PINX:CMCI Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2012
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______to______.

CHINA MODERN AGRICULTURAL INFORMATION, INC.
 (Exact name of registrant as specified in its charter)

Commission File Number: 333-164488

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

No.A09, Wuzhou Sun Town
Limin Avenue, Limin Development District
Harbin, Heilongjiang, China
(Address of principal executive offices, Zip Code)

(86) 0451-84800733
 (Registrant’s telephone number, including area code)
_______________

Not Applicable.
 (Former name, former address and former fiscal year, if changed since last report)

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

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

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

Large accelerated filer o                                                                                            Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)            Smaller reporting company x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock: As of May 10, 2012, 50,100,000 shares of common stock, par value $0.001 per share, and are issued and outstanding.

 
 

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.

QUARTERLY REPORT ON FORM 10-Q
March 31, 2012

TABLE OF CONTENTS

PART 1 - FINANCIAL INFORMATION
 
   
PAGE
Item 1.
Financial Statements (Unaudited)
1
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
35
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
43
Item 4.
Controls and Procedures
43
   
PART II - OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
44
Item 1A.
Risk Factors
44
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
44
Item 3.
Defaults Upon Senior Securities
44
Item 4.
Mine Safety Disclosures
44
Item 5.
Other Information
44
Item 6.
Exhibits
44
   
SIGNATURES
45
 
 
 

 
 
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

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

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

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

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

CERTAIN TERMS USED IN THIS QUARTERLY REPORT ON FORM 10-Q
 
When this report uses the words “we,” “us,” “our,” and the “Company,” they refer to China Modern Agricultural Information, Inc. and its consolidated subsidiaries Value Development Holding, Value Development Group and Jiasheng Consulting, its variable interest entity Zhongxian Information, Xinhua Cattle and Yulong Cattle, the subsidiaries of Zhongxian Information.

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

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

 
 
PART I—FINANCIAL INFORMATION

Item 1.                 Financial Statements.
 
 
 

 
  CHINA MODERN AGRICULTURAL INFORMATION, INC. AND SUBSIDIARIES

Consolidated Financial Statements for the
Three and Nine Months Ended March 31, 2012 and 2011
 

 
 
 

 

CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2012 AND 2011

 
CONTENTS                                                                                                                                          
   PAGE
     
CONSOLIDATED FINANCIAL STATEMENTS:
   
     
  Consolidated Balance Sheets 
  1 
     
  Consolidated Statements of Income and Other Comprehensive Income 
3
     
  Consolidated Statements of Changes in Stockholders’ Equity 
  6
     
  Consolidated Statements of Cash Flows 
  7
     
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
  9
 
 
 

 

CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
MARCH 31, 2012 AND JUNE 30, 2011 (IN U.S. $)

 
ASSETS
 
March 31,
2012
   
June 30,
2011
 
   
(Unaudited)
       
Current assets
           
 Cash
  $ 11,486,130     $ 5,525,180  
 Accounts receivable
    3,397,219       2,506,548  
 Inventories
    710,573       90,017  
 Prepaid expenses
    382,196       238,238  
 Prepaid land lease, current portion
    474,300       -  
 Interest receivable
    402,464       -  
 Notes receivable, current portion
    1,781,339       210,674  
                 
  Total current assets
    18,634,221       8,570,657  
                 
Property, plant and equipment
    4,490,741       1,884,944  
Less: accumulated depreciation
    (604,200 )     (430,096 )
                 
  Property, plant and equipment, net
    3,886,541       1,454,848  
                 
Other assets
               
 Notes receivable
    8,098,529       1,127,707  
 Prepaid land lease
    4,150,125       -  
 Loan receivable
    -       2,165,800  
 Biological assets, net
    18,377,265       17,204,616  
                 
  Total other assets
    30,625,919       20,498,123  
                 
TOTAL ASSETS
  $ 53,146,681     $ 30,523,628  
 
See accompanying notes to the consolidated financial statements.
 
