Item 1. Business.
Overview
We are a leading producer and distributor of natural fresh milk in China. We have two operating entities with an aggregate natural fresh milk production capacity of approximately 234 tons (approximately 7,431gallons) per day. We also have 76 exclusive individual partners with an aggregate natural fresh milk production capacity of approximately 405 tons per day. We have five major customers, one of which is the leading dairy company in China.
Corporate History
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 the Exchange Agreement by and among (i) Value Development Holding, a British Virgin Islands company, (ii) Value Development Holding’s shareholders, (iii) us, and (iv) our former principal stockholders. Pursuant to the terms of the Exchange Agreement, Value Development Holding’s shareholders transferred to us all of the shares of Value Development Holding in exchange for the issuance of 35,998,000 shares of our common stock (the “Securities Exchange”). The shares issued to Value Development Holding’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 stockholder became our principal stockholder.
Value Development Holdings was incorporated under the laws of British Virgin Islands on June 24, 2010 to serve as an investment holding company. Value Development Holdings owns 100% of the equity interest of Value Development Group, a company incorporated under the laws of Hong Kong on September 17, 2010. Value Development Group owns 100% of the equity interest of Jiasheng Consulting, a company incorporated under the laws of the PRC on September 15, 2010.
On January 28, 2011, Value Development Group completed the acquisition of Jiasheng Consulting. Jiasheng Consulting entered into a series of agreements (the “Contractual Arrangements”) with Zhongxian Information, its shareholders, in which Jiasheng Consulting effectively assumed management of the business activities of Zhongxian Information and its 99% owned subsidiary Heilongjiang Xinhua Cattle, and acquired the right to appoint all executives and senior management and the members of the Board of Directors of Zhongxian Information. Zhongxian Information was founded on January 21 2005, and is headquartered in the Limin Development Zone, Harbin, Heilongjiang Province, with registered capital of 10 million RMB or $1,206,800. The Contractual Arrangements are comprised of a series of agreements, including an Exclusive Business Cooperation Agreement, Exclusive Option Agreement, and an Equity Interest Pledge Agreement, through which Jiasheng Consulting has the right to provide exclusive complete business support and technical and consulting service to Zhongxian Information. Additionally, Zhongxian Information’s shareholders have pledged their rights, titles and equity interest in Zhongxian Information as security for Jiasheng Consulting to collect consulting and services fees provided to Zhongxian Information through an Equity Pledge Agreement. In order to further reinforce Jiasheng Consulting’s rights to control and operate Zhongxian Information, the shareholders 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.
Zhongxian Information was incorporated in China in January 2005 with registered capital of 10 million RMB or $1,206,800 US Dollars. In February 2006, it acquired 99% of the registered capital of Xinhua Cattle, which was incorporated in China in December 2005 with registered capital of three million RMB 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 breading and fresh milk production.
On November 23, 2011, Zhongxian Information acquired 100% of the equity interest of 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 production, and primarily generates its revenue from the sale of fresh milk.
Recent Company Restructure
Early in July 2015, Hope Diary acquired 60% of China Dairy and became a wholly-owned subsidiary of the Company after Mr. Youliang Wang, Company’s Chief Executive Officer, transferred 100% of his interest in Hope Diary to the Company for $50,000 (the “Hope Diary Transfer”). On July 16, 2015, the Company transferred 100% of the issued and outstanding shares of Value Development to China Dairy, which is 60% owned indirectly by the Company through the Company’s wholly owned subsidiary, Hope Diary as a result of the Hope Diary Transfer (the “Restructure”).
The Restructure involves nominal consideration received or paid as Value Development and China Dairy are under common control by the Company and this transaction affects the Company’s interests in Value Development.
As a result of the Restructure, the Company indirectly owns 60% of China Dairy through its wholly-owned subsidiary, Hope Diary, which holds 60% of the issued and outstanding shares of China Dairy, which in turn holds 100% of the issued and outstanding shares of Value Development.
The effect of this transaction was the decrease in interest of the Company in its operating company by 40%. This will result in the Company recognizing a transaction loss of approximately $50,300,000 during the three months ended September 30, 2015.
The purpose of the transfer of Value Development to China Dairy is to facilitate a public offering of the capital stock of China Dairy in Australia. The completion of an offering in Australia is anticipated to further dilute the Company’s ownership of China Dairy.
Our corporate structure pre-restructure is set forth below:
Our corporate structure post-restructure is set forth below:
Our Business Model
We generate revenues from three sources: sale of fresh milk, processing and sales of organic fertilizer, and assisting local farmers with their fresh milk sale efforts.
Fresh Milk
We exclusively use Holstein cows for our milk production. Holstein cows are well-regarded for their abundant milk production and high quality milk. Our cows currently have an average milking period of 305 days, and produce milk that contains approximately 3.5% fat. Each adult cow produces approximate 8,700 kilogram annually.
Our farmland is located in the Heilongjiang province which has a humid continental climate. This climate is ideal for the growth of grass, which in turn is essential in the grazing and feeding of our cattle that aids in our breeding of cows and calves, fresh milk production and organic fertilizer production. We maintain strict quality control and testing procedures to ensure our milk products are of high quality. The milk production and quality controls ensure that the milk produced is high in nutrients and active biological substances.
Cow Feeders
Xinhua Cattle outsources over 90% of the cow feeding to local farmers pursuant to a series of entrust feeding agreements with the local farmers. Pursuant to these agreements, we pay for the fostering fees and feed costs. In return, the local farmers provide us with the fresh milk produced by the cows.
Pursuant to these entrust feeding agreements, we entrust our cattle to local farmers to assist in a more efficient means to produce fresh milk, as well as manure, used in our production of organic fertilizer. In that regard, we pay a monthly fee to local farmers that correlate to the number of calves, cattle and cows that are placed in their care. Pursuant to the agreements, local farmers are responsible for the feeding and raising of the cattle as well as the fresh milk production. Additionally, these local farmers ensure that each cow produces a minimum of 20 kilogram of milk daily.
From July 2014 to February 2015, monthly feeding fee to the local farmers is $8.13 per baby cow, $11.39 per pre-adult cow, $16.27 per young cow and $32.54 per adult cow, respectively; food costs every month to the local farmers is $46 per baby cow, $57 per pre-adult cow, $62 per young cow, and $88 per adult cow, respectively. Since March 2015, the monthly feeding fee remains the same while the foods costs increased to $54 per baby cow, $68 per pre-adult cow, $75 per young cow, and $111 per adult cow, respectively.
Local farmers are responsible for milk production and are required to timely deliver the milk production daily. All of the raw milk produced by the cattle is owned by us. Additionally, the local farmers are contractually obligated to conduct periodic breeding for the young cattle and cows, at our expense. The breeding is overseen by veterinarians of our choosing. All calves produced by our entrusted cows are our property, and all calve births are overseen by veterinarians of our choosing. All cow waste produced by our entrusted cattle is owned by us. The local farmers are obligated to collect the waste and provide it to us for further processing, and eventual sale as organic fertilizer.
Fresh Milk Customers
Mengniu Dairy Co. Ltd.
Mengniu Dairy Co. Ltd. (“Mengniu”) has been a purchaser of our raw milk products since 2006. Our current and previous contractual arrangement provides for the purchase of our milk at the base price of RMB 3.45 or $0.55/kilogram. However, the base price is based on the quality of our raw milk, namely, fat percentage of 3.1%, protein percentage of 2.95%, and the Level One microorganism quality (less than 0.5 million / ml). Mengniu has renewed a two-year contractual commitment to continue to purchase raw milk products from us until February 21, 2016.
Mengniu accounted for 22.8% of all milk sales for the fiscal year ended June 30, 2015 and 43.4% of all milk sales for the fiscal year ended June 30, 2014.
Qiqihaer Heshan Dairy Co., Ltd.
Qiqihaer Heshan Dairy Co., Ltd. (“Heshan Dairy”) has been a purchaser of our fresh milk products since 2011. Our current and previous contractual arrangement provides for the purchase of our milk at the base price of RMB 3.50 or $0.56/kilogram. However, the base price is based on the quality of our fresh milk, namely, fat percentage of 3.1%, protein percentage of 2.95%, and the Level One microorganism quality (less than 0.5 million / ml). Heshan Dairy has renewed a one year contractual commitment to continue to purchase fresh milk products from us until December 31, 2014.
Heshan Dairy accounted for 20.3% of all our milk sales for the fiscal year ended June 30, 2015 and 13.9% of all our milk sales for the fiscal year ended June 30, 2014.
Heilongjiang Longxing Dairy Co., Ltd.
Heilongjiang Longxing Dairy Co., Ltd. (“Longxing Dairy”) has been a purchaser of our fresh milk products since 2011. Our current and previous contractual arrangement provides for the purchase of our milk at the base price of RMB 3.50 or $0.56/kilogram. However, the base price is based on the quality of our fresh milk, namely, fat percentage of 3.1%, protein percentage of 2.95%, and the Level One microorganism quality (less than 0.5 million / ml). Longxing Dairy has renewed a one-year contractual commitment to continue to purchase fresh milk products from us until December 31, 2014.
Longxing Dairy accounted for 19.4% of all our milk sales for the fiscal year ended June 30, 2015 and 14.3% of all our milk sales for the fiscal year ended June 30, 2014.
Heilongjiang Nongken Delong Dairy Co., Ltd.
Heilongjiang Nongken Delong Dairy Co., Ltd. (“Nongken Delong Dairy”) has been a purchaser of our fresh milk products since 2011. Our current and previous contractual arrangement provides for the purchase of our milk at the base price of RMB 3.50 or $0.56/kilogram. However, the base price is based on the quality of our fresh milk, namely, fat percentage of 3.1%, protein percentage of 2.95%, and the Level One microorganism quality (less than 0.5 million / ml). Nongken Delong Dairy has renewed a one-year contractual commitment to continue to purchase fresh milk products from us until December 31, 2014.
Nongken Delong Dairy accounted for 18.6% of all our milk sales for the fiscal year ended June 30, 2015 and 14.4% of all our milk sales for the fiscal year ended June 30, 2014.
SuihuaDongxing Dairy Co., Ltd.
