution channel to them and receive up to 30% of the farmers’ milk sales as a commission. It makes our performance is stably increased and we have enough production resources to feed more cows by ourselves. In addition, we signed with another 27 local farmers to feed 2,000 adult cows in May 2016 to increase our production resources.

 

Sale of Cows

 

We had agreements with local farmers entered into June 2011, for their purchase of cows to be collected over five years, with a minimum payment of 20% of the sales price to be paid each year. The notes were recorded at their present value with a discount rate of 12%, which was commensurate with interest rates for notes with similar risk. We also entered into agreements with these local farmers for a 30% commission of their monthly milk sales generated by the cows sold in exchange for our assistance in arranging for the sale of the milk. As of March 31, 2017, the farmers had fully repaid the principle payments.

 

 

In December 2016, November 2016, September 2011, August 2011, and June 2011, Xinhua Cattle sold 130, 4,000, 3,787, 5,635, and 2,000 of its cows to local farmers, respectively. 2,000 of the cows sold were purchased from outside parties for $4,446,000. The remaining cows sold were raised by Xinhua. In November 2016, November2014 and December 2014, Yulong sold 4,317, 3,714 and 2,995 cows to local farmers respectively. 5,500 of the cows sold were purchased from outside unrelated parties for $8,996,000. The remaining cows sold were raised by Yulong.

 

Pursuant to agreements for the sale of cows signed in August 2011, September 2011, November 2014, and December 2014, the sales price will be collected in monthly installments plus interest at 7% on the outstanding balance, over the remaining useful lives of the cows, which range from one to eight years. Local farmers are required to pay 30% of monthly milk sales generated from the cows purchased by the farmers. The 30% monthly payments are to be applied first to the monthly installment of principal for the cows sold and the balance as commission income for our assistance in arranging for the sale of the milk. While the 30% rate and the amount applied to monthly installments for the purchase price of the cows remain the same, the amount of sales commission income will vary depending on total monthly milk sales and the progress of repayments towards the purchase price.

 

Pursuant to the agreements signed in November 2016 and December 2016, the sales price will be collected in monthly installments plus interest at 5% on the outstanding balance, over the remaining useful lives of the cows, which range from one to eight years. Local farmers are required to pay a 20% of monthly milk sales generated from the cows sold. The 20% monthly payments are to be applied first to the monthly installment of principal for the cows sold and the balance as commission income for our assistance in arranging for the sale of the milk. While the 20% rate and the amount applied to monthly installments for the purchase price of the cows remain the same, the amount of sales commission income will vary depending on total monthly milk sales and the progress of repayments towards the purchase price.

 

In August 2015, Xinhua Cattle sold 200 cows to an outside party at a total price of RMB 160,000(US $24,861) including insurance of RMB 100,000 (US $ 15,540). The cows had a net book value approximately $43,000 as of the disposal date, which includes cost basis approximate $560,000 and accumulated depreciation approximately $516,000. In May 2016, Xinhua Cattle sold 904 cows to an outside party at a total price of RMB 3,616,000(US $561,854). The cows had a net book value approximately $564,000 as of the disposal date, which includes cost basis approximate $1,147,000 and accumulated depreciation approximately $583,000. In June 2016, Xinhua Cattle also sold 500 female calves to an outside party at a total price of RMB 2,000,000 (US $310,760). The cost of these female calves was approximate $322,000.  In November, 2016, Xinhua Cattle also sold 1,542 adult cows to an outside party at a total price of RMB 6,915,550 (US $1,017,969) with a net residual value of RMB 7,705,937 (US $1,134,314). Xinhua Cattle sold totally 5,070 female calves to outside parties at a total price of RMB 22,273,500 (US $3,278,659) in the nine months ended March 31, 2017. The net value of these female calves was approximate RMB 31,103,000 (US$ 4,578,000).