 
1

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
MARCH 31, 2012 AND JUNE 30, 2011 (IN U.S. $)

 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
March 31,
2012
   
June 30,
2011
 
   
(Unaudited)
       
Current liabilities
           
 Accounts payable
  $ -     $ -  
 Accrued expenses and other payables
    206,290       123,876  
 Stockholder loans
    180,280       230,356  
                 
  Total current liabilities
    386,570       354,232  
                 
Deferred income taxes
    11,873,405       7,080,292  
                 
  Total liabilities
    12,259,975       7,434,524  
                 
Stockholders’ equity
               
 Common stock, $0.001 par value; 75,000,000 shares
  authorized; 50,100,000 and 41,100,000 shares issued
  and outstanding at March 31, 2012 and June 30, 2011
    50,100       41,100  
 Additional paid-in capital
    4,654,170       1,603,170  
 Retained earnings
    33,247,743       19,477,303  
 Statutory reserve fund
    462,120       190,011  
 Other comprehensive income
    2,092,358       1,498,692  
                 
  Sub-total
    40,506,491       22,810,276  
                 
 Noncontrolling interests
    380,215       278,828  
                 
  Total stockholders’ equity
    40,886,706       23,089,104  
                 
TOTAL LIABILITIES AND
 STOCKHOLDERS’ EQUITY
  $ 53,146,681     $ 30,523,628  
 
See accompanying notes to the consolidated financial statements.
 
 
2

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
AND OTHER COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED) (IN U.S. $)

 
   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
 
 
2012
   
2011
   
2012
   
2011
 
                         
Revenues
                       
 Milk sales
  $ 6,425,656     $ 6,805,786     $ 12,778,783     $ 17,201,388  
 Sales commission
    2,980,377       -       6,725,530       -  
                                 
  Total revenues
    9,406,033       6,805,786       19,504,313       17,201,388  
Cost of goods sold
    (3,360,430 )     (3,426,988 )     (6,522,244 )     (8,652,287 )
                                 
Gross profit
    6,045,603       3,378,798       12,982,069       8,549,101  
                                 
Operating expenses
                               
 Selling and marketing
    (188,529 )     (4,756 )     (413,296 )     (36,735 )
 General and administrative
    (102,015 )     (672,697 )     (267,515 )     (836,096 )
                                 
  Total operating expenses
    (290,544 )     (677,453 )     (680,811 )     (872,831 )
                                 
Operating income
    5,755,059       2,701,345       12,301,258       7,676,270  
                                 
See accompanying notes to the consolidated financial statements.
 
 
3

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
AND OTHER COMPREHENSIVE INCOME (continued)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED) (IN U.S. $)

 
   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
 
 
2012
   
2011
   
2012
   
2011
 
                         
Other income and expenses
                       
 Bargain purchase gain
    -       -       5,721,596       -  
 Interest income on notes receivable
    193,596       -       521,577       -  
 Other non-operating income
    100,548       -       204,946       -  
                                 
  Total other income
    294,144       -       6,448,119       -  
                                 
Income before income taxes
    6,049,203       2,701,345       18,749,377       7,676,270  
Provision for income taxes
    1,444,980       710,352       4,602,303       1,941,431  
                                 
Net income before noncontrolling interests
    4,604,223       1,990,993       14,147,074       5,734,839  
Noncontrolling interests
    (39,050 )     (33,480 )     (104,525 )     (84,091 )
                                 
Net income attributable to controlling interests
    4,565,173       1,957,513       14,042,549       5,650,748  
                                 
See accompanying notes to the consolidated financial statements.
 
 
4

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
AND OTHER COMPREHENSIVE INCOME (continued)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED) (IN U.S. $)

 
   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
 
 
2012
   
2011
   
2012
   
2011
 
                         
Other comprehensive income
                       
 Foreign currency translation adjustment
    230,436       75,969       593,666       531,037  
                                 
Total comprehensive income
  $ 4,795,609     $ 2,033,482     $ 14,636,215     $ 6,181,785  
                                 
                                 
Earnings per common share, basic and diluted
  $ 0.09     $ 0.05     $ 0.31     $ 0.14  
                                 
Weighted average shares outstanding, basic and diluted
    50,100,000       40,779,900       45,321,818       40,278,332  
 
See accompanying notes to the consolidated financial statements.
 
