ORGANIC AGRICULTURAL COMPANY LIMITED The following discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of such financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. On an ongoing basis, we evaluate these estimates, including those related to useful lives of real estate assets, bad debts, impairment, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates.
Application of Critical Accounting Policies
In preparing our financial statements, we are required to formulate working policies regarding valuation of our assets and liabilities and to develop estimates of those values. In our preparation of the financial statements for the three months endedJune 30, 2021 and 2020, there was no estimate made which was (a) subject to a high degree of uncertainty and (b) material to our results. Results of Operations
The following table shows key components of the results of operations during the
three months ended
For the Three Months Ended
June 30, Change
2021 2020 $ %
Revenue $ 30,091 $ 68,528 $ (38,437 ) (56 %)
Cost of Sales 20,680 39,349 (18,669 ) (47 %)
Gross Profit 9,411 29,179 (19,768 ) (68 %)
Total operating costs and expenses 800,123 61,854 738,269 1,194 % (Loss) from operations before other income and income taxes (790,712 ) (32,675 ) (758,037 ) 2,320 % Other income 13 382 (369 ) (97 %) (Loss) from operations before income taxes (790,699 ) (32,293 ) (758,406 ) 2,349 % Income taxes - - - N/A Net (loss) from continuing operations (790,699 ) (32,293 ) (758,406 ) 2,349 % (Loss) on the sale of discontinued operations, net of income taxes - (713,722 ) 713,722 (100 %) Net income from discontinued operations, net of income taxes - 743 (743 ) (100 %) Total net (loss) income from discontinued operations - (712,979 ) 712,979 (100 %) Net (loss) (790,699 ) (745,272 ) (45,427 ) 6 % Less: net income attributable to non-controlling interests - 364 (364 ) (100 %) Net (loss) attributable to common shareholders'$ (790,699 ) $ (745,636 ) $ (45,063 ) 6 % All of the Company's operations are currently carried out by its subsidiary, Yuxinqi. Yuxinqi is a marketing enterprise with a focus on milled rice and other agricultural products. Incorporated onFebruary 5, 2018 , with a short operating history, Yuxinqi's sales are erratic, since a stable customer base has not been established yet. Sales by Yuxinqi during the three months endedJune 30, 2021 were lower than during the three months endedJune 30, 2020 . The decrease in revenue occurred primarily because our principal customers, such as Huiye and Shouhang Commerce, reduced their orders. The cost of sales of$20,680 and$39,349 for the three months endedJune 30, 2021 and 2020, respectively, was attributable to the sales of milled rice and other foodstuffs. Those operations yielded a gross profit of$9,411 and$29,768 with a gross margin of 31.3% and 42.6%, respectively. The decrease in gross margin during the three months endedJune 30, 2021 , compared to the same period of the previous year was primarily attributable to the reduced price of products and the change of series of products. 1 To focus on the sale of value-added processed products, the Company's subsidiary, Tianci Liangtian, completed the spin-off of its ownership interest in Lvxin onApril 30, 2020 . During the three months endedJune 30, 2020 , the Company incurred$713,722 of investment loss due to the divestment of Lvxin. InApril 2021 , in order to boost sales, the Company granted a total of 345,000 fully vested shares with a fair value on the grant date of$2.20 per share to 25 individuals for sales promotion services. As a result,$759,000 in compensation expense was recognized as advertising and promotion expenses for the three months endedJune 30, 2021 . Therefore, during the three months endedJune 30, 2021 and 2020, the Company incurred$800,123 and$61,854 , respectively, in operating expenses. In addition to the advertising and promotion expense in 2021, for the three months ended ofJune 30, 2021 and 2020, salaries and benefits expenses were$33,014 and$24,280 , office expenses were$14,302 and$4,243 , professional fees were$18,110 and$16,543 and advertising and promotion expenses were$761,840 and$6,431 , respectively. The Company's operating expenses were partially offset by$33,345 of gain on exchange realized during the three months endedJune 30, 2021 . This represented the increase in the USD value of Tianci's debt toOrganic Agricultural as a result of the decline in the USD to CNY exchange rate from 6.5565 to 6.4579.