 

In November 2015, Yulong Cattle Sold 347 cows to an outside party at a total price of RMB 1,144,800 (US $177,879) including insurance of RMB 104,100 (US $ 16,175). The cows had a net book value approximately $254,000 as of the disposal date, which includes cost basis approximate $588,000 and accumulated depreciation approximately $335,000. In May 2016, Yulong Cattle sold 331 cows to an outside party at a total price of RMB 1,390,200 (US $216,009). The cows had a net book value approximately $324,000 as of the disposal date, which includes cost basis approximate $709,000 and accumulated depreciation approximately $385,000. In November, 2016, Yulong Cattle sold 142 adult cows to an outside party at a total price of RMB 994,000 (US $146,317) with a net residual value of RMB 1,114,344 (US $164,031). Yulong Cattle also sold 1,657 female calves to outside parties at a total price of RMB 7,272,000 (US $1,070,438) in the nine months ended March 31, 2017. The net value of these female calves was approximate RMB 6,884,000 (US$1,013,000).

 

 

Increase in payment to local farmers 

 

Due to the significant increase in forage price, our payment to local farmers was increased as well during last twelve months. Before March 2015, the payment which included feeding expense and forage cost was $49, $62, $71 and $109, respectively, which paid for calve, pre-adult cow, young cow and adult cow per month. Since April 2015, such expenses increased to $56, $72, $82 and $130, respectively, paid for each type of cows. Since September 2015, such expenses increased to $65, $82, $96 and $150, respectively. In the end of September 2015, we terminated the agreements with the original 200 local farmers and signed with new 179 local farmers near around Harbin city. However, it didn’t stop the increase in forage price. Since November 2015, the feeding expenses and forage costs increased to $74, $91, $110 and $250 for each calve, pre-adult cow, young cow and adult cow, respectively.

 

Results of Operations

 

Comparison of three months ended March 31, 2017 and 2016 

 

The following table sets forth certain information regarding our results of operations for the three months ended March 31, 2017 and 2016. 

 

		For the three months ended March 31,
										Change
		2017				2016				Amount				%
Revenue		$	29,346,857			$	26,336,427			$	3,010,430				11	%
Cost of goods sold			17,920,642				15,821,031				2,099,611				13	%
Gross profit			11,426,215				10,515,396				910,819				9	%
Operating expenses			1,280,006				1,627,682				(347,676	)			(21	%)
Operating income/(loss)			10,146,209				8,887,714				1,258,495				14	%
Other income and (expenses)			(67,802	)			164,793				(232,595	)			(141	%)
Income before income taxes			10,078,407				9,052,507				1,025,900				11	%
Provision for income taxes			-				-				-				-	%
Net income before noncontrolling interests			10,078,407				9,052,507				1,025,900				11	%
Noncontrolling interests			4,785,844				5,637,682				(851,838	)			(15	%)
Net income attributable to controlling interests		$	5,292,563			$	3,414,825			$	1,877,738				55	%

 

Revenues 

 

Our revenue was primarily generated from sales of fresh milk and commissions on fresh milk sales by farmers to whom we sold cows. We had total revenues of $29,346,857 for the three months ended March 31, 2017, an increase of $3,010,430 or 11%, compared to $26,336,427 for the three months ended March 31, 2016. There are two main reasons caused such increase: 1) total average milk cows increased from 17,463 to 20,021 and 2) milk’s sale price increased from $0.52 per kg to $0.56 per kg since November 2015 for approximately 98% of total milk sales.  

 

The following table shows a breakdown of revenue from natural milk sales and sales commission, respectively: 

 

		For the three months ended March 31,
										Change
		2017				2016				Amount				%
Sales of natural milk		$	24,571,384			$	21,492,079			$	3,079,305				14	%
Sales commissions			4,775,473				4,844,348				(68,875	)			(1	%)
Total revenue		$	29,346,857			$	26,336,427			$	3,010,430				11	%

 

 

For the three months ended March 31, 2017, our revenue generated from natural milk sales was $24,571,384 which represented an increase of $3,079,305 or an increase of 14% compared to $21,492,079 for the three months ended March 31, 2016. The increase in the natural milk sales was primarily due to the increased number of milk cows compared to the same period of prior year. 

 

The following table sets forth information regarding the number of milk cows and the revenue per cow:

 

		For the three months ended March 31,
										Change
		2017				2016				Amount				%
Sales of natural milk		$	24,571,384			$	21,492,079			$	3,079,305				14	%
Average number of milk cows			20,021				17,463				2,558				15	%
Revenue from per milk cow		$	1,227			$	1,231			$	(4	)			0	%

 

The revenue per milk cow remained stable from $1,231, per milk cow to $1,227 per milk cow from the three months ended March 31, 2016 to the three months ended March 31, 2017. There are two main reasons that caused the increase in total natural milk sales, of which two were described above: 1) total milk cows increased from 17,463 to 20,021 which represented an increase of 15%; 2) milk’s sales price increased from $0.52 per kg to $0.56 per kg since November 2015 for approximate 98% of total milk sales which represented an increase of 6%.