 
5

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2012 (UNAUDITED) (IN U.S. $)

 
   
Common Stock
   
Additional Paid-in Capital
   
Retained Earnings
   
Statutory Reserve Fund
   
Noncontrolling Interests
   
Other Comprehensive
Income
   
 
Total
 
                                           
Balance, June 30, 2011
  $ 41,100     $ 1,603,170     $ 19,477,303     $ 190,011     $ 278,828     $ 1,498,692     $ 23,089,104  
Issuance of common stock for acquisition
    9,000       3,051,000       -       -       -       -       3,060,000  
Net income
    -       -       14,042,549       -       104,525       -       14,147,074  
VIE distribution
    -       -       -       -       (3,138 )     -       (3,138 )
Appropriation of statutory reserves
    -       -       (272,109 )     272,109       -       -       -  
Other comprehensive income
    -       -       -       -       -       593,666       593,666  
Balance, March 31, 2012
  $ 50,100     $ 4,654,170     $ 33,247,743     $ 462,120     $ 380,215     $ 2,092,358     $ 40,886,706  

See accompanying notes to the consolidated financial statements.
 
 
6

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED) (IN U.S. $)

 
   
2012
   
2011
 
             
Cash flows from operating activities
           
 Net income before noncontrolling interests
  $ 14,147,074     $ 5,734,839  
  Adjustment to reconcile net income to net cash
               
   provided by (used in) operating activities:
               
   Depreciation
    822,961       1,052,553  
   Deferred income taxes
    4,602,303       1,941,431  
   Value of stocks issued for expenses of reverse merger
    -       41,000  
   Bargain purchase gain
    (5,721,596 )     -  
   Gain from sale of biological assets
    (145,711 )     -  
 Change in operating assets and liabilities
               
   (Increase) in accounts receivable
    (46,041 )     (1,081,293 )
   Decrease (increase) in inventories
    97,999       (56,271 )
   (Increase) decrease in prepaid expenses
    (118,034 )     358,398  
   (Increase) in prepaid land lease
    (4,624,425 )     -  
   (Increase) in interest receivable
    (402,464 )     -  
   (Decrease) in accounts payable
    (42,954 )     (2,235 )
   Increase (decrease) in accrued expenses and other payables
    24,525       (48,018 )
                 
    Net cash provided by operating activities
    8,593,637       7,940,404  
                 
Cash flows from investing activities
               
 Acquisition of Yulong Cattle, net of cash acquired
    9,442       -  
 Collection of notes receivable
    1,120,390       -  
 Proceeds from sales of biological assets
    550,537       -  
 Purchase of property, plant and equipment
    (2,824 )     -  
 (Increase) in biological assets
    (4,607,857 )     (6,469,000 )
                 
    Net cash (used in) investing activities
    (2,930,312 )     (6,469,000 )
                 
Cash flows from financing activities
               
 Loans from affiliates
    -       1,094,805  
 VIE distribution
    (3,138 )     -  
 Repayment of affiliates loans
    -       (1,670,427 )
 Proceeds from stockholder loans
    372,537       29,940  
 Repayment of stockholder loans
    (470,047 )     (644,525 )
                 
    Net cash (used in) financing activities
    (100,648 )     (1,190,207 )
 
See accompanying notes to the consolidated financial statements.
 
 
7

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE NINE MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED) (IN U.S. $)

 
   
2012
   
2011
 
             
Effect of exchange rate changes on cash
    398,273       661,599  
                 
Net increase in cash
    5,960,950       942,796  
Cash, beginning of period
    5,525,180       2,959,661  
                 
Cash, end of period
  $ 11,486,130     $ 3,902,457  
                 
                 
Supplemental disclosure of cash flow information
               
                 
 Cash paid for income taxes
  $ -     $ -  
                 
 Cash paid for interest
  $ -     $ -  
                 
                 
Supplemental disclosure of non-cash investing and
 financing activities
               
                 
 Fair value of stock issued in exchange for
  consulting and legal services
  $ -     $ 437,470  
                 
 Notes receivable from sale of biological assets
  $ 9,410,342     $ -  

   
2012
 
       
 Acquisition of Yulong
     
Net working capital other than cash
  $ (716,733 )
Property, plant and equipment
    2,528,279  
Biological assets
    6,960,608  
         
  Total net assets acquired other than cash
    8,772,154  
         
Bargain purchase gain
    (5,721,596 )
  Issuance of 9,000,000 shares of common stock for purchase
    (3,060,000 )
         
  Cash received upon acquisition of Yulong
  $ (9,442 )
 
See accompanying notes to the consolidated financial statements.
 