SuihuaDongxing Dairy Co., Ltd. (“Dongxing Dairy”) has been a purchaser of our fresh milk products since 2011. Our current and previous contractual arrangement provides for the purchase of our milk at the base price of RMB 3.50 or $0.56/kilogram. However, the base price is based on the quality of our fresh milk, namely, fat percentage of 3.1%, protein percentage of 2.95%, and the Level One microorganism quality (less than 0.5 million / ml). Dongxing Dairy has renewed a one-year contractual commitment to continue to purchase fresh milk products from us until December 31, 2014.
Dongxing Dairy accounted for 18.9% of all our milk sales for the fiscal year ended June 30, 2015 and 14.0% of all our milk sales for the fiscal year ended June 30, 2014.
Organic Fertilizer
As a by-product of the fresh milk production, we use the resulting manure as a source of additional revenue. We combine the raw material, the manure, with inoculating complex microbial agents, and then ferment the product using biological and chemical processes and microbial fermentation technology, which produces the organic fertilizer.
Our fertilizer product is unique, in that it decomposes slowly, maintains long fertilizing effect and slow nutrient loss. It can effectively promote the proliferation of useful microorganisms and enhance soil fertility, resulting in more abundant crop growth.
Zhongxian Information has formed a livestock business system which integrates fresh milk production and organic fertilizer production for direct sale to suppliers.
The sale of organic fertilizer only makes up a very small amount of our total revenue. We generated USD $20,401 in revenue from our organic fertilizer sales in the fiscal year ended June 30, 2015 and USD 20,199 in revenue from our organic fertilizer sales in the fiscal year ended on June 30, 2014. Jianfa Bio-Organic Fertilizer Plant was the sole customer for our organic fertilizer products from 2006 to June 2011. Since July 2011, we have been selling our organic fertilizer products to Heilongjiang Soyang Bio Energy Development Ltd.
Sales Commissions
In addition to selling fresh milk to Chinese manufacturing and distribution companies of dairy products, we started to sell our milk cows to local farmer in exchange for monthly payments from the local farmers on their monthly milk sales since June 2011. The monthly payments represent the monthly installments, including interest, for the purchase price of milk cows sold, or a mix of the purchase price and commissions for our assistance in arranging for their milk sales.
In June 2011, Xinhua sold 2,000 milk cows to six local farmers with the purchase price being paid in installments over a five-year period with a minimum payment of 20% of the sales price annually. No down payment was made by the farmers for these sales in June 2011. In August 2011, through initial negotiation and subsequent modification of sales terms, Xinhua sold 5,635 milk cows to 20 local farmers with a 10% down payment plus monthly installments with interest at 7% on any remaining principal payment over a period of the remaining useful life of the cows sold. In September 2011, Xinhua also sold 3,787 milk cows to 13 local farmers with monthly installments over a period of the remaining useful life of the cows sold with no down payment. The receivables related to the sales of these all cows is included in notes receivable in the accompanying consolidated balance sheets as of June 30, 2015 and 2014. In addition to monthly installments for the purchase price of the cows sold, these local farmers who bought our cows in August and September 2011 also pay commissions to us each month for our assistance in arranging for the sale of their milk. In November and December 2014, Yulong sold 3,714 and 2,995 cows, respectively to 37 local farmers.
Pursuant to the agreements 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. The 30% monthly payments will continue over the entire remaining life of the cows sold. 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.
By the end of June 30, 2015, we had 22,206 cows, among which, 19,555 cows continue to be fed by local farmers, 400 cows are maintained by Xinhua Cattle, and 2,251 cows are maintained by Yulong Cattle.
From July 2014 to Feb 2015, monthly feeding fee to the local farmers of $8.13 per baby cow, $11.39 per pre-adult cow, $16.27 per young cow and $32.54 per adult cow, respectively; food costs every month to the local farmers of $46 per baby cow, $57 per pre-adult cow, $62 per young cow, and $88 per adult cow, respectively. Since March 2015, the monthly feeding fee remains the same while the foods costs increased to $54 per baby cow, $68 per pre-adult cow, $75 per young cow, and $111 per adult cow, respectively.
The increase in feeding costs was the main reason that we disposed of a large number of our cows. The bulk sales of milk cows provides us with a new revenue stream with relatively low direct costs as the local farmers assumed the milk production function.
Research and Development
We had no expenses on research and development activities during the fiscal years ended June 30, 2015 and 2014.
Intellectual Property
We regard the protection of our copyrights, service marks, trademarks, trade secrets and other intellectual property rights as critical to our future success. We rely on contractual restrictions to protect our proprietary rights in products and services. We cannot assure you that these contractual arrangements or the other steps taken by us to protect our intellectual property will prove sufficient to prevent misappropriation of our technology or to deter independent third-party development of similar technologies.
Trademarks
Through Zhongxian Information, we have registered the following trademark with the Trademark Office, State Administration for Industry and Commerce in the PRC:
We plan to file for extension with the Trademark Office of the above trademark prior to the expiration date.
Copyright
The Company currently does not own any copyrights. The copyright of Zhongxian Agricultural Economy Network Services System V1.0 and Zhongxian Agricultural Capital Information Services System V1.0 were previously contributed to the Company by its shareholders and have now been reverted back to such shareholders.
Domain Names
Zhongxian Information owns the domain name of www.hljzhongxian.com (Registration No.: Hei ICP Bei 10200342).
Government Regulation
We are subject to inspection of the Livestock and Veterinary Bureau each quarter for our breeder farms. We have never been penalized by the bureau.
China Regulations
This section sets forth a summary of the most significant Chinese regulations or requirements that may affect our business activities operated in China or our shareholders’ right to receive dividends and other distributions of profits from the PRC subsidiaries.
Foreign Investment in PRC Operating Companies
The Foreign Investment Industrial Catalogue jointly issued by the MOFCOM and the National Development and Reform Commission or the NDRC in 2007 classified various industries/business into three different categories: (i) encouraged for foreign investment; (ii) restricted to foreign investment; and (iii) prohibited from foreign investment. For any industry/business not covered by any of these three categories, they will be deemed industries/business permitted to have foreign investment. Except for those expressly provided restrictions, encouraged and permitted industries/business are usually 100% open to foreign investment and ownership. With regard to those industries/business restricted to or prohibited from foreign investment, there is always a limitation on foreign investment and ownership. The PRC Subsidiary’s business does not fall under the industry categories that are restricted to, or prohibited from foreign investment and is not subject to limitation on foreign investment and ownership.
Regulation of Foreign Currency Exchange
Foreign currency exchange in the PRC is governed by a series of regulations, including the Foreign Currency Administrative Rules (1996), as amended, and the Administrative Regulations Regarding Settlement, Sale and Payment of Foreign Exchange (1996), as amended. Under these regulations, the Renminbi is freely convertible for trade and service-related foreign exchange transactions, but not for direct investment, loans or investments in securities outside the PRC without the prior approval of SAFE. Pursuant to the Administrative Regulations Regarding Settlement, Sale and Payment of Foreign Exchange (1996), Foreign Invested Enterprises (“FIEs”) may purchase foreign exchange without the approval of SAFE for trade and service-related foreign exchange transactions by providing commercial documents evidencing these transactions. They may also retain foreign exchange, subject to a cap approved by SAFE, to satisfy foreign exchange liabilities or to pay dividends. However, the relevant Chinese government authorities may limit or eliminate the ability of FIEs to purchase and retain foreign currencies in the future. In addition, foreign exchange transactions for direct investment, loan and investment in securities outside the PRC are still subject to limitations and require approvals from SAFE.
Regulation of FIEs’ Dividend Distribution
The principal laws and regulations in the PRC governing distribution of dividends by FIEs include:
(i) The Sino-foreign Equity Joint Venture Law (1979), as amended, and the Regulations for the Implementation of the Sino-foreign Equity Joint Venture Law (1983), as amended;
(ii) The Sino-foreign Cooperative Enterprise Law (1988), as amended, and the Detailed Rules for the Implementation of the Sino-foreign Cooperative Enterprise Law (1995), as amended;
(iii) The Foreign Investment Enterprise Law (1986), as amended, and the Regulations of Implementation of the Foreign Investment Enterprise Law (1990), as amended.
Under these regulations, FIEs in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, foreign-invested enterprises in the PRC are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds unless such reserve funds have reached 50% of their respective registered capital. These reserves are not distributable as cash dividends. The board of directors of a FIE has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.
Regulation of a Foreign Currency’s Conversion into RMB and Investment by FIEs
On August 29, 2008, SAFE issued a Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises or Notice 142, to further regulate the foreign exchange of FIEs. According to the Notice 142, FIEs shall obtain verification report from a local accounting firm before converting its registered capital of foreign currency into Renminbi, and the converted Renminbi shall be used for the business within its permitted business scope. The Notice 142 explicitly prohibits FIEs from using RMB converted from foreign capital to make equity investments in the PRC, unless the domestic equity investment is within the approved business scope of the FIE and has been approved by SAFE in advance.
Regulation of Foreign Exchange in Certain Onshore and Offshore Transactions
In October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies , or SAFE Notice 75, which became effective as of November 1, 2005, and was further supplemented by two implementation notices issued by SAFE on November 24, 2005 and May 29, 2007, respectively. SAFE Notice 75 states that PRC residents, whether natural or legal persons, must register with the relevant local SAFE branch prior to establishing or taking control of an offshore entity established for the purpose of overseas equity financing involving onshore assets or equity interests held by them. The term “PRC legal person residents” as used in SAFE Notice 75 refers to those entities with legal person status or other economic organizations established within the territory of the PRC. The term “PRC natural person residents” as used in SAFE Notice 75 includes all PRC citizens and all other natural persons, including foreigners, who habitually reside in the PRC for economic benefit. SAFE implementation notice of November 24, 2005 further clarifies that the term “PRC natural person residents” as used under SAFE Notice 75 refers to those “PRC natural person residents” defined under the relevant PRC tax laws and those natural persons who hold any interests in domestic entities that are classified as “domestic-funding” interests.