 

The sales commissions from local farmers decreased by $68,875 or 1% to $4,775,473 for the three months ended March 31, 2017 from $4,844,348 for the three months ended March 31, 2016. Although the average quantity of milk cows we now earn commission on increased by 27% or 4,537, to 21,187 for the three months ended March 31, 2017 from 16,650 for the three months ended March 31, 2016 due to the new disposal of 8,447 adult cows to total 29 local farmers in November and December 2016. However, per the new contract term, the sales commission was only deducted from 20% milk sales less principle payment but not 30% milk sales like before. The average quantity of milk cows from the disposal in November 2016 and December 2016 covered 40% of total average quantity of milk cows for the three months ended March 31, 2017. Thus, the sales commission still decreased for the three months ended March 31, 2017 by comparing with prior period.

 

Gross profit 

 

Our cost of goods sold consists of feeding food, feeding expenses and other direct production overhead which includes labor costs, depreciation, lease, water & electricity, etc. Because we started to use the two new farms in Shuangcheng District and Xiangfang District in Harbin, more direct production overhead was allocated to our costs of goods sold. In addition, the direct feeding expenses and food costs paid to local farmers increased from $130 per cow before September 2015 to $250 per cow since September 2015. Direct feeding expenses and food costs paid to local farmers were not changed after October 2015. As a result, there was no significant change on the cost per cow.

 

		For the three months ended March 31,
										Change
		2017				2016				Amount				%
Cost of goods sold		$	17,920,642			$	15,821,031			$	2,099,611				13	%
Average number of milk cows			20,021				17,463				2,558				15	%
Cost per milk cow		$	895			$	906			$	(11	)			(1	%)

 

The cost per milk cow decreased to $895 for the three months ended March 31, 2017 which represented a decrease of $11 or 1% compared to $906 for the three months ended March 31, 2016. It remained stable because the main cost of goods sold which the food and feeding expenses paid to local farmers were not changed after October 2015 as described above. 

 

 

Gross profit margin 

 

Our gross profit margin was 38.9% for the three months ended March 31, 2017 which decreased by 1% from 39.9% for the three months ended March 31, 2016. The main reason for such a decrease primarily caused by the increase in the portion of milk sales which yield a lower gross profit margin than sales commission.

 

Operating expenses  

 

Our operating expenses significantly decreased to $1,280,006 for the three months ended March 31, 2017 from $1,627,682 for the three months ended March 31, 2016, a decrease of $347,676 or 21%. Our operating expenses primarily consist of human resource costs, depreciation, professional fees associated with filings required by the securities laws of the United States, consulting fees for a Chinese financial advisory company and business taxes or VAT surcharges, etc. We incurred a total of $34,383 and $271,283 in VAT surcharges and business taxes for the three months ended March 31, 2017 and 2016, respectively. We classified these VAT surcharges and business taxes as selling expenses and it is the primary reason why our operating expenses decreased.

 

Operating income (loss)

 

As a result of the foregoing, we had operating income of $10,146,209 and $8,887,714 for the three months ended March 31, 2017 and 2016, respectively.

 

Non-operating income (expenses)

 

For the three months ended March 31, 2017, non-operating income consists primarily of interest income of $296,627 earned on the outstanding notes receivable from the farmers and other non-operating income of $32,023 which mainly consists of bank interest earned. We also had a net loss from disposal of female calves of $396,452 for the three months ended March 31, 2017. For the three months ended March 31, 2016, non-operating income consists primarily of interest income of $140,404 earned on the outstanding notes receivable from the farmers and other non-operating income of $24,389 which mainly consists of bank interest earned.

 

Comparison of nine months ended March 31, 2017 and 2016

 

The following table sets forth certain information regarding our results of operations for the nine months ended March 31, 2017 and 2016. 