 
8

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
1.           ORGANIZATION

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

On January 28, 2011, Trade Link entered into a Share Exchange Agreement (the “Exchange Agreement”) by and among (i) Value Development Holdings, Ltd., a British Virgin Islands company, (“Value Development”) (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 own 87.80% of Trade Link’s outstanding shares (the “Share Exchange”).

On January 28, 2011, Value Development completed the acquisition of Harbin Jiasheng Consulting Managerial Co. Ltd. (“Jiasheng Consulting” or “WFOE”), a holding company.  Jiasheng Consulting has entered into 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. Liu Zhengxin holds a 62% equity interest in Zhongxian Information and Mr. Wang Youliang holds a 38% equity interest in Zhongxian Information.  Pursuant to a VIE agreement signed by Mr. Liu Zhengxin and Mr. Wang Youliang, Jiasheng Consulting now controls all management responsibilities of 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 service 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, titles and equity interest in Zhongxian Information as security for the collection of consulting and services fees provided through an Equity Pledge Agreement.
 
 
9

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
1.           ORGANIZATION (continued)

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

At the closing of the Share Exchange, Trade Link cancelled 5,500,000 shares of its common stock held by its principal stockholders.

The share exchange transaction constituted a reverse takeover transaction.  Accordingly, the purchase method under reverse takeover accounting has been 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 and its subsidiaries (the accounting acquirer).  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 Zhongxian Information’s 99% owned subsidiary, Heilongjiang Xinhua Cattle Industry Co., Ltd. (“Xinhua Cattle”) are 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.  The effect of the reorganization was applied retroactively to the prior year’s consolidated financial statements as if the current structure existed since inception of the periods presented.

Zhongxian Information and Xinhua Cattle are engaged in 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 Yulong Cattle Industry Co., Ltd. (“Yulong Cattle”) from Yulong Cattle’s original stockholders for consideration of 9,000,000 shares of the Company’s common stock and cash consideration amounting to $4,396,000.  Yulong Cattle was a privately held company in China engaged in the acquisition, breeding and rearing of dairy cows, and
 
 
10

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
1.           ORGANIZATION (continued)

production and sale of fresh milk to manufacturing and distribution companies.

As a result of the entry into the foregoing agreements, the Company has a corporate structure which is set forth below:
 
 
 
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CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Change of Reporting Entity and Basis of Accounting and Presentation

The reverse acquisition described in Note 1 was treated as recapitalization of the Company. As such, China Modern Agricultural Information, Inc. is the continuing entity for financial reporting purposes.  Securities and Exchange Commission (“SEC”) Manual Item 2.6.5.4 “Reverse Acquisitions” requires that “in a reverse acquisition, the historical shareholder’s equity of the accounting acquirer prior to the merger is retroactively reclassified (a recapitalization) for the equivalent number of shares received in the merger after giving effect to any difference in par value of the registrant’s and the accounting acquirer’s stock by an offset to paid-in capital.”  Therefore, the consolidated financial statements have been prepared as if Value Development and its subsidiaries had always been the reporting company and then on the reverse acquisition date, had changed its name and reorganized its capital stock.

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 VIEs.  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 enjoy the rewards normally associated with ownership of the entities, and therefore the company is the primary beneficiary of the entities.

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 Zhongxian Information’s newly acquired 100% owned subsidiary, Yulong Cattle from November 23, 2011, the date of acquisition.  The Company is the primary beneficiary of the VIE and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.
 
 
12

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Change of Reporting Entity and Basis of Accounting and Presentation (continued)

The unaudited interim consolidated financial statements of the Company as of March 31, 2012 and for the three and nine months ended March 31, 2012 and 2011, 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 fiscal year ended June 30, 2011, previously filed with the SEC.  In the opinion of management, the interim information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented.  The results of operations for the three and nine months ended March 31, 2012 are not necessarily indicative of the results to be expected for future quarters or for the year ending June 30, 2012.

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 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 (loss).