PRC residents are required to complete amended registrations with the local SAFE branch upon: (i) injection of equity interests or assets of an onshore enterprise to the offshore entity, or (ii) subsequent overseas equity financing by such offshore entity. PRC residents are also required to complete amended registrations or filing with the local SAFE branch within 30 days of any material change in the shareholding or capital of the offshore entity, such as changes in share capital, share transfers and long-term equity or debt investments and these changes do not relate to return investment activities. PRC residents who have already organized or gained control of offshore entities that have made onshore investments in the PRC before SAFE Notice 75 was promulgated must register their shareholdings in the offshore entities with the local SAFE branch on or before March 31, 2006.
Under SAFE Notice 75, PRC residents are further required to repatriate into the PRC all of their dividends, profits or capital gains obtained from their shareholdings in the offshore entity within 180 days of their receipt of such dividends, profits or capital gains. The registration and filing procedures under SAFE Notice 75 are prerequisites for other approval and registration procedures necessary for capital inflow from the offshore entity, such as inbound investments or shareholders loans, or capital outflow to the offshore entity, such as the payment of profits or dividends, liquidating distributions, equity sale proceeds, or the return of funds upon a capital reduction.
Government Regulations Relating to Taxation
On March 16, 2007, the National People’s Congress or NPC, approved and promulgated the PRC Enterprise Income Tax Law , which we refer to as the New EIT Law. The New EIT Law took effect on January 1, 2008. Under the New EIT Law, FIEs and domestic companies are subject to a uniform tax rate of 25%. The New EIT Law provides a five-year transition period starting from its effective date for those enterprises which were established before the promulgation date of the New EIT Law and which were entitled to a preferential lower tax rate under the then-effective tax laws or regulations.
On December 26, 2007, the State Council issued a Notice on Implementing Transitional Measures for Enterprise Income Tax, or the Notice, providing that the enterprises that have been approved to enjoy a low tax rate prior to the promulgation of the New EIT Law will be eligible for a five-year transition period since 1 January, 2008, during which time the tax rate will be increased step by step to the 25% unified tax rate set out in the New EIT Law. From 1 January, 2008, for the enterprises whose applicable tax rate was 15% before the promulgation of the New EIT Law, the tax rate will be increased to 18% for year 2008, 20% for year 2009, 22% for year 2010, 24% for year 2011, 25% for year 2012. For the enterprises whose applicable tax rate was 24%, the tax rate will be changed to 25% from January 1, 2008.
The New EIT Law provides that an income tax rate of 20% may be applicable to dividends payable to non-PRC investors that are “non-resident enterprises”. Non-resident enterprises refer to enterprises which do not have an establishment or place of business in the PRC, or which have such establishment or place of business in the PRC but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within the PRC. The income tax for non-resident enterprises shall be subject to withholding at the income source, with the payor acting as the obligatory withholder under the New EIT Law, and therefore such income taxes generally called withholding tax in practice. The State Council of the PRC has reduced the withholding tax rate from 20% to 10% through the Implementation Rules of the New EIT Law. It is currently unclear in what circumstances a source will be considered as located within the PRC. We are a U.S. holding company and substantially all of our income is derived from dividends we receive from our subsidiaries located in the PRC. Thus, if we are considered as a “non-resident enterprise” under the New EIT Law and the dividends paid to us by our subsidiary in the PRC are considered income sourced within the PRC, such dividends may be subject to a 10% withholding tax.
Such income tax may be exempted or reduced by the State Council of the PRC or pursuant to a tax treaty between the PRC and the jurisdictions in which our non-PRC shareholders reside. For example, the 10% withholding tax is reduced to 5% pursuant to the Double Tax Avoidance Agreement Between Hong Kong and Mainland China if the beneficial owner in Hong Kong owns more than 25% of the registered capital in a company in the PRC.
The new tax law provides only a framework of the enterprise tax provisions, leaving many details on the definitions of numerous terms as well as the interpretation and specific applications of various provisions unclear and unspecified. Any increase in the combined company’s tax rate in the future could have a material adverse effect on its financial conditions and results of operations.
Regulations of Overseas Investments and Listings
On August 8, 2006, six PRC regulatory agencies, including MOFCOM, CSRC, SASAC, SAT, SAIC and SAFE, jointly amended and released the M&A Rules, which became effective on September 8, 2006. This regulation, among other things, includes provisions that purport to require that an offshore SPV formed for purposes of overseas listing of equity interest in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. On September 21, 2006, CSRC published on its official website procedures regarding its approval of overseas listings by SPVs. CSRC approval procedures require the filing of a number of documents with CSRC and it would take several months to complete the approval process. The application of the M&A Rules with respect to overseas listings of SPVs remains unclear with no consensus currently existing among the leading PRC law firms regarding the scope of the applicability of CSRC approval requirement.
Regulations on Work Safety
On June 29, 2002, the Work Safety Law (“WSL”) of the PRC was adopted by the Standing Committee of the 9th National People’s Congress and came into effect on November 1, 2002, as amended on August 27, 2009. The WSL provides general work safety requirements for entities engaging in manufacturing and business activities within the PRC. Additionally, Regulation on Work Safety Licenses (“RWSL”), as adopted by the State Council on January 7, 2004 effective on January 13, 2004, requires enterprises engaging in the manufacture of dangerous chemicals to obtain a work safety license with a term of three years. If a work safety license needs to be extended, the enterprise must go through extension procedures with authorities three months prior to its expiration. In addition, on May 17, 2004, the Measures for Implementation of Work Safety Licenses of Dangerous Chemicals Production was promulgated as implementing measures to the Regulation on Work Safety Licenses which provides that entities producing dangerous chemicals are required to obtain work safety licenses pursuant to specific requirements. Without work safety licenses, no entity may engage in the formal manufacture of dangerous chemicals.
The Regulations on the Safety Administration of Dangerous Chemicals (“RSADC”) was promulgated by the State Council on January 26, 2002, effective as of March 15, 2002. It sets forth general requirements for manufacturing and the storage of dangerous chemicals in China. The RSADC requires that companies manufacturing dangerous chemicals establish and strengthen their internal regulations and rules on safety control and fulfill the national standards and other relevant provisions of the State. In addition, according to the RSADC, companies that manufacture, store, transport or use dangerous chemicals shall be required to obtain corresponding approvals or licenses with the State Administration of Work Safety and its local branches and other proper authorities. Companies that manufacture or store dangerous chemicals without approval or registration with the proper authorities can be shut down, ordered to stop manufacturing or ordered to destroy the dangerous chemicals. Such companies can also be subject to fines. If criminal law is violated, the persons chiefly liable, along with other personnel directly responsible for such impropriety, shall be subject to relevant criminal liability.
Regulations on Environmental Protection
According to the Prevention and Control of Water Pollution Law, as adopted by the Standing Committee of the 10th National People’s Congress on February 28, 2008 and effective on June 1, 2008, China adopted a licensing system for pollutant discharge. Companies directly or indirectly responsible for discharge of industrial waste water or medical sewage to waters shall be required to obtain a pollutant discharge license. All companies are prohibited from discharging wastewater and sewage to waters without or in violation of the terms of the pollutant discharge license.
The Regulations on the Administration of Construction Projects Environmental Protection (“RACPEP”), as adopted by the State Council on November 18, 1998 and effective on November 29, 1998, governs construction projects and the impact such projects will have on the environment. Pursuant to the RACPEP, the governing body is responsible for supervising the implementation of a three tiered system that includes (i) reviewing and approving a construction project, (ii) overseeing the construction project and (iii) to inspect the finished construction project and ensure that all harmful pollutants are disposed of correctly. Manufacturing companies are required to apply for inspection with environment protection authorities upon completion of a construction project.
Food Safety Law of the People’s Republic of China
The Food Safety Law of the People’s Republic of China (the “Food Safety Law”) as adopted at the 7th Session of the Standing Committee of the 11th National People’s Congress of the People’s Republic of China and effective on June 1, 2009, governs the food safety in food production and business operation activities. Pursuant to the Food Safety Law, food producers must establish an internal inspection and record system for raw materials and predelivery products, and food distributors must also establish internal systems to record and inspect food products procured from suppliers. In addition, any food addictives that are not in the approved government catalog must not be used and no food products can be sold inspection-free.
Regulations on the Implementation of the Food Safety Law of the People’s Republic of China
The Regulations on the Implementation of the Food Safety Law of the People’s Republic of China (the “Regulations”) as adopted at the 73rd Standing Committee Meeting of the State Council on July 8, 2009 and effective on July 20, 2009, are promulgated in accordance with the Food Safety Law. The Regulations require that the local People’s Government at or above the country level shall perform the responsibility specified in the Food Safety Law, improve the ability for supervision and administration of food safety, ensure supervision and administration of food safety; establish and improve the coordination mechanism between food safety regulatory authorities, integrate and improve the food safety information network, and realize the sharing of food safety and food inspection information and other technical resources.
Law of the People’s Republic of China on Quality and Safety of Agricultural Products
The Law of the People’s Republic of China on Quality and Safety of Agricultural Products was adopted at the 21st Meeting of the Standing Committee of the Tenth National People’s Congress on April 29, 2006. This Law was enacted in order to ensure the quality and safety of agricultural products, maintain the health of the general public, and promote the development agriculture and rural economy. Pursuant to this Law, agricultural products distribution enterprises shall establish a sound system of inspection and acceptance for their purchases. In addition, agricultural products that fail to pass the inspection based on the quality and safety standards of agricultural products cannot be marketed.
Compliance with Environmental Laws
We strive to meet the requirements provided in environmental protection regulations, and regulations related to facility safety and quality control, throughout the design, maintenance and growth of our operation facilities and manufacturing process.
Employees
We currently have approximately 168 employees of which Zhongxian Information has 6 employees, Xinhua Cattle has 78 employees and Yulong Cattle has 84 employees and all of our employees are full-time employees.
Item 1A.
Item 1A. Risk Factors.
Smaller reporting companies are not required to provide the information required by this item.
Item 1B.
Item 1B. Unresolved Staff Comments
Smaller reporting companies are not required to provide the information required by this item.
Item 2.
Item 2. Properties.