 

		For the nine months ended March 31,
										Change
		2017				2016				Amount				%
Revenue		$	88,963,391			$	71,628,562			$	17,334,829				24	%
Cost of goods sold			55,481,417				39,112,813				16,368,604				42	%
Gross profit			33,481,974				32,515,749				966,225				3	%
Operating expenses			4,112,658				41,504,772				(37,392,114	)			(90	%)
Operating income/(loss)			29,369,216				(8,989,023	)			38,358,239				427	%
Other income and (expenses)			1,955,498				505,665				1,449,833				287	%
Income before income taxes			31,324,814				(8,483,358	)			39,808,172				469	%
Provision for income taxes			-				2,415,816				(2,415,816	)			N/A
Net income before noncontrolling interests			31,324,814				(10,899,174	)			42,223,988				387	%
Noncontrolling interests			14,872,859				12,771,911				2,100,948				16	%
Net income attributable to controlling interests		$	16,451,955			$	(23,671,085	)		$	40,123,040				170	%

 

 

Revenues 

 

Our revenue was primarily generated from sales of fresh milk and commissions on fresh milk sales by farmers to whom we sold cows. We had total revenues of $88,963,391 for the nine months ended March 31, 2017, an increase of $17,334,829 or 24%, compared to $71,628,562 for the nine months ended March 31, 2016. There are two main reasons caused such increase: 1) total average milk cows increased from 15,444 to 20,225 and 2) milk’s sale price increased from $0.52 per kg to $0.56 per kg since November 2015 for approximately 98% of total milk sales.  

  

The following table shows a breakdown of revenue from natural milk sales and sales commission, respectively: 

 

		For the nine months ended March 31,
										Change
		2017				2016				Amount				%
Sales of natural milk		$	75,854,589			$	56,576,754			$	19,277,835				34	%
Sales commissions			13,108,802				15,051,808				(1,943,006	)			(13	%)
Total revenue		$	88,963,391			$	71,628,562			$	17,334,829				24	%

 

For the nine months ended March 31, 2017, our revenue generated from natural milk sales was $75,854,589 which represented an increase of $19,277,835 or 34% compared to $56,576,754 for the nine months ended March 31, 2016. The increase in the natural milk sales was primarily due to the increased number of milk cows compared to the same period of prior year. 

 

The following table sets forth information regarding the number of milk cows and the revenue per cow:

 

		For the nine months ended March 31,
										Change
		2017				2016				Amount				%
Sales of natural milk		$	75,854,589			$	56,576,754			$	19,277,835				34	%
Average number of milk cows			20,225				15,444				4,781				31	%
Revenue from per milk cow		$	3,751			$	3,663			$	88				2	%

 

The revenue per milk cow increased to $3,751 for the nine months ended March 31, 2017 from $3,663 for the nine months ended March 31, 2016, an increase of $88 or 2%. There are three main reasons that caused the increase in natural milk sales, of which two were described above: 1) total average milk cows were increased from 15,444 to 20,225 which represented an increase by 31%; 2) milk’s sales price increased from $0.52 per kg to $0.56 per kg since November 2015 for approximate 98% of total milk sales which represented an increase by 6%. In addition, due to the purchase of new adult cows during the year ended June 30, 2016, the average age of the adult milk cows decreased, which contributed to the slight increase in daily production.

 

The sales commissions from local farmers decreased by $1,943,006 or 13% to $13,108,802 for the nine months ended March 31, 2017 from $15,051,808 for the nine months ended March 31, 2016. The average quantity of milk cows we now earn commission on increased by 6% or 1,019, to 17,878 for the nine months ended March 31, 2017 from 16,859 for the nine months ended March 31, 2016 due to the new disposal of total 8,447 adult cows in November 2016 and December 2016. However, per the new contract term, the sales commission was only deducted from 20% milk sales less principle payment but not 30% milk sales like before. The average quantity of milk cows from the disposal in November 2016 and December 2016 covered approximately 26% of total average quantity of milk cows for the nine months ended March 31, 2017. Thus, the sales commission decreased for the nine months ended March 31, 2017 by comparing with prior period.

 

 

Gross profit 

 

Our cost of goods sold consists of feeding food, feeding expenses and other direct production overhead which includes labor costs, depreciation, lease, water & electricity, etc. Because we started to use the two new farms in Shuangcheng district and Xiangfang District in Harbin, more direct production overhead was allocated to our costs of goods sold. In addition, the direct feeding expenses and food costs paid to local farmers increased from $130 per cow before September 2015 to $250 per cow since September 2015. Furthermore, the food costs for the cows we fed by ourselves also increased. As a result, we saw a decrease in our margins compared with the same period in 2015. 