 
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CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Foreign Currency Translations (continued)

The exchange rates used to translate amounts in RMB into US dollars for the purposes of preparing the consolidated financial statements are as follows:

   
March 31,
2012
   
June 30,
2011
   
March 31,
2011
 
                   
Balance sheet items, except for stockholders’ equity, as of period end
    0.1581       0.1547       N/A  
                         
Amounts included in the statements of income, statements of changes in stockholders’ equity and statements of cash flows for the period
      0.1569       N/A         0.1497  

Foreign currency translation adjustments of $230,436 and $75,969 for the three months ended March 31, 2012 and 2011, respectively, and $593,666 and $531,037 for the nine months then ended, respectively, have been reported as other comprehensive income in the consolidated statements of income and other comprehensive income.

Although government regulations now allow convertibility of 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 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 may materially affect the Company’s consolidated financial condition in terms of US dollar reporting.
 
 
14

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
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) commission from local farmers of their monthly milk sales.  The Company’s revenue recognition policies comply with SEC Staff Accounting Bulletin (“SAB”) 104.  Revenues from sales 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 to the goods has been passed to 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 its 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 sale 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.
 
 
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CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Fair Value of Financial Instruments

Financial instruments include accounts receivable, interest receivable, notes receivable, loan receivable, accounts payable, accrued expenses and other payables and stockholder loans.  As of March 31, 2012 and June 30, 2011, the carrying values of accounts receivable, interest receivable, accounts payable, accrued expenses and other payables and stockholders loans approximated their fair values due to the short maturity of these financial instruments.  The carrying values of notes receivable and loan receivable are valued at their net realizable value which approximates the fair value.

Business Combination

In accordance with FASB ASC 805 “Business Combinations” (“ASC 805”), the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree were recognized at the acquisition date, measured at their fair values as of that date.  In a bargain purchase in which the total acquisition date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any noncontrolling interest in the acquiree, that excess was recognized as a bargain purchase gain in the accompanying consolidated statements of income and other comprehensive income.

Advertising Cost

Advertising costs are charged to operations when incurred.  No advertising costs were incurred for the three and nine month ended March 31, 2012.  Advertising cost totalled $2,080 and $24,162 for the three and nine months ended March 31, 2011, 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.
 
 
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CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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 considers all accounts receivable at March 31, 2012 and June 30, 2011, to be fully collectible and, therefore, did not provide for an allowance for doubtful accounts.  For the periods presented, the Company did not write off any accounts receivable as bad debts.

Inventories

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

The Company estimates an inventory allowance for excessive or unusable inventories.  Inventory amounts are reported net of such allowances, if any.  There was no allowance for excessive or unusable inventories as of March 31, 2012 and June 30, 2011.

Prepaid Expenses

Prepaid expenses as of March 31, 2012 and June 30, 2011 mainly represent the prepayments of $348,236 and $238,238 for consulting services, respectively.

Prepaid Land Lease

Prepaid land lease represents the prepayment of $4,624,425 for grassland rental (see Note 8).
 
 
17

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Loan Receivable

Loan receivable at June 30, 2011 represents a non-interest bearing loan to Yulong Cattle.  The loan was converted to a non-interest bearing security deposit upon the execution of the letter of intent in July 2011, and was subsequently applied against the acquisition purchase price in November 2011 (see Note 4).

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 extend 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
Automobile
4 and 10 years
Building and building improvements
20 and 10 years

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 future undiscounted cash flows attributable to the asset.  No impairment of long-lived assets was recognized for the three and nine months ended March 31, 2012 and 2011.
 
 
18

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Biological Assets

Biological assets consist of dairy cows for milking purposes.

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 or weighted average 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 March 31, 2012 and 2011, losses of $0 and $28,226, respectively, and losses of $7,799 and $43,778 for the nine months then ended, respectively, are included in the cost of goods sold in the accompanying consolidated statements of income and other comprehensive income.

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 to result from their use and eventual disposition.  In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss will be recognized equal to an amount by which the carrying value exceeds the fair value of the asset.  The factors considered by management in performing this assessment include current health status and production capacity.  There were no impairment losses recorded during the three and nine months ended March 31, 2012 and 2011.

 
19

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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 consequence 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 at 25% for the earnings when distributed by Xinhua Cattle and Yulong Cattle. At March 31, 2012 and June 30, 2011, undistributed earnings allocated to Zhongxian Information were approximately $42,630,000 and $29,360,000, 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 tax positions.  As of March 31, 2012 and June 30, 2011, the Company does not have a liability for any uncertain tax positions.