Farmland
All land in China is government owned and cannot be sold to any individual or company. The Company obtained a “land use right” to use 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 to obtain the “land use right” to use this land from May 1, 2013 to Apr 30, 2063. The Company recorded the prepayment of RMB 37,500,000 ($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 remaining prepayment of $5,854,800 and $5,947,900 is included in prepaid land lease in the consolidated balance sheets as of June 30, 2015 and 2014, 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 related prepayment of $3,060,000 and $3,532,200 is included in prepaid land lease in the consolidated balance sheets as of June 30, 2015 and 2014, respectively. The lease provides for renewal options.
On February 25, 2013, the Company obtained another “land use right” to use 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 remaining prepayment of $11,986,191 and $12,177,662 is included in prepaid land lease in the consolidated balance sheets as of June 30, 2015 and 2014, respectively. The lease provides for renewal options.
On May 7, 2015, the Company obtained another “land use right” to use 238,001 square meters of land, from May 7, 2015 to May 6, 2045. In addition, the Company also leased all the constructions on the land which includes cowsheds at 35,808 square meters on top of the land leased, an office building at 3,500 square meters and a flat building at 3,500 square meters. The lease period of all these constructions is the same as the land. The Company recorded the prepayment of RMB 74,847,600 (US$12,215,000) as prepaid lease. The prepaid lease is being amortized over the lease term of 30 years using the straight-line method. The remaining prepayment of $12,147,266 is included in prepaid lease in the consolidated balance sheets as of June 30, 2015.
On May 14, 2015, the Company obtained another “land use right” to use 283,335 square meters of land, from May 14, 2015 to May 13, 2045. In addition, the Company also leased all the constructions on the land which includes cowsheds at 42,100 square meters, an office building at 3,000 square meters and a flat building at 3,000 square meters. The lease period of all these constructions is the same as the land. The Company recorded the prepayment of RMB 111,887,500 (US$18,260,000) as prepaid lease. The prepaid lease is being amortized over the lease term of 30 years using the straight-line method. The remaining prepayment of $18,158,595 is included in prepaid lease in the consolidated balance sheets as of June 30, 2015.
Rent expense charged to operations for the fiscal years ended June 30, 2015 and 2014 was $1,029,601 and $860,813, respectively.
Office Space
We are under arrangements with an unrelated third party to use an office space at no cost from September 1, 2010, to August 31, 2015.
Item 3.
Item 3. Legal Proceedings.
From time to time, we may be involved in litigation in the ordinary course of business. We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. To our knowledge, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of our executive officers or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or any of our companies or our companies’ subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 4.
Item 4. Mine Safety Disclosures.
Not Applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities.
Market Information
Our common stock began to be quoted on the OTC Bulletin Board on July 8, 2010 and is currently quoted on OTCQB under the symbol “CMCI”. There has been a very limited public market for our common stock. There can be no assurance that a liquid market for our securities will ever develop.
The following table sets forth the high and low bid quotations for our common stock as reported on the OTCQB for the periods indicated.
* The quotations of the closing prices reflect inter-dealer prices, without retail mark-up, markdown or commission.
Holders
As of September 30, 2015, there are 787 holders of record of the Company’s common stock.
Dividends
The Company has not paid any cash dividends to date and does not anticipate or contemplate paying dividends in the foreseeable future. It is the present intention of management to utilize all available funds for the development of the Company's business.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth securities authorized for issuance under any equity compensation plans approved by our stockholders as well as any equity compensation plans not approved by our stockholders as of June 30, 2015.
(1) On April 16, 2012, the Company granted 3,000,000 shares of restricted stock under the Plan to its employees and the shares were issued on April 26, 2012. The shares, with a fair value of $1,200,000 at the grant date, were fully vested on May 20, 2012 and the fair value of the shares was charged to operations for the fiscal year ended June 30, 2012. As of September 30, 2015, there are currently no shares available to be issued.
Item 6.
Item 6. Selected Financial Data.
Smaller reporting companies are not required to provide the information required by this item.
Item 7.
Item 7. 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 fiscal years ended June 30, 2015 and 2014. 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 Annual 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 234 tons per day. We also have 76 exclusive individual partners with an aggregate fresh milk production capacity of approximately 405 tons per day. We have five major customers, one of which is the leading dairy company in China.
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 the Exchange Agreement by and among (i) Value Development, a British Virgin Islands company, (ii) Value Development’s shareholders, (iii) us, and (iv) our former principal stockholders. Pursuant to the terms of the Exchange 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. Jiasheng Consulting entered into a series of agreements with 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 10 million Renminbi or $1,206,800 US Dollars. In February 2006, it acquired 99% of the registered capital of Xinhua Cattle, which was incorporated in China in December 2005 with registered capital of three million RMB 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 breading and fresh milk production and distribution.
On November 23, 2011, Zhongxian Information acquired 100% of the equity interest of 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.
Recent Company Restructure
Early in July 2015, Hope Diary acquired 60% of China Dairy and became a wholly-owned subsidiary of the Company after Mr. Youliang Wang, Company’s Chief Executive Officer, transferred 100% of his interest in Hope Diary to the Company for $50,000 (the “Hope Diary Transfer”). On July 16, 2015, the Company transferred 100% of the issued and outstanding shares of Value Development to China Dairy, which is 60% owned indirectly by the Company through the Company’s wholly owned subsidiary, Hope Diary as a result of the Hope Diary Transfer (the “Restructure”).
The Restructure involves nominal consideration received or paid as Value Development and China Dairy are under common control by the Company and this transaction affects the Company’s interests in Value Development.
As a result of the Restructure, the Company indirectly owns 60% of China Dairy through its wholly-owned subsidiary, Hope Diary, which holds 60% of the issued and outstanding shares of China Dairy, which in turn holds 100% of the issued and outstanding shares of Value Development.
The effect of this transaction was the decrease in interest of the Company in its operating company by 40%. This will result in the Company recognizing a transaction loss of approximately $50,300,000 during the three months ended September 30, 2015.
The purpose of the transfer of Value Development to China Dairy is to facilitate a public offering of the capital stock of China Dairy in Australia. The completion of an offering in Australia is anticipated to further dilute the Company’s ownership of China Dairy.
Company’s current structure are set forth as follows:
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 and 427,572 square meters grassland in February 2013. 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.
Sale of Cows
In September 2011, August 2011, and June 2011, Xinhua Cattle sold 3,787, 5,635, and 2,000 of its cows to local farmers, respectively. In November and December 2014, Yulong sold 3,714 and 2,995 cows to local farmers respectively. 3,500 of the cows sold in 2014 were purchased from outside unrelated parties for $4,550,000. The remaining cows sold were raised by Yulong.
According to the agreements signed with the local farmers in June 2011, the sales price will be collected over five years, with a minimum payment of 20% of the sales price to be paid each year. The related receivable is recorded at its present value at a discount rate of 12%, which is 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.
Pursuant to the agreements 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. The 30% monthly payments will continue over the entire remaining life of the cows sold. 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.
Results of Operations
Comparison of Fiscal Years Ended June 30, 2015 and 2014
The following table sets forth certain information regarding our results of operations for the fiscal years ended June 30, 2015 and 2014.
Revenues
The revenue was primarily generated from sales of fresh milk and commissions on fresh milk sales by famers to whom we sold cows. We had total revenues of $66,335,166 for the fiscal year ended June 30, 2015, an increase of $7,581,912 or 13%, compared to $58,753,254 for the fiscal year ended June 30, 2014. Such increases were mainly driven by approximately $6 million commission revenue generated from the total 6,709 milk cows disposed by Yulong in November and December 2014.
The following table shows a breakdown of revenue from natural milk sales and sales commission, respectively:
For the fiscal year ended June 30, 2015, our revenue generated from natural milk sales was $48,441,505 which represented an increase of $1,864,281 or 4% compared to $46,577,224 for the fiscal year ended June 30, 2014. The increase in the natural milk sales was directly related to the increased number of milk cows compared to the same period of 2014.
The following table sets forth information regarding the number of milk cows and the revenue per cow:
The revenue per milk cow increased to $4,927 for the fiscal year ended June 30, 2015 from $4,804 for the fiscal year ended June 30, 2014, an increase of $123 or 3%. Such increase was a result of the increase in number of young adult cows with high daily production comparing to the fiscal year ended June 30, 2014, but the increase is slight.
The sales commissions increased from local farmers increased by $5,717,631 or 47% to $17,893,661 for the fiscal year ended June 30, 2015 from $12,176,030 for the fiscal year ended June 30, 2014. The quantity of milk cows we now earn commission revenue increased by 52% or 5,919 to 17,341 for the fiscal year ended June 30, 2015 from 11,422 for the fiscal year ended June 30, 2014 due to an addition from the sale of cows of 6,709 by Yulong in November and December 2014 and a deduction of 790 cows which had been fully depreciated from 3 farmers. The farmers started to pay the commission to Yulong in April 2015. In addition, the daily production of the cows sold by Yulong is also higher than the cows sold by Xinhua due to their younger age.
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. Upon the shift of milk production and distribution responsibilities from us to local farmers, our direct costs have been reduced as a result of lowered feeding food costs due to lower quantity of milk cows and, we have seen a marked improvement in our margins compared with the past two years.
The cost per milk cow decreased to $2,058 for the fiscal year ended June 30, 2015 which represented a decrease of $164 or 7% compared to $2,222 for the fiscal year ended June 30, 2014. The main reason for the decrease was due to the increase in the cows fed by local farmers at a lower cost. As a result, the cost per milk cow decreased accordingly.
Gross profit margin
Our gross profit margin was 69.5% for the fiscal year ended June 30, 2015 which increased by 9.7% from the fiscal year ended June 30, 2014. The main reason for such an increase was mainly due to the disposal of adult cows by Yulong for which we now earn commissions and the decreased cost per milk cow.
Operating expenses
Our operating expenses increased to $1,930,266 for the fiscal year ended June 30, 2015 from $1,644,152 for the fiscal year ended June 30, 2014, an increase of $286,114 or 17%. 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 tax surplus fund, etc. We incurred $1,002,045 and $ 679,343 in tax surplus fund for the fiscal year ended June 30, 2015 and 2014, respectively. We classified these tax surplus fund as selling expenses.
Operating income
As a result of the foregoing, we had operating income of $44,175,604 for the fiscal year ended June 30, 2015, representing an increase of $8,610,874, as compared to operating income of $35,564,730 for the fiscal year ended June 30, 2014.