 

		For the nine months ended March 31,
										Change
		2017				2016				Amount				%
Cost of goods sold		$	55,481,417			$	39,112,813			$	16,368,604				42	%
Average number of milk cows			20,225				15,444				4,781				31	%
Cost per milk cow		$	2,743			$	2,533			$	210				8	%

  

The cost per milk cow increased to $2,743 for the nine months ended March 31, 2017 which represented an increase of $210 or 8% compared to $2,533 for the nine months ended March 31, 2016. We described the reason for the increase as above.

 

Gross profit margin 

 

Our gross profit margin was 37.6% for the nine months ended March 31, 2016 which decreased by 7.9% from 45.4% for the nine months ended March 31, 2016. The main reason for such a decrease was the increase in feeding and food cost and direct production overhead. In addition, the increase in the portion of milk sales yield a lower gross profit margin than sales commission.

 

Operating expenses  

 

Our operating expenses sharply decreased to $4,112,658 for the nine months ended March 31, 2017 from $41,504,772 for the nine months ended March 31, 2016, a decrease of $37,392,114 or 90%. Our operating expenses primarily consist of human resource costs, depreciation, professional fees associated with filings required by the securities laws of the United States, consulting fees for a Chinese financial advisory company and business taxes, etc. We incurred a total of $94,383 and $842,904 in VAT surcharges and business taxes for the nine months ended March 31, 2017 and 2016, respectively. We classified these VAT surcharges and business taxes as selling expenses. As we discussed above, we restructured in July, 2015 and have been listed on the ASX main board. We lost 40% of the interest of our operating company as a result. We treated the reduction of our interest by 40% as a stock compensation to our shareholders and consultants for a total of $37,762,400 as it was recorded under our G&A expenses for the nine months ended March 31, 2016. This is the primary reason that caused such sharp decrease in our operating expenses.

 

Operating income (loss)

 

As a result of the foregoing, we had operating income of $29,369,316 for the nine months ended March 31, 2017, representing an increase of $38,358,239, as compared to operating loss of $8,989,023 for the nine months ended March 31, 2016.

 

 

Non-operating income (expenses)

 

For the nine months ended March 31, 2017, non-operating income consists primarily of interest income of $663,660 earned on the outstanding notes receivable from the farmers and other non-operating income of $98,029 which mainly consists of bank interest earned. We also had a net gain from disposal of biological properties of $1,193,809 for the nine months ended March 31, 2017. For the nine months ended March 31, 2016, non-operating income consists primarily of interest income of $486,312 earned on the outstanding notes receivable from the farmers and other non-operating income of $123,266 which mainly consists of bank interest earned. Non-operating expenses consist of the loss on the disposal of mature biological assets of $103,913.

 

Net Income 

 

Xinhua Cattle and Yulong Cattle are entitled to a tax exemption for the full Enterprise Income Tax in China due to a government tax preference policy for the dairy farming industry. Zhongxian Information is subject to an Enterprise Income Tax of 25% and files its own tax returns before January 16, 2015. On January 16, 2015, Zhongxian Information received a tax exemption notice from Harbin National Tax Bureau on its investment income from its subsidiaries. Jiasheng Consulting (the “WFOE”) is subject to an Enterprise Income Tax at 25% and files its own tax return before September 16, 2015. On September 16, 2015, Jiasheng Consulting purchased all of the registered equity of Zhongxian Information and the VIE structure was terminated. Under China tax law, Jiasheng Consulting is exempt from income tax on its investment income since September 16, 2015. The provision for income taxes was $0 and $0, respectively, $0 and $2,415,816, respectively for the three and nine months ended March 31, 2017 and 2016, respectively, primarily representing the enterprise income tax on the income of Zhongxian Information. We had a net income (loss) before non-controlling interests of $10,078,407 and $$9,052,507, respectively, $31,324,814 and $(10,899,174), respectively, which represented an increase in $1,025,900 or 11% and $42,223,988 or 387%, respectively, for the three and nine months ended March 31, 2017 and 2016. We initially owned 99% of Xinhua Cattle’s shares and our non-controlling interest was only 1% of Xinhua’s net income. On July 16, 2015, as we transferred 100% of the issued and outstanding shares of Value Development to China Dairy, which we own 60% through our wholly owned subsidiary, Hope Diary. This transaction resulted a reduction of our interest in our operating company by 40%. In addition, on April 8, 2016, our 60% owned subsidiary, China Dairy Corporation Limited issued 84,906,541 CDI shares at AUD $0.2 per share on ASX and after the IPO, our ownership was diluted to 53.07%. As a result, net income attributed to the non-controlling shareholders increased from 1% to 46.93%. $4,785,844 and $5,637,682, respectively, $14,872,859 and $12,771,911, respectively, was attributed to non-controlling interest for the three and nine months ended March 31, 2017 and 2016. We had net income (loss) attributable to the common stockholders of the Company of $5,292,563 and $3,414,825, respectively, $16,451,955 and $(23,671,085), respectively, representing $0.10 per share and $0.06 per share, respectively, $0.31 per share and $(0.45) per share, respectively, for the three and nine months ended March 31, 2017 and 2016.

