| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting and Presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the financial statements of China Modern Agricultural Information, Inc. and its subsidiaries, Hope Diary, China Dairy (Hope Diary’s 53.07% owned subsidiary), Value Development, Value Development Group Limited, Jiasheng Consulting, and, Zhongxian Information and Zhongxian Information’s 99% owned subsidiary, Xinhua Cattle and its 100% owned subsidiary, Yulong. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited consolidated financial statements of the Company as of September 30, 2017 and for the three months ended September 30, 2017 and 2016, have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the SEC which apply to interim financial statements. Accordingly, they do not include all of the information and footnotes normally required by accounting principles generally accepted in the United States of America for annual financial statements. The interim consolidated financial information should be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company’s Form 10-K for the year ended June 30, 2017, previously filed with the SEC. In the opinion of management, the interim information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. The results of operations for the three months ended September 30, 2017 are not necessarily indicative of the results to be expected for future quarters or for the year ending June 30, 2018. Variable Interest Entity Pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation” 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. 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. On September 16, 2015 the VIE structure was terminated when Jiasheng Consulting exercised its option to purchase all of the registered equity of Zhongxian Information. Jiasheng Consulting became the sole owner of Zhongxian Information. Foreign Currency Translations All Company assets are located in the People’s Republic of China (“PRC”). The functional currency for the majority of the Company’s operations is the Renminbi (“RMB”). The Company uses the United States dollar (“US Dollar” or “US$” or “$”) for financial reporting purposes. The consolidated financial statements of the Company have been translated into US dollars in accordance with FASB ASC 830, “Foreign Currency Matters.”
September 30, 2017 June 30, September 30,
(Unaudited) (Unaudited)
RMB A$ RMB A$ RMB A$
Balance sheet items, except for stockholders’ equity, as of period end 0.1503 0.7844 0.1469 0.7538 0.1499 0.7634
Amounts included in the statements of income, statement of changes in stockholders’ equity and statements of cash flows for the period 0.1500 0.7896 N/A
N/A 0.1500 0.7577 Foreign currency translation adjustments of $3,830,708 and $(248,988), respectively, for the three months ended September 30, 2017 and 2016, have been reported as other comprehensive income (loss) in the consolidated statements of income and other comprehensive income (loss). Other comprehensive income (loss) of the Company consists entirely of foreign currency translation adjustments. Pursuant to ASC 740-30-25-17, “Exceptions to Comprehensive Recognition of Deferred Income Taxes,” 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. 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.” 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. 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. Fair Value of Financial Instruments FASB ASC 820, “Fair Value Measurement”
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. Advertising Costs Advertising costs are charged to operations when incurred. Advertising costs are $44,358 and $120,788, respectively, for the three months ended September 30, 2017 and 2016. Cash and Cash Equivalents The Company considers all demand and time deposits and all highly liquid investments with an original maturity of three months or less to be cash equivalents. 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 September 30, 2017 and June 30, 2017. Prepaid Expenses Prepaid expenses as of September 30, 2017 mainly represent the prepayments of approximately $6,512,000 for prepaid cow insurance expenses and R&D expenses. Prepaid expenses as of June 30, 2017 mainly represent the prepayment of approximately $1,375,000 for prepaid cow insurance expenses. Prepaid Land Leases Prepaid land leases represent the prepayment for grassland rental (see Note 7). 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 September 30, 2017 and June 30, 2017, 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. On June 29, 2017, Xinhua Cattle entered into agreement with Longing Xiandai Farm (“Longing”) to purchase 4,000 adult cows at RMB 15,000 (approximately $2,255) per cow for a total price of RMB 60,000,000 (approximately $9,018,000). The purchase price was fully paid on the date of the delivery of the cows. Xinha Cattle immediately transfers all the cows to the 13 local farmers that entered agreement with prior for a total consideration of RMB68,000,000 (approximately $10,220,400). In October 2017, the sales of cows to the 13 farmers was terminated and all the cows were returned to Xinhua Cattle due to omasum impaction. As a result, Xinha Cattle will have to pay a total of RMB27,600,000 (approximately $4,140,000) as reimbursement to farmers. Xinhua Cattle then entered into agreement with Longing, the seller of the cows, to return all the cows to Longing for a return of the full purchase amount of RMB60,000,000 (approximately $9,018,000) that was paid by Xinhua Cattle. The transactions, as well as the reimbursement that payable to farmers had been properly reflected on the accompanying consolidated financial statements. (Also see Note 12). Property, Plant and Equipment Property, plant and equipment are recorded at cost, less accumulated depreciation. Cost includes the price paid to acquire or construct the asset, including capitalized interest during the construction period, and any expenditures that substantially increase the assets value or extends the useful life of an existing asset. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the periods benefited. Maintenance and repairs are generally expensed as incurred. The estimated useful lives for property, plant and equipment categories are as follows:
Machinery and equipment 3 to 10 years
Automobiles 4 to 10 years
Building and building improvements 10 to 20 years
Leasehold improvements Lesser of the remaining term or useful life Impairment of Long-lived Assets The Company utilizes FASB ASC 360, “Property, Plant and Equipment” 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 three months ended September 30, 2017, a loss of $330,992, on the sale of the adult cows is included in non-operating income (expenses) in the accompanying consolidated statements of income and other comprehensive income. (See Note 5) The Company reviews the carrying value of its biological assets for impairment at least annually or whenever events and circumstances indicate that their carrying value may not be recoverable from the estimated future cash flows expected from their use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss will be recognized equal to an amount by which the carrying value exceeds the fair value of the asset. The factors considered by management in performing this assessment include current health status and production capacity. There were no impairment losses recorded during the three months ended September 30, 2017 and 2016. Income Taxes The Company accounts for income taxes in accordance with FASB ASC 740, “Income Taxes” 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 September 30, 2017 and June 30, 2017, the Company does not have a liability for any uncertain tax positions. The income tax laws of various jurisdictions in which the Company and its subsidiaries operate are summarized as follows: United States The Company is subject to United States tax at graduated rates from 15% to 35%. No provision for income tax in the United States has been made as the Company had no U.S. taxable income for the three months ended September 30, 2017 and 2016. BVI Value Development and Hope Diary are 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 and China Dairy are incorporated in Hong Kong. Pursuant to the income tax laws of Hong Kong, the Company is not subject to tax on non-Hong Kong source income. PRC Xinhua Cattle and Yulong are entitled to a tax exemption for the full Enterprise Income Tax in China due to a government tax preferential policy for the dairy farming industry. In January 2015, Zhongxian obtained an income tax exemption notice from the tax authority to exempt the income tax on its investment income from its subsidiaries Xinhua Cattle and Yulong. Net Income (Loss) Per Share The Company computes net income (loss) per common share in accordance with FASB ASC 260, “Earnings Per Share” Statutory Reserve Fund Pursuant to the 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 September 30, 2017 and June 30, 2017, the required statutory reserve funds have been fully funded. |