Non-operating income (expenses)
For the fiscal year ended June 30, 2015, non-operating income consists primarily of interest income of $618,263 earned on the outstanding notes receivable from the farmers and other non-operating income of $226,543 which mainly consists of bank interest earned. Non-operating expenses consists of the loss on the disposal of mature biological assets of $1,101,101 and the loss on the disposal of a motor vehicle of $3,244. For the fiscal year ended June 30, 2014, non-operating income consists primarily of interest income of $537,737 earned on the outstanding notes receivable from the farmers and other non-operating income of $149,185 and $1,031 which mainly consists of bank interest earned and the gain on disposal of biological assets, respectively.
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. The provision for income taxes was $10,968,816 and $9,446,671 for the fiscal years ended June 30, 2015 and 2014, respectively, primarily representing the enterprise income tax on the income of Zhongxian Information. Net income before non-controlling interests was $32,947,249 and $26,806,012 for the fiscal years ended June 30, 2015 and 2014, respectively, which represented an increase in $6,141,237 or 23%. As we own 99% of Xinhua Cattle’s shares, net income attributed to the non-controlling shareholders was $355,982 and $285,569 for the fiscal years ended June 30, 2015 and 2014, respectively. Our net income attributable to the common stockholders of the Company was $32,591,267 representing $0.61 per share and $26,520,443 representing $0.50 per share for the fiscal years ended June 30, 2015 and 2014, respectively.
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 fiscal years ended June 30, 2015 and 2014, foreign currency translation adjustments of $560,995 and $874,250, respectively, have been reported as other comprehensive income in the consolidated statements of income and other comprehensive income, respectively.
Liquidity and Capital Resources
As of June 30, 2015 and June 30, 2014, we had no bank debt but amounts owed to shareholders of $937,524 and $656,995, respectively. The amounts due to our stockholders was principally for the professional fees incurred for being a reporting company in the United States from our stockholders’ personal bank accounts because of the restriction of official bank transfers abroad by the Bank of China. At the same time, we had $54,145,781 and $58,032,554 in cash at June 30, 2015 and 2014 as well as working capital of $64,685,249 and $65,364,104, respectively.
Operating activities
During the fiscal year ended June 30, 2015, our operating activities provided $12,491,180 in net cash, compared to $38,093,140 during the fiscal year ended June 30, 2014. The net cash provided in the fiscal year ended June 30, 2015 was significantly lower than our net income primarily due to the increase in deferred income tax liabilities of $10,968,816 and the increase in lease payment of $33,431,988. The net cash provided in the fiscal year ended June 30, 2014 was much more than the net income primarily due to the increase in the deferred income tax liabilities of $9,446,671.
Investing activities
During the fiscal year ended June 30, 2015, our investing activities provided a cash outflow of $17,186,113 compared with a cash outflow of $6,268,810 for the fiscal year ended June 30, 2014. The food costs and feeding expenses for biological properties used cash of $10,741,615 and $8,156,871 for the fiscal years ended June 30, 2015 and 2014, respectively. For the fiscal year ended June 30, 2015, we spent $4,555,600 for purchasing milk cows. Conversely, we received cash of $1,875,642 and $1,869,595 during the fiscal years ended June 30, 2015 and 2014, respectively, from collection of notes receivable from the disposal of biological properties in 2011 and 2014. For the fiscal years ended June 30, 2015 and 2014, we also received $19,524 and $18,466 in cash from our sales of biological properties, respectively. For the fiscal year ended June 30, 2015, we also spent $3,784,064 for addition of property, plant and equipment for daily operations.
Financing activities
Our financing activities mainly included proceeds from shareholders and repayment to shareholders. For the fiscal years ended June 30, 2015 and 2014, we received $193,182 and $270,431 from shareholders, respectively. For the fiscal years ended June 30, 2015 and 2014, we repaid of $99,316 and $1,161 to our shareholders, respectively.
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, there is no guarantee and our observation of the equity markets does not indicate that we will be able 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 June 30, 2015 and 2014 and for the fiscal years ended June 30, 2015 and 2014, 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 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Smaller reporting companies are not required to provide the information required by this item.
Item 8.
Item 8. Financial Statements and Supplementary Data.
China Modern Agricultural
Information, Inc. and
subsidiaries
Consolidated Financial Statements for the
Fiscal Years Ended June 30, 2015 and 2014
And
Report of Independent Registered Public Accounting Firm
China Modern Agricultural Information, Inc.
and subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended June 30, 2015 and 2014
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
China Modern Agricultural Information, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of China Modern Agricultural Information, Inc. and Subsidiaries (the “Company”) as of June 30, 2015 and 2014, and the related consolidated statements of income and other comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the two-year period ended June 30, 2015. China Modern Agricultural Information, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of China Modern Agricultural Information, Inc. and Subsidiaries as of June 30, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended June 30, 2015, in conformity with accounting principles generally accepted in the United States of America.
/s/ Wei, Wei & Co., LLP
Flushing, New York
October 13, 2015
China Modern Agricultural Information, Inc.
and subsidiaries
CONSOLIDATED BALANCE SHEETS
junE 30, 2015 and 2014 (IN U.S. $)
See accompanying notes to the consolidated financial statements.
China Modern Agricultural Information, Inc.
and subsidiaries
CONSOLIDATED BALANCE SHEETS (CONTINUED)
june 30, 2015 AND 2014 (IN U.S. $)
See accompanying notes to the consolidated financial statements.
China Modern Agricultural Information, Inc.
and subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
AND OTHER COMPREHENSIVE INCOME
FOR THE FISCAL YEARS ENDED june 30, 2015 and 2014 (IN U.S. $)
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 FISCAL YEARS ENDED JUNE 30, 2015 and 2014 (IN U.S. $)
See accompanying notes to the consolidated financial statements.
China Modern Agricultural Information, Inc.
and subsidiaries
CONSOLIDATED STATEMENTS OF changes in Stockholders’ EQUITY
FOR THE FISCAL YEARs ENDED JUNE 30, 2015 (IN U.S. $)
See accompanying notes to the consolidated financial statements.
China Modern Agricultural Information, Inc.
and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED june 30, 2015 AND 2014 (IN U.S. $)
See accompanying notes to the consolidated financial statements.
China Modern Agricultural Information, Inc.
and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE FISCAL YEARS ENDED JUNE 30, 2015 AND 2014 (IN U.S. $)
See accompanying notes to the consolidated financial statements.
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
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 an Equity Pledge Agreement.
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
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) and the VIE its subsidiaries. Before and after the Share Exchange, Value Development, Value Development Group Limited (a wholly-owned subsidiary of Value Development), Jiasheng Consulting, and 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
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
1. ORGANIZATION (CONTINUED)
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
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
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, Value Development, Value Development Group Limited, Jiasheng Consulting, and its VIE, Zhongxian Information and Zhongxian Information’s 99% owned subsidiary, Xinhua Cattle and its 100% owned subsidiary, Yulong. The Company is the primary beneficiary of the VIE and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The audited consolidated financial statements of the Company as of June 30, 2015 and for the fiscal years ended June 30, 2015 and 2014, 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.
Variable Interest Entity
Pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation” (“ASC 810”), the Company is required to include in its consolidated financial statements the financial statements of its VIE’s. ASC 810 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which a company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the entity, and therefore the company is the primary beneficiary of the entity.
Zhongxian Information and its subsidiaries (collectively, the “Chinese VIE”) have no assets that are collateral for or restricted solely to settle their obligations. The creditors of the Chinese VIE and its subsidiaries do not have recourse to the Company’s general credit. Because Value Development, Value Development Group Limited and Jiasheng Consulting are established for the sole purpose of holding ownership interest and do not have any operations, the financial statement amounts and balances are principally those of the Chinese VIE and its subsidiaries.
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Variable Interest Entity (Continued)
Under ASC 810, an enterprise has a controlling financial interest in a VIE, and must consolidate that VIE, if the enterprise has both of the following characteristics: (a) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance; and (b) the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE. The Company’s determination of whether it has this power is not affected by the existence of kick-out rights or participating rights, unless a single enterprise, including its related parties and de facto agents, has the unilateral ability to exercise those rights. The Chinese VIE’s actual stockholders do not hold any kick-out rights that will affect the consolidation determination.
Foreign Currency Translations
All Company assets are located in People’s Republic of China (“PRC”). The functional currency for the majority of the Company’s operations is the Renminbi (“RMB”). The Company uses the United States dollar (“US Dollar” or “US$” 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 and other comprehensive income 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”).
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign Currency Translations (Continued)
The exchange rates used to translate amounts in RMB into US dollars for preparing the consolidated financial statements are as follows:
Foreign currency translation adjustments of $560,995 and $874,250 for the fiscal years ended June 30, 2015 and 2014, respectively, have been reported as other comprehensive income in the consolidated statements of income and other comprehensive income. Other comprehensive income 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 other currencies 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.
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Milk sales revenue is recognized when the title has been passed to the customers, which is the date when the milk is delivered to designated locations and accepted by the customers and the previously discussed requirements are met. Fresh milk is delivered to its customers 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.
The Company believes that Jiasheng Consulting’s contractual agreements with Zhongxian Information are in compliance with PRC law and are legally enforceable. The stockholders of Zhongxian Information are also the senior management of the Company and therefore the Company believes that they have no current interest in seeking to act contrary to the contractual agreements. However, Zhongxian Information and its stockholders may fail to take certain actions required for the Company’s business or to follow the Company’s instructions despite their contractual obligations to do so.
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Vulnerability Due to Operations in PRC (Continued)
Furthermore, if Zhongxian Information or its stockholders do not act in the best interests of the Company under the contractual agreements or any dispute relating to these contractual agreements remains unresolved, the Company will have to enforce its rights through the operations of PRC law and courts and therefore will be subject to uncertainties in the PRC legal system.
All of these contractual agreements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. As a result, uncertainties in the PRC legal system could limit the Company’s ability to enforce these contractual agreements, which could make it difficult to exert effective control over Zhongxian Information, and its ability to conduct the Company’s business may be adversely affected.