 

Foreign Currency Translation Adjustment 

 

Our reporting currency is the U.S. dollar. Our local currency, Renminbi, is our functional currency. All asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transactions occurred. Statements of income and other comprehensive income and cash flows have been translated using the average exchange rate for the periods presented. Adjustments resulting from the translation of our consolidated financial statements are recorded as other comprehensive income (loss). Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. For the three and nine months ended March 31, 2017 and 2016, we incurred foreign currency translation adjustments gain (loss) of $1,899,898 and $1,029,227, respectively, $(5,588,748) and $(6,556,665), respectively. They are reported as other comprehensive income (loss) in the consolidated statements of income and other comprehensive income (loss), respectively. 

 

 

Liquidity and Capital Resources 

 

As of March 31, 2017 and June 30, 2016, we had no bank debt but amounts owed to shareholders of $1,854,922 and $1,672,707, respectively. The amounts due to our stockholders were principally for the professional fees incurred for being a reporting company in the United States and in Australia because of the restriction of official bank transfers abroad. At the same time, we had $36,957,482 and $30,780,198 in cash at March 31, 2017 and June 30, 2016 as well as working capital of $ 64,176,773 and $56,811,959, respectively.

 

Operating activities 

 

During the nine months ended March 31, 2017, our operating activities provided $36,135,113 in net cash, compared to $17,964,557 during the nine months ended March 31, 2016.The net cash provided in the nine months ended March 31, 2017 was slightly higher than our net income primarily due to the depreciation on fixed assets and biological properties of $5,445,626 and amortization on lease of $1,271,289. The gain of disposal from biological properties reduced our cash provided by operating activities by $1,193,809 for the nine months ended March 31, 2017. The net cash provided in the nine months ended March 31, 2016 was materially higher than our net loss primarily due to the lack of deferred income tax liabilities of $2,415,816, increase in depreciation on fixed assets and biological properties of $3,334,363 and amortization on lease of $1,348,534 and the stock compensation for shareholders and consultants of $37,762,400. In addition, the increase in accounts receivable of $16,343,276, decrease in inventories of $63,563, increase in prepaid expenses of $383,409, increase in interest receivable of $211,869 caused the increase in cash. 

 

Investing activities

 

During the nine months ended March 31, 2017, our investing activities provided a cash outflow of $26,710,847 compared with a cash outflow of $47,957,092 for the nine months ended March 31, 2016. The food costs and feeding expenses for biological properties used cash of $12,369,308 and $13,176,885 for the nine months ended March 31, 2017 and 2016, respectively. For the nine months ended March 31, 2017 and 2016, we spent $17,664,000 and $10,700,655, respectively, for purchasing milk cows. Conversely, we received cash of $1,972,099 and $1,154,760 during the nine months ended March 31, 2017 and 2016, respectively, from the collection of notes receivable from the disposal of biological properties in 2011, 2014 and 2016. For the nine months ended March 31, 2017 and 2016, we also received $5,533,256 and $178,454 in cash from our disposal of biological properties, respectively. For the nine months ended March 31, 2017 and 2016, we spent $2,442,342 and $23,454,798, respectively, for the addition of PP&E for daily operations. The material additions during the nine months ended March 31, 2016 were the production facilities, office buildings, cow-houses, and forage storage built and refurbished on the new land, which mostly were completed and in service before June 30, 2016. The material additions during the nine months ended March 31, 2017 were the production facilities and forage plant which were not completed and in service as of March 31, 2017.