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

United States

The Company is subject to United States tax at graduated rates from 15% to 35%.  No provision for income tax in the United States has been made as the Company had no U.S. taxable income for the three and nine months ended March 31, 2012 and 2011.
 
 
20

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income Taxes (continued)

BVI

Value Development is incorporated in BVI and is governed by the income tax laws of 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 Cattle 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 returns.  Consolidated tax returns are not permitted in China.

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”) and SEC SAB 98.  Under the provisions of ASC 260 and SAB 98, basic net income (loss) per common share is computed by dividing the amount available to common shareholders 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 shareholders 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 diluted shares outstanding for the three and nine months ended March 31, 2012 and 2011.
 
 
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CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Statutory Reserve Fund

Pursuant to corporate law of the PRC, the Company’s Chinese 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 the 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.
   
3.           RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”).  The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position.  An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.  The Company does not expect that the adoption of ASU 2011-11 will have a significant, if any, impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”) that permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the required annual goodwill impairment test. The ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011; however, early adoption is permitted. The Company does not believe that the adoption of this standard will have a material impact on the Company’s consolidated financial statements.
 
 
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CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
3.           RECENTLY ISSUED ACCOUNTING STANDARDS (continued)

In June 2011, FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”) that improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income (loss) by eliminating the option to present components of other comprehensive income (loss) as part of the statement of changes in stockholders’ equity. ASU 2011-05 requires that all changes in other comprehensive income (loss) items be presented either in a single continuous statement of comprehensive income (loss) or in two separate but consecutive statements.  In both methods, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income (loss) to net income (loss) in the statement(s) where the component of net income (loss) and the components of other comprehensive income (loss) are presented.  ASU No. 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and is to be applied retrospectively, with early adoption permitted.  The adoption of this standard will not have a material effect on the Company’s consolidated financial statements.

In May 2011, FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.GAAP and IFRSs” (“ASU 2011-04”) that provides clarification about the application of existing fair value measurements and disclosure requirements and expands certain other disclosure requirements.  ASU 2011-04 amends U.S. GAAP to provide common fair value measurements and disclosure requirements with International Financial Reporting Standards.  The amendments in this ASU are effective prospectively for interim and annual periods beginning after December 15, 2011, with no early adoption permitted.  The Company does not believe that the adoption of this standard will have a material impact on the Company’s consolidated financial statements.

In December 2010, FASB issued ASU No. 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU 2010-29”).  ASU 2010-29 specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.  ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption
 
 
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CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
3.           RECENTLY ISSUED ACCOUNTING STANDARDS (continued)

of this standard did not have a material impact on the Company’s consolidated financial statements.

In December 2010, FASB issued ASU No. 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts” (“ASU 2010-28”).  ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. This eliminates an entity’s ability to assert that a reporting unit is not required to perform Step 2 because the carrying amount of the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. ASU 2010-28 is effective for fiscal and interim periods beginning after December 15, 2010. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
 
4.           BUSINESS COMBINATION
 
On November 23, 2011, Zhongxian Information acquired 100% of equity interests of Yulong Cattle for consideration of 9,000,000 shares of the Company’s common stock and cash consideration of RMB28,000,000 (US$4,396,000), of which RMB14,000,000 (US$2,186,800) was paid by a security deposit pursuant to a letter of intent with respect to the acquisition dated July 11, 2011, as amended on September 26, 2011.

The acquisition was accounted for under the purchase method of accounting in accordance with ASC 805.  Under the purchase method of accounting, the total purchase price is allocated to the net tangible and intangible assets of Yulong Cattle based on their estimated fair values.  Management has made the allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed that existed as of the date of completion of the acquisition as follows.

Cash consideration
  $ 4,396,000  
Fair value of 9,000,000 shares of common stock issued
    3,060,000  
 
       
  Total consideration transferred
  $ 7,456,000  
 
 
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CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
4.           BUSINESS COMBINATION (continued)

Cash
  $ 4,405,442  
Net working capital other than cash
    (716,733 )
Property, plant and equipment
    2,528,279  
Biological assets
    6,960,608  
         
  Total net assets acquired
    13,177,596  
         
Bargain purchase gain
    5,721,596  
         
  Total consideration transferred
  $ 7,456,000  

The nonrecurring bargain purchase gain of $5,721,596 is included in other income in the consolidated statements of income and other comprehensive income for the nine months ended March 31, 2012.  In accordance with ASC 805, the Company had two independent valuations of Yulong Cattle to verify that the bargain purchase gain was reasonable.  The bargain purchase gain arose mainly due to higher share market price in July 2011 when the letter of intent was signed.