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
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
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 upon 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, accrued expenses, and other payables, 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
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
Advertising costs are charged to operations when incurred. Advertising costs were $814 and $0 for the fiscal years ended June 30, 2015 and 2014, respectively.
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 30 days credit term for its milk sales, and usually receives the payment in the following month. The Company considers all accounts receivable at June 30, 2015 and 2014, 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 June 30, 2015 and 2014.
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Prepaid Expenses
Prepaid expenses as of June 30, 2015 and 2014 mainly represent the prepayments of approximately $898,900 and $2,900 for prepaid cow insurances expenses, for prepaid construction expenses, for heating expenses and for consulting services. The increase in the prepaid expenses was mainly due to the increases in the prepaid insurances expenses for the cows and the prepaid construction expenses in 2015.
Prepaid Land Leases
Prepaid land 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:
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
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 fiscal years ended June 30, 2015 and 2014.
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 expenses, 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. For the fiscal year ended June 30, 2015, a loss of $1,101,101 on the sale of the adult cows is included in non-operating expenses in the accompanying consolidated statements of income and other comprehensive income. (See Note 6)
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Biological Assets
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 fiscal years ended June 30, 2015 and 2014.
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 for 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. Zhongxian Information is subject to the tax rate of 25% for the earnings when distributed by Xinhua Cattle and Yulong. At June 30, 2015 and 2014, undistributed earnings allocated to Zhongxian Information were approximately $160,600,000 and $117,000,000, respectively.
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 June 30, 2015 and 2014, the Company does not have a liability for any uncertain tax positions.
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes (Continued)
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 fiscal years ended June 30, 2015 and 2014.
BVI
Value Development is incorporated in the BVI and is 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 is 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.
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. Zhongxian Information is subject to an Enterprise Income Tax at 25% and files its own tax return.
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 fiscal years ended June 30, 2015 and 2014.
Statutory Reserve Fund
Pursuant to corporate law of the PRC, Jiasheng Consulting and the Company’s Chinese VIE and its 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 June 30, 2015 and 2014, the required statutory reserve funds have been fully funded.
3. Recently Issued Accounting Standards
In March 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU 2015-03 - Interest - Imputation of Interest (Subtopic 835-30). This ASU addressed the simplification of debt issuance costs presentation by presenting debt issuance costs in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. This accounting standard update is not expected to have a material impact on the Company’s consolidated financial statements.
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
3. Recently Issued Accounting Standards (CONTINUED)
In January 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU 2015-01 - Income Statement - Extraordinary and Unusual Items (Subtopic 225-20). This ASU addressed the simplification of income statement presentation by eliminating the concept of extraordinary items. The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to the users of financial statements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. This accounting standard update is not expected to have a material impact on the Company’s consolidated financial statements.
In August 2014, the FASB issued authoritative guidance that requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern and requires additional disclosures if certain criteria are met. This guidance is effective for fiscal periods ending after December 15, 2016, with early adoption permitted. This accounting standard update is not expected to have a material impact on the Company’s consolidated financial statements.
In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASU 2014-12). ASU 2014-12 requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Accounting Standards Codification (ASC) 718, Compensation-Stock Compensation, as it relates to such awards. ASU 2014-12 is effective for us in our first quarter of fiscal 2017 with early adoption permitted using either of two methods: (i) prospective to all awards granted or modified after the effective date; or (ii) retrospective to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter, with the cumulative effect of applying ASU 2014-12 as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented in the financial statements. This accounting standard update is not expected to have a material impact on the Company’s consolidated financial statements.
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
3. Recently Issued Accounting Standards (CONTINUED)
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition”. The core principle of this updated guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new rule also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The FASB has recently extended the effective date for one year. Companies are permitted to adopt this new rule following either a full or modified retrospective approach. Early adoption is not permitted. The Company has not yet determined the potential impact of this updated authoritative guidance on its consolidated financial statements.
4. Property, plant and equipment
Property, plant and equipment are summarized as follows:
Depreciation expense charged to operations for the fiscal years ended June 30, 2015 and 2014 were $339,274 and $299,386, respectively.
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
5. Biological assets
Biological assets consist of the following:
Depreciation expense for fiscal years ended June 30, 2015 and 2014 was $1,961,300 and $1,947,156, respectively, all of which was included in cost of goods sold in the consolidated statements of income and other comprehensive income. The decrease of accumulated depreciation is due to the disposal of cows in November and December, 2014.
6. Notes Receivable
Notes receivable are related to the sales of cows (mature biological assets) to local farmers.
In September 2011, August 2011, and June 2011, Xinhua Cattle sold 3,787, 5,635, and 2,000 of its cows to local farmers, respectively.
In November and December 2014, Yulong sold 3,714 and 2,955 cows to local farmers respectively. 3,500 of the cows sold were purchased from outside parties for $4,550,000. The remaining cows sold were raised by Yulong.
According to the agreements signed with the local farmers in June 2011, the sales price will be collected over five years, with a minimum payment of 20% of the sales price to be paid each year. The related receivable is recorded at its present value at a discount rate of 12%, which is 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.
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
6. Notes Receivable (CONTINUED)
Pursuant to the agreements 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 a 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. The 30% monthly payments will continue over the entire remaining life of the cows sold. 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.
During the fiscal years ended June 30, 2015 and 2014, the Company received principal and interest payments of $2,681,845 and $1,982,139, respectively. Commission income for the fiscal years ended June 30, 2015 and 2014, was $17,893,661 and $10,022,286, respectively, under these agreements.
The receivable related to the sales of cows is included in notes receivable in the consolidated balance sheets as of June 30, 2015 and 2014. The related commission receivable of $3,408,759 and $989,792 at June 30, 2015 and 2014, respectively, is included in accounts receivable in the consolidated balance sheets.
Notes receivable at June 30, 2015 and 2014 consists of the following:
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
6. Notes Receivable (CONTINUED)
Future maturities of notes receivable as of June 30, 2015 are as follows:
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
The Company leases an office at no cost from an unrelated third party. On September 1, 2010, the Company entered into an operating lease agreement expiring on August 31, 2015. The lease agreement does not provide for payment of rent.
All land in China is government owned and cannot be sold to any individual or company. The Company obtained a “land use right” to use a track of land of 250,000 square meters at no cost through December 1, 2015. On May 10, 2013, the Company, however, entered into an agreement with the municipality of Qiqihaer to obtain the “land use right” to use this land 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 remaining prepayment of $5,854,800 and $5,947,900 is included in prepaid land lease in the consolidated balance sheets as of June 30, 2015 and 2014, respectively. The lease provides for renewal options.
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
7. LeaseS (CONTINUED)
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 related prepayment of $3,060,000 and $3,532,200 is included in prepaid land lease in the consolidated balance sheets as of June 30, 2015 and 2014, respectively. The lease provides for renewal options.
On February 25, 2013, the Company obtained another “land use right” to use 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 remaining prepayment of $11,986,191 and $12,177,662 is included in prepaid land lease in the consolidated balance sheets as of June 30, 2015 and 2014, respectively. The lease provides for renewal options.
On May 7, 2015, the Company obtained another “land use right” to use 238,001 square meters of land, from May 7, 2015 to May 6, 2045. In addition, the Company also leased all the constructions on the land which includes cowsheds at 35,808 square meters on top of the land leased, an office building at 3,500 square meters and a flat building at 3,500 square meters. The lease period of all these constructions is the same as the land. The Company recorded the prepayment of RMB 74,847,600 (US$12,215,000) as prepaid lease. The prepaid lease is being amortized over the lease term of 30 years using the straight-line method. The remaining prepayment of $12,147,266 is included in prepaid lease in the consolidated balance sheets as of June 30, 2015.
On May 14, 2015, the Company obtained another “land use right” to use 283,335 square meters of land, from May 14, 2015 to May 13, 2045. In addition, the Company also leased all the constructions on the land which includes cowsheds at 42,100 square meters, an office building at 3,000 square meters and a flat building at 3,000 square meters. The lease period of all these constructions is the same as the land. The Company recorded the prepayment of RMB 111,887,500 (US$18,260,000) as prepaid lease. The prepaid lease is being amortized over the lease term of 30 years using the straight-line method. The remaining prepayment of $18,158,595 is included in prepaid lease in the consolidated balance sheets as of June 30, 2015.
Rent expense charged to operations for the fiscal years ended June 30, 2015 and 2014 was $1,029,601 and $860,813, respectively.
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
8. EMPLOYMENT AGREEMENTS
The Company had Employment Agreements with its executive officers which expired in 2015. The Agreements were later renewed until August 31, 2015. For the fiscal years ended June 30, 2015 and 2014, compensation under these agreements was $33,923 and $33,923, respectively.
At June 30, 2015, the future commitment under these agreements is approximately $71,000.
9. Related party transactions
The Company obtained demand loans from one of its stockholders which are non-interest bearing. The loans of $937,524 and $656,995 as of June 30, 2015 and 2014, respectively, are reflected as stockholder loans in the consolidated balance sheets.
10. Income taxes
The provision for income taxes consisted of the following for the fiscal years ended June 30:
The following table reconciles the effective income tax rates with the statutory rates for the fiscal years ended June 30:
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
10. Income taxes (CONTINUED)
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.
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.
Deferred tax assets (liabilities) are comprised of the following:
At June 30 2015 and 2014, Zhongxian Information had unused operating loss carry-forwards of approximately $1,836,000 and $1,739,000, respectively, expiring in various years through 2019. The Company has established a valuation allowance of approximately $460,000 and $430,000 against the deferred tax asset related to the net operating loss carry forward at June 30, 2015 and 2014, 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 2014 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 2012 and 2014. The year ended June 30, 2013 was examined by the Internal Revenue Service and resulted in no adjustment.
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
11. 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.
Five customers accounted for approximately 100% of milk sales for the fiscal years ended June 30, 2015 and 2014. The same four and five customers also accounted for approximately 48% and 79% of accounts receivable at June 30, 2015 and 2014, respectively.
Seventy six farmers and Thirty nine famers accounted for the notes receivable at June 30, 2015 and 2014, respectively.