 

Financing activities 

 

Our financing activities mainly included proceeds from shareholders dividends payment for the nine months ended March 31, 2017. For the nine months ended March 31, 2017 and 2016, we received $84,179 and $114,155 from shareholders, respectively. For the nine months ended March 31, 2017, we paid total dividends of $1,397,543 to our subsidiary’s shareholders. For the nine months ended March 31, 2016, our 60% owned subsidiary, China Dairy Corporation Limited issued 84,906,541 CDI shares at AUD $0.2 per share on ASX and raised total fund of $13,021,267.

 

We have historically financed our operations through cash generated from our fresh milk sales and commissions from milk sales from local farmers. Over the long term, it is our expectation to utilize our additional capital resources to expand our operating activities. At the present time, however, we are able to operate profitably without any significant additional investment. Moreover, our observation of the equity markets indicates that we would be unlikely to obtain financing, or if available, on favorable terms at this time. Accordingly, our near-term plan is to finance our operations with our current working capital and with the expected income from our ongoing operations. 

 

 

Critical Accounting Policies and Estimates 

 

Basis of Accounting and Presentation 

 

The consolidated financial statements of the Company as of March 31, 2017 and June 30, 2016 for the three and nine months ended March 31, 2017 and 2016 have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the SEC.

 

Revenue Recognition 

 

The Company’s primary sources of revenues are derived from (a) sale of fresh milk to Chinese manufacturing and distribution companies of dairy products and (b) commissions from local farmers on their monthly milk sales.  The Company’s revenue recognition policies comply with SEC Staff Accounting Bulletin (“SAB”) 104. Revenues from the sale of milk are recognized when the milk is delivered and the title is transferred, the risks and rewards of ownership have been transferred to the customer, the price is fixed and determinable and collection of the related receivable is reasonably assured. 

 

Milk sales revenue is recognized when the title to the goods has been passed to our customers, which is the date when the goods are delivered to designated locations and accepted by the customers and the previously discussed requirements are met.  Fresh milk is delivered to our customers on a daily basis.  The customers’ acceptance occurs upon inspection of quality and measurement of quantity at the time of delivery. The Company does not provide the customer with the right of return.  Sales commission revenue is recognized on a monthly basis based on monthly sales reports received from the dairy companies.

 

Estimates 

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

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.  

  

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Smaller reporting companies are not required to provide the information required by this item.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officers as appropriate, to allow timely decisions regarding required disclosures. Management conducted an assessment as of March 31, 2017 of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective to ensure that information required to be included in our periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms due to a material weakness related to the lack of accounting personnel with sufficient experience in maintaining books and records and preparing financial statements in accordance with U.S. GAAP. 

 

 

Our management has identified the following steps to address the above material weakness:

 

(1) We have been working with a financial accountant to assist us in preparing our financial statements in accordance with US GAAP standards and SEC rules and regulations.

 

(2) We intend to hire, as needed, key accounting personnel with technical accounting expertise and reorganize the finance department to ensure that accounting personnel with adequate experience, skills and knowledge relating to complex, non-routine transactions are directly involved in the review and accounting evaluation of our complex, non-routine transactions.

 

Changes in Internal Control over Financial Reporting

 

No changes were made to our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

There are no other actions, suits, proceedings, inquiries 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.

 

Not applicable because we are a smaller reporting company.

 

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

 

There were no unregistered sales of the Company’s equity securities during the three months ended March 31, 2017, that were not otherwise disclosed in a Current Report on Form 8-K.

 

Item 3. Defaults Upon Senior Securities.

 

There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company during the quarter ended March 31, 2017.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

There is no other information required to be disclosed under this item which was not previously disclosed. 

 

Item 6. Exhibits.

 

(a) Exhibits

 

Exhibit Number		Description
31.1		Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1+		Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2+		Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

 

+ In accordance with the SEC Release 33-8238, deemed being furnished and not filed.

 

 

SIGNATURES

 

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

 

	CHINA MODERN AGRICULTURAL INFORMATION, INC.
Dated: May 15, 2017	By:	/s/ Youliang Wang
		Youliang Wang
		Chief Executive Officer (Principal Executive Officer)

 

Dated: May 15, 2017	By:	/s/ Yanyan Liu
		Yanyan Liu
		Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer)

 

 

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