In accordance with SEC Regulation S-X Rule 3-05, Yulong Cattle was a significant subsidiary as of the acquisition date, and the conditions set by SEC Regulation S-X Rule 1-02(w) exceeded 40 percent, but none exceeded 50 percent.  Therefore the separate audited financial statements of Yulong Cattle for the years ended June 30, 2011 and 2010 and the unaudited interim financial statements for three months period ended September 30, 2011 and 2010 were presented on the Form 8-K/A filed on February 3, 2012.

The results of operations of Yulong Cattle for the period from November 23, 2011 to March 31, 2012 have been consolidated.  Revenues of $4,717,700 and $6,296,690, respectively, and net income of $2,179,109 and $2,721,086, respectively, for Yulong Cattle is included in accompanying consolidated statements of income and other comprehensive income for the three and nine months ended March 31, 2012, respectively.

Pro Forma Results of Operations

The following pro forma results of operations, excluding the bargain purchase gain and related income tax effect, for the three months ended March 31, 2011 and nine months ended March 31, 2012 and 2011 have been prepared as though the acquisition of Yulong Cattle had occurred as of the earliest period presented.
 
 
25

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
4.           BUSINESS COMBINATION (continued)

Pro Forma Results of Operations (continued)

This pro forma financial information is not indicative of the results of operations that the Company would have attained had the acquisition of Yulong Cattle occurred at the beginning of the periods presented, nor is the pro forma financial information indicative of the results of operations that may occur in the future.

   
Three months
ended
March 31,
   
Nine months ended
March 31,
 
   
2011
   
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                   
Revenues
  $ 9,509,084     $ 24,998,874     $ 24,976,660  
Cost of goods sold
    (4,947,270 )     (9,579,933 )     (12,840,554 )
                         
Gross profit
    4,561,814       15,418,941       12,136,106  
                         
Operating expenses
    (754,804 )     (745,643 )     (1,179,426 )
Non-operating income
    16,414       724,221       161,248  
                         
Income before income taxes
    3,823,424       15,397,519       11,117,928  
Provision for income taxes
    710,352       3,177,354       1,941,431  
                         
Net income before
  noncontrolling interests
    3,113,072       12,220,165       9,176,497  
Noncontrolling interests
    (33,480 )     (104,525 )     (84,091 )
                         
Net income attributable to
  controlling interest
  $ 3,079,592     $ 12,115,640     $ 9,092,406  
                         
Net income per Share,
  basic and diluted
  $ 0.06     $ 0.24     $ 0.18  
                         
Weighted average shares
  outstanding, basic and diluted
    49,779,900       50,100,000       49,278,332  
 
 
26

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
5.
     PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are summarized as follows:

   
March 31,
2012
   
June 30,
2011
 
             
Machinery and equipment
  $ 396,634     $ 81,171  
Automobile
    102,377       37,098  
Building and building improvements
    3,991,730       1,766,675  
                 
      4,490,741       1,884,944  
Less: accumulated depreciation
    (604,200 )     (430,096 )
                 
Property, plant and equipment, net
  $ 3,886,541     $ 1,454,848  

Depreciation expense charged to operations for the three months ended March 31, 2012 and 2011 was $70,304 and $24,358, respectively, and was $141,347 and $78,587 for the nine months then ended, respectively.
 
6.     BIOLOGICAL ASSETS
 
Biological assets consist of the following:

   
March 31,
2012
   
June 30,
2011
 
             
Immature biological assets
  $ 10,541,090     $ 8,243,869  
Mature biological assets
    9,004,486       11,698,941  
                 
      19,545,576       19,942,810  
Less: accumulated depreciation
    (1,168,311 )     (2,738,194 )
                 
Biological assets, net
  $ 18,377,265     $ 17,204,616  
 
 
27

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
6.     BIOLOGICAL ASSETS (continued)

Depreciation expense for three months ended March 31, 2012 and 2011 was $268,314 and $387,831, respectively, and was $681,614 and $973,966 for the nine months then ended, respectively, all of which was included in cost of goods sold in the consolidated statements of income and other comprehensive income.
 