12. Parent company only condensed financial information
The following is the condensed financial information of China Modern Agricultural Information, Inc. only, the US parent, balance sheets as of June 30, 2015 and 2014, statements of income for the fiscal years ended June 30, 2015 and 2014, and statements of cash flows for the fiscal years ended June 30, 2015 and 2014:
Condensed Balance Sheets
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
12.Parent company only condensed financial information (CONTINUED)
Condensed Balance Sheets (Continued)
Condensed Statements of Income
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
12.Parent company only condensed financial information (CONTINUED)
Condensed Statements of Cash Flows (Unaudited)
Basis of Presentation
The Company records its investment in its subsidiaries and VIE under the equity method of accounting. Such investments are presented as “Investment in subsidiaries and VIE” on the condensed balance sheets and the subsidiaries and VIE profits are presented as “Share of earnings from investment in subsidiaries and VIE” in the condensed statements of income.
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 fiscal years ended June 30, 2015 and 2014.
China Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
12.Parent company only condensed financial information (CONTINUED)
Restricted Net Assets
Under PRC laws and regulations, the Company’s PRC subsidiaries and VIE 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 and the VIE amounted to $129,259,501 and $95,871,710 as of June 30, 2015 and 2014, respectively.
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.
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, advances 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 and VIE exceed 25% of the consolidated net assets of the Company.
13. SUBSEQUENT EVENTS
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 Modern Agricultural Information, Inc.
and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ended JUNE 30, 2015 AND 2014 (IN U.S. $)
13. SUBSEQUENT EVENTS (CONTINUED)
These transactions involves nominal consideration received or paid as Value Development and China Dairy are under common control by the Company and this transaction is a restriction to the Company’s interests in Value Development.
As a result of this transaction, the Company indirectly owns 60% of China Dairy, as the Company owns 100% shares of Hope Diary, which in turn owns 60% of the shares of China Dairy, which in turn owns 100% of the shares of Value Development.
The remaining 40% of the shares of China Dairy is owned by the following entities: 3% to Beijing Ruihua Future, 4% to Donghe Group, 3% to Integral Capital, 20% to Dingxi Shanghai Fund and 10% to Zhiyuan International.
Value Development is the sole shareholder of Value Development Group Limited, which is the sole shareholder 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%. This will result in the Company recognizing a transaction loss of approximately $50,300,000 during the quarter ended September 30, 2015.
The purpose of the transfer of Value Development to China Dairy is to facilitate a public offering of the capital stock of China Dairy in Australia. The successful completion of an offering in Australia will further dilute the Company’s ownership of China Dairy.
On September 16, 2015 the Company’s 60%-owned subsidiary, Harbin Jiasheng Consulting Management Co., Ltd. ("Jiasheng Consulting"), exercised its option to purchase all of the registered equity of the Company’s operating subsidiary, Heilongjiang Zhongxian Information Co., Ltd. ("Zhongxian Information") from its stockholders Zhenxin Liu and Youliang Wang, who are also the members of the Company’s 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 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.
Item 9A.
Item 9A. 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. Our President and Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of disclosure controls and procedures as of June 30, 2015, pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the President and 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 a lack of accounting personnel with sufficient experience in maintaining books and records and preparing financial statements in accordance with U.S. GAAP.
Management's Annual Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to, in general, provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2015. The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, our management has determined that as of June 30, 2015, our internal control over financial reporting was not effective due to a material weakness related to a lack of accounting personnel with sufficient experience in maintaining books and records and preparing financial statements in accordance with U.S. GAAP.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during the fourth fiscal quarter of the fiscal year ended June 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
Set forth below is information regarding our directors and executive officers.
A brief description of the background and business experience of our sole executive officer and director for the past five years is as follows:
Mr. Liu Enjia
Mr. Liu Enjia is the Chairman of the Company. In 1985, Mr. Liu Enjia served as the Chairman of the Board for Hong Kong Yunli Development (Heilongjiang) Co. Thereafter, in 1991, Mr. Liu Enjia served as the Chairman and President of Hong Kong Yunli Group. Mr. Liu Enjia has also served as faculty member and lecturer at numerous Chinese universities. In 1994, he was a guest lecturer and Visiting Professor at the Social Development Institute at Peking University. Also, in 1994, he served as a Visiting Professor at Shenzhen University. In 1995, he was a guest researcher with the State Economic System Reform Committee. Also in 1995, Mr. Liu Enjia served as consultant for the Heilongjiang Provincial Government System, as well as the Honorary President of Chamber of Commerce of the Heilongjiang Province.
In 1996, at the National Agricultural Conference, Mr. Liu Enjia proposed the business model for agricultural enterprise, which was published in the People’s Forum. Mr. Liu Enjia also established the “Zhongxian Agriculture” theory and the harmonious ecological agricultural practice model which has been implemented in the Heilongjiang Province, winning high praise from State leaders and the State Council.
Mr. Liu Enjia is a dedicated researcher of China’s economic behavior and reform. To that end, he currently serves as the Director of China’s Economic Behavior Research Center. Mr. Liu Enjia is credited with advancing the “Zhongxian” model and business commercialization theory, which brought about entrusted operations in state-owned enterprises, attracting the eye of the international community.
We believe that Mr. Liu Enjia is qualified to serve on our Board of Directors because he brings a broad base of knowledge and experience in the agriculture industry.
Mr. Wang Youliang
Mr. Youliang is the Chief Executive Officer and a Director of the Company. From 1991 to 1997, Mr. Youliang was a staff member of the Tonghua Branch of China Construction Bank. Thereafter, from 1997 to 2006, he was the founder and President of TonghuaHongyuan Trading Co., Ltd. From 2006 to 2008, MrYouliang served as the CMO of Yunnan NanyaoJiaoxiong Pharmaceutical Co., Ltd. From 2008 to 2010 he served as the Vice President of Guofa Venture Investment Co., Ltd. Currently, Mr. Youliang is the General Manager, Chief Executive Officer and Director of Heilongjiang Zhongxian Information Co., Ltd. Mr. Youliang graduated from Jilin University with a degree in Finance.
We believe that Mr. Wang Youliang is qualified to serve on our Board of Directors because he brings a broad base of knowledge and experience in business administration and management.
Ms. Shan Yanqin
Ms. Shan Yangin serves as a Director. While working with Harbin Thermodynamic Company from 1990-2000, she served as the office director and manager of the company. Thereafter, from 2000-2005, Ms. Yangin was the founder and Vice President of Daqing Sunlight Terrestrial Heat Tubing Sales Co., Ltd. From 2005 to the present, Ms. Yangin serves as a Director for Heilongjiang Zhongxian Information Co., Ltd. Ms. Shan Yangin graduated from the Harbin University of Commerce with a Business Administration degree.
We believe that Ms. Shan Yanqin is qualified to serve on our Board of Directors because she brings a broad base of knowledge and experience in business administration and management.
Ms. Liu Yanyan
Ms. Liu Yanyan serves as the Chief Financial Officer of the company. Ms. Yanyan has over a decade of experience in accounting and financial management. From 1995-2000 she served as a staff member of the Harbin Decorative Advertisement Design Corporation. Thereafter, she served as a staff member of Baixin Shoes Co., Ltd from 2000-2001. More recently, from 2002 to May 2010, Ms. Yanyan was a member of Harbin CaiyunTradings Company. Ms. Liu Yanyan graduated from the Heilongjiang College of Commerce with an accounting degree.
Mr. Qin Libei
Mr. Qin Libei serves as the Chief Operating Officer of the company. Mr. Libei has significant experience in the agricultural and livestock field. From 1981 to 1986, he was the Chief Secretary of Heilongjiang Bureau of Animal Husbandry. From 1986 to 1990 he was the Deputy Chief of Heilongjiang Livestock Breeding Guidance Station. Then, from 1991 to 1994, he served as the Deputy Chief of Heilongjiang Grassland Fodder Center experiment station. Additionally, from 1995 to 2000 he served as the Chairman of Heilongjiang Grassland Fodder Development Co., Ltd. and President of Heilongjiang Caiyuan Information Co. Ltd. More recently, from 2001 to 2010 Mr. Libei was a researcher with the Heilognjiang Grassland Fodder Center experimentation station. Currently, Mr. Libei also serves as the Chief Operating Officer for Heilongjiang Zhongxian Information Co., Ltd.. Mr. Libei graduated from Heilongjiang University with a degree in Economics and Management.
Mr. Liu Zhengxin
Mr. Lin Zhengxin serves as the Chief Human Resource Officer of the company. From 1992 to 1993, Mr. Zhengxin was a sales representative with Yunli Development (Heilongjiang) Co., Ltd. Then, from 1993 to 2005, he serves as sales director for Yunli Development (Heilongjiang) Co., Ltd. More recently, from 2005 to 2010, Mr. Zhengxin was the Assistant President of Heilongjiang Zhongxian Information Co. Ltd. From 2008 to the present, Mr. Zhengxin also serves as the CHO for Heilongjiang Zhongxian Information Co. Ltd.. Mr. Zhengxin holds an accounting degree from Heilongjiang Institute of Economic Management, and a minor in Human Resource Management.
Term of Office
Our directors are appointed for a one-year term to hold office until the next annual general meeting of our stockholders or until removed from office in accordance with our bylaws. Our officers are appointed by our Board of Directors and hold office until removed by the Board of Directors.
There are no agreements or understandings among Mr. Liu Enjia, Mr. Wang Youliang, Ms. Shan Yanqin, Ms. Liu Yanyan, Mr. Qin Libei, and Mr. Liu Zhengxin and any other person pursuant to which Mr. Liu Enjia, Mr. Wang Youliang, Ms. Shan Yanqin, Ms. Liu Yanyan, Mr. Qin Libei, and Mr. Liu Zhengxin were selected as a director or executive officer.
Family Relationships
Mr. Liu Enjia and Mr. Liu Zhengxin are father and son. There are no other family relationships between our director and executive officers.
Involvement in Legal Proceedings
To the best of our knowledge, our director or executive officer has not, during the past ten years:
● been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
● had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
● been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
● been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
● been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
● been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” our director or executive officer has not been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
Potential Conflicts of Interest
We are not aware of any current or potential conflicts of interest with our directors or executive officers.