The Company's continuing operations produced a net loss of
Liquidity and Capital Resources
The Company's operations have been financed primarily by proceeds from the sale of shares. The Company received$920,000 from the sale of 4,119,500 shares to a single investor during the three months endedJune 30, 2021 . As ofJune 30, 2021 , our working capital was$723,313 , an increase of$868,451 during the three months endedJune 30, 2021 , primarily due to the sale of 4,119,500 shares. The largest components of working capital atJune 30, 2021 were cash of$884,311 and inventories of$138,641 , which were offset by$165,693 in customer deposits against future sales. Cash Flows The following table summarizes our cash flows for the three months endedJune 30, 2021 and 2020. For the Three Months Ended June 30, Change 2021 2020 $
Net cash (used in) operating activities$ (84,086 ) $ (1,482 ) $ (82,604 ) Net cash (used in) investing activities - (1,343 ) 1,343 Net cash provided by financing activities 920,000 38,900 881,100 Effect of exchange rate fluctuation on cash and cash equivalents (22,109 ) 4,247 (26,356 ) Net increase in cash and cash equivalents 813,805 40,322 773,483 Cash and cash equivalents, beginning of year 70,506 242,174 (171,668 ) Cash and cash equivalents, end of year$ 884,311 $
282,496$ 601,815 During the three months endedJune 30, 2021 , our operations used net cash of$84,086 . The Company incurred a cash use from operations primarily because it recorded an increase in accounts receivable of$17,140 and an increase in investories by$15,051 . During the three months endedJune 30, 2020 , the Company recorded$1,482 of cash used in operating activities, primarily due to the net loss of$32,293 from continuing operations during that period. The Company had no investing activity during the three months endedJune 30, 2021 . The Company's only investing activity during the three months endedJune 30, 2020 was the distribution of$1,343 of cash in connection with the sale of the discontinued operations. Our financing activities during the three months endedJune 30, 2021 generated$920,000 from the sale of common stock. During the three months endedJune 30, 2020 , our financing activities generated$38,900 from the sale of common stock. 2
Trends, Events and Uncertainties
The Company intends to expand its product offerings to include value-added products, both products based on rice and products based on other food stuffs, such as organic red beans and millet. Our marketing personnel will endeavor to expand awareness of our brand, open new marketing channels, and educate the nation about the health benefits of selenium-enriched rice. In this manner, the Company hopes to increase sales to support the future operations and development of the Company. There is no guarantee that the Company's new strategy will
be successful. OnNovember 6, 2020 Organic Agricultural entered into a Cooperation Agreement withUnbounded IOT Block Chain Limited ("Unbounded"), an entity with offices inXiamen City,Fujian Province . The purpose of the Cooperation Agreement was to promote the use of blockchain technology in agriculture, specifically the development of tracing systems for agricultural products, the development of a blockchain-based shopping mall for agricultural products, and related improvements to the agricultural sector of the economy. To accomplish those purposes,Tianci Wanguan (Xiamen) Digital Technology Co., Ltd. was incorporated inXiamen, China onNovember 5, 2020 . Tianci Wanguan is 51% owned by Organic Agricultural HK and 49% owned by Chen Zewu on behalf of Unbounded. Each party committed to provide capital resources to Tianci Wanguan in proportion to its ownership percentage. OnJuly 19, 2021 the parties executed a supplement to the Cooperation Agreement. The Supplementary Agreement sets forth performance criteria for Unbounded's management of Tianci Wanguan: specifically, that within 12 months after the shares mentioned below are issued to Unbounded, Tianci Wanguan must have made a profit of five million Renminbi from the business described in the Cooperation Agreement or any other business approved byOrganic Agricultural . Any profits generated by Tianci Wanguan will be held for use by that company. The Supplementary Agreement further provides that, after implementing a 5.16 -for-1 stock split contemplated by the Cooperation Agreement and the supplement,Organic Agricultural will issue 10 million shares of its common stock to Unbounded. The certificate for the shares will be held by Chen Zewu, who will vote the shares in accordance with the direction he receives fromHao Shuping , a member of the Organic Agricultural Board of Directors. If Unbounded fails to satisfy the criteria described above, the 10 million shares must be returned toOrganic Agricultural . If Unbounded does satisfy the criteria, then it will have unrestricted ownership of the 10 million shares, andOrganic Agricultural will issue an additional 10 million shares to Unbounded. The COVID-19 outbreak has had a significant adverse impact and created many uncertainties related to our business, and we expect that it will continue to do so. The Company is experiencing challenges in sales and has suffered a significant decrease in revenues which has increased financial uncertainty. Our future business outlook and expectations are very uncertain due to the impact of the COVID-19 pandemic and is very difficult to quantify. It is difficult to assess or predict the impact of this unprecedented event on our business, financial results or financial condition. Factors that will impact the extent to which the COVID-19 pandemic affects our business, financial results and financial condition include: the duration, spread and severity of the pandemic; the actions taken to contain the virus or treat its impact, including government actions to mitigate the economic impact of the pandemic; and how quickly and to what extent normal economic and operating conditions can resume, including whether any future outbreaks interrupt economic recovery. TheU.S. government, including theSEC , has made statements and taken certain actions that led to changes toUnited States and international relations, and will impact companies with connections tothe United States orChina , including imposing several rounds of tariffs affecting certain products manufactured inChina , imposing certain sanctions and restrictions in relation toChina and issuing statements indicating enhanced review of companies with significantChina -based operations. It is unknown whether and to what extent new legislation, executive orders, tariffs, laws or regulations will be adopted, or the effect that any such actions would have on companies with significant connections to theU.S. or toChina , our industry or on us. Any unfavorable government policies on cross-border relations and/or international trade, including increased scrutiny on companies with significantChina -based operations, capital controls or tariffs, may affect our ability to raise capital, the market price of our shares. If any new legislation, executive orders, tariffs, laws and/or regulations are implemented, if existing trade agreements are renegotiated or if theU.S. or Chinese governments take retaliatory actions due to the recentU.S. -China tension, such changes could have an adverse effect on our business, financial condition and results of operations, our ability to raise capital and the market price of our shares. Changes inUnited States andChina relations, as well as relations with other countries, and/or regulations may adversely impact our business, our operating results, our ability to raise capital and the market price of our shares.
Other than the factors listed above we do not know of any trends, events or uncertainties that have had or are reasonably expected to have a material impact on our net sales or revenues or income from continuing operations.
Off-Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.
Recent Accounting Pronouncements
New accounting rules and disclosure requirements can significantly impact the comparability of our financial statements. Please refer to Note 2 of our condensed consolidated financial statements included in this quarterly report.
There were no recent accounting pronouncements that we expect to have a material effect on the Company's financial position or results of operations.
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