Board Committees
We have not formed an Audit Committee, Compensation Committee or Nominating and Corporate Governance Committee as of the filing of this Annual Report. Our Board of Directors performs the principal functions of an Audit Committee. We currently do not have an audit committee financial expert on our Board of Directors. We believe that an audit committee financial expert is not required because the cost of hiring an audit committee financial expert to act as one of our directors and to be a member of an Audit Committee outweighs the benefits of having an audit committee financial expert at this time.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, officers and persons who beneficially own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC and are required to furnish us with copies of these reports. Based solely on our review of the reports filed with the SEC, we believe that all persons subject to Section 16(a) of the Exchange Act timely filed all required reports in fiscal year ended June 30, 2015, except that reports were not filed by the following persons:
Code of Ethics
We have not adopted a Code of Ethics that is applicable to our Chief Executive Officer and chief financial and principal accounting officer. We are in the process of formulating a code of ethics and intend to adopt one in the future.
Item 11.
Item 11. Executive Compensation.
The following table sets forth the compensation paid or accrued by us to our President, Chief Executive Officer, Chief Financial Officer and each of our other officers for the fiscal year ended June 30, 2015.
Narrative Disclosure to Summary Compensation Table
Mr. Wang Youliang
For the fiscal years ended June 30, 2015 and 2014, Mr. Wang Youliang received annual compensation of RMB 72, 000, or USD $11,594 and $11,714 respectively due to the fluctuating currency exchange rate between USD and RMB in respective year.
We entered into an Employment Agreement with Wang Youliang (the “Youliang Agreement”). Pursuant to the Youliang Agreement, Mr. Wang will serve as our Chief Executive Officer. The initial term of Youliang Agreement ended in 2014, but the agreement was renewed until July 31, 2015. The Youliang Agreement provides that Mr. Wang’s initial base salary during the term shall be RMB 72,000, or approximately USD $11,714 per annum. Mr. Wang’s salary shall be paid on monthly basis, payable at the 30th day of each following month. If the Company unilaterally terminates the employment within the term of the agreement, the Company shall, on the termination date, make a lump-sum salary payment of the immediately preceding month to Mr. Wang plus compensation equal to three (3) months of Mr. Wang’s salary.
The agreement provides that it will automatically terminate upon either the expiration of the term of the Youliang Agreement, or the occurrence of events authorizing such termination or the dissolution of the Company. The Youliang Agreement may also be terminated upon the occurrence of either a serious violation of company policy by Mr. Wang or by any major damages to the Company resulting from Mr. Wang’s failure to duly perform his duties.
Ms. Liu Yanyan
For the fiscal year ended June 30, 2015 and 2014, Ms. Liu Yanyan received annual compensation of RMB 54,000, or USD $ 8,695 and $8,786 respectively due to the fluctuating currency exchange rate between USD and RMB in respective year.
We entered into an Employment Agreement with Liu Yanyan (the “Yanyan Agreement”). Pursuant to the Yanyan Agreement, Ms. Liu serves as our Chief Financial Officer. The initial term of Yanyan Agreement ended in 2014, but the agreement was renewed until July 31, 2015. The Yanyan Agreement provides that Ms. Liu’s initial base salary during the term shall be RMB 54,000, or approximately $8,786 per annum. Ms. Liu’s salary shall be paid on monthly basis, payable at the 30th day of each following month. If the Company unilaterally terminates Ms. Liu within the term of the agreement, the Company shall, on the termination date, make a lump-sum salary payment of the immediately preceding month to Ms. Liu plus compensation equal to three (3) months of Ms. Liu’s salary.
The agreement provides that it will automatically terminate upon either the expiration of the term of the Yanyan Agreement, or the occurrence of events authorizing such termination or the dissolution of the Company. The Yanyan Agreement may also be terminated upon the occurrence of either a serious violation of the company policy by Ms. Liu or by any major damages to the Company resulting from Ms. Liu’s failure to duly perform her duties.
Mr. Qin Libei
For the fiscal year ended June 30, 2015 and 2014, Mr. Qin Libei received annual compensation of RMB 48,000, or USD $7,729 and $7,810 respectively due to the fluctuating currency exchange rate between USD and RMB in respective year.
We entered into an Employment Agreement with Qin Libei (the “Libei Agreement”). Pursuant to the Libei Agreement, Mr. Qin serves as our Chief Operating Officer. The initial term of Libei Agreement ended in 2014, but the agreement was renewed until July 31, 2015. The Libei Agreement provides that Mr. Qin’s initial base salary during the term shall be 48,000 RMB, or approximately USD,$7,810 per annum. Mr. Qin’s salary shall be paid on monthly basis, payable at the 30th day of each following month. If the Company unilaterally terminates Mr. Qin within the term of the agreement, the Company shall, on the termination date, make a lump-sum salary payment of the immediately preceding month to Mr. Qin plus compensation equal to three (3) months of Mr. Qin’s salary.
The agreement provides that it will automatically terminate upon either the expiration of the term of the Libei Agreement, or the occurrence of events authorizing such termination or the dissolution of the Company. The Libei Agreement may also be terminated upon the occurrence of either a serious violation of the company policy by Mr. Qin or by any major damages to the Company resulting from Mr. Qin’s failure to duly perform his duties.
Mr. Liu Zhengxin
For the fiscal year ended June 30, 2015 and 2014, Mr. Liu Zhengxin received annual compensation of RMB 36,000, or USD $5,797 and $5,857 respectively due to the fluctuating currency exchange rate between USD and RMB in respective fiscal year.
We entered into an Employment Agreement with Liu Zhengxin (the “Zhengxin Agreement”). Pursuant to the Zhengxin Agreement, Mr. Liu serves as our Chief HR Officer. The initial term of Zhengxin Agreement ended in 2014, but the agreement was renewed until July 31, 2015. The Zhengxin Agreement provides that Mr. Liu’s initial base salary during the term shall be 36,000 RMB, or USD $5,857 per annum. Mr. Liu’s salary shall be paid on monthly basis, payable at the 30th day of each following month. If the Company unilaterally terminates Ms. Zhengxin within the term of the agreement, the Company shall, on the termination date, make a lump-sum salary payment of the immediately preceding month to Mr. Liu plus compensation equal to three (3) months of Mr. Liu’s salary.
The agreement provides that it will automatically terminate upon either the expiration of the term of the Zhengxin Agreement, or the occurrence of events authorizing such termination or the dissolution of the Company. The Zhengxin Agreement may also be terminated upon the occurrence of either a serious violation of the company policy by Mr. Liu or by any major damages to the Company resulting from Mr. Liu’s failure to duly perform his duties.
Outstanding Equity Awards at Fiscal Year-End Table
None.
Director Compensation
The members of our board of directors are not compensated for serving on the board.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table shows the number of our securities beneficially owned by our named executive officers, our director, our executive officers and directors as a group, and each person known to us to own more than 5% of our outstanding shares of common stock as of October 12, 2015. Except as otherwise indicated, all shares are owned directly and the shareholders possess sole voting and investment power with respect to the shares listed below. As of October 12, 2015, 53,100,000 shares of our common stock were issued and outstanding. Unless otherwise stated, the business address of the person listed below is c/o No.A09, Wuzhou Sun Town Limin Avenue, Limin Development District Harbin, Heilongjiang, China.
(1) A person is considered to beneficially own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii) of which such person has the right to acquire beneficial ownership at any time within 60 days through such as exercise of stock options or warrants. Unless otherwise indicated, voting and investment power relating to the shares shown in the table for our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children.
(2) For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock that such person has the right to acquire within 60 days of October 12, 2015. For purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within 60 days of October 12, 2015 is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The Company obtained demand and non-interest bearing loans from an affiliated party. The following sets forth the name and affiliation of such affiliated party, the aggregate amount of principal loaned during 2015 and 2014, the amount of principal paid during 2015 and 2014, and the outstanding balance as of June 30, 2015 and 2014.
The loans of $937,524 and $656,995 as of June 30, 2015 and 2014, respectively, are reflected as stockholder loans in the consolidated balance sheets.
Director Independence
Mr. Liu Enjia, Mr. Wang Youliang, and Ms. Shan Yanqin, the members of our Board of Directors, are not independent using the definition of independence under the rules of the SEC.
Item 14.
Item 14. Principal Accounting Fees and Services.
The following table shows the aggregate fees billed for professional services provided to us by Wei, Wei & Co., LLP for 2014 and 2013:
For the fiscal years ended June 30, 2015 and 2014, the aggregate fees billed for professional services rendered for the audit and review of our financial statements were approximately $90,000, respectively.
There were no fees for other audit related services for the fiscal years ended June 30, 2015 and 2014.
For our fiscal years ended June 30, 2015 and 2014, the aggregate fees billed for professional services rendered for tax compliance, tax advice, and tax planning were approximately and $4,500, respectively.
All Other Fees
We did not incur any other fees related to services rendered by our independent registered public accounting firm for the fiscal years ended June 30, 2015 and 2014.
The SEC requires that before our independent registered public accounting firm is engaged by us to render any auditing or permitted non-audit related service, the engagement be either: (i) approved by our Audit Committee or (ii) entered into pursuant to pre-approval policies and procedures established by the Audit Committee, provided that the policies and procedures are detailed as to the particular service, the Audit Committee is informed of each service, and such policies and procedures do not include delegation of the Audit Committee’s responsibilities to management.
We do not have an Audit Committee. Our Board of Directors pre-approves all services provided by our independent registered public accounting firm. All of the above services and fees during 2015 and 2014 were reviewed and approved by our Board of Directors either before or after the respective services were rendered.
PART IV
Item 15.
Item 15. EXHIBITS
(a) Exhibits
* Filed herewith
+ In accordance with the SEC Release 33-8238, deemed being furnished and not filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Enjia Liu
Enjia Liu
Chairman of the Board of Directors
October 13, 2015
/s/ Youliang Wang
Chief Executive Officer and Director
Youliang Wang
(Principal Executive Officer)
October 13, 2015
/s/ Yanqin Shan
Youqin Shan
Director
October 13, 2015
/s/ Yanyan Liu
Chief Financial Officer
Yanyan Liu
(Principal Financial Officer)
October 13, 2015