7.
     NOTES RECEIVABLE

Notes receivable is related to the sales of cows (mature biological assets) to local farmers.  Xinhua Cattle sold 3,787, 5,635, and 2,000 of its cows to local farmers in September 2011, August 2011, and June 2011, respectively. The cost and accumulated depreciation were removed from the accounts and a gain was recognized.  A total gain of $247,628 is included in non-operating income in the accompanying consolidated statements of income and other comprehensive income for the nine months ended March 31, 2012.

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 per 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 and September 2011, the sales price will be collected in monthly installments plus interest at 7% on any outstanding balance, over the remaining useful life, which range from three to eight years, of the cows sold. Local farmers are required to pay 30% of monthly milk sales generate by the cows sold to the Company. The required 30% monthly payments represent the monthly installment for the cows sold and commission income for the Company’s assistance in arranging for the sale of the milk.

The receivable related to the sales of cows is included in notes receivable in the consolidated balance sheets as of March 31, 2012 and June 30, 2011. The related commission receivable of $1,115,887 and $126,059 at March 31, 2012 and June 30, 2011, respectively, is included in accounts receivable in the consolidated balance sheets.  Commission income of $2,980,377 and $6,725,530 is included in revenues in the consolidated statements of income and other comprehensive income for the three and nine months ended March 31, 2012, respectively.
 
 
28

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
7.           NOTES RECEIVABLE (continued)

Notes receivable consists of the following:

   
March 31,
2012
   
June 30,
2011
 
             
Notes receivable
  $ 10,286,170     $ 1,856,400  
Less: discount for interest
    (406,302 )     (518,019 )
                 
      9,879,868       1,338,381  
Less: current portion
    (1,781,339 )     (210,674 )
                 
Non-current portion
  $ 8,098,529     $ 1,127,707  

Future maturities of notes receivable as of March 31, 2012 are as follows:

 
Year Ending March 31,
 
Annual Amount
 
       
2012
  $ 1,781,339  
2013
    1,809,500  
2014
    1,841,042  
2015
    1,719,592  
2016
    1,249,513  
Thereafter
    1,478,882  
         
    $ 9,879,868  

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

 
29

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
8.     LEASES

The Company leased one of its offices from an unrelated third party at a monthly rental of approximately $1,100 under an operating lease, which expired in May 2010.  The Company has a verbal agreement with the landlord to continue to use the office at no cost until September 30, 2011.  On September 12, 2011, the Company entered into a lease agreement with the landlord to continue the operating lease with a monthly rental of $2,354, expiring on September 30, 2012.

The Company also leases another 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 for the period from December 2, 2005 to December 1, 2015.

On October 9, 2011, the Company entered into an operating lease, effective from October 9, 2011 to October 8, 2021, with a municipality of Heilongjiang to lease 16,666,750 square meters of land.  The lease required the Company to prepay the ten year rental of RMB30,000,000 (US$4,686,000).  The related prepayment of $4,624,425 is included in the prepaid land lease in the consolidated balance sheets as of March 31, 2012.  The lease provides for renewal options.  Pursuant to the lease, the Company has the right to occupy, use, and transfer the land leased during the lease term.

Prepaid land lease consists of the following:

   
March 31, 2012
 
       
Prepaid land lease
  $ 4,624,425  
Less: current portion
    (474,300 )
         
Non-current portion
  $ 4,150,125  
 
 
30

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
9.
    RELATED PARTY TRANSACTIONS

The Company obtained demand loans from two of its stockholders which are non-interest bearing.  The loans of $180,280 and $230,356 as of March 31, 2012 and June 30, 2011, respectively, are reflected as stockholder loans in the consolidated balance sheets.
 
10.
  FAIR VALUE MEASUREMENTS

FASB ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”), 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 prices or 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 and liabilities that are required to be presented in the consolidated balance sheets at fair value.
 
 
31

 
 
CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
11.
   INCOME TAXES

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

   
Three Months Ended March 31,
   
Nine Months Ended March 31,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Current
  $ -     $ -     $ -     $ -  
Deferred
    1,444,980       710,352       4,602,303       1,941,431  
                                 
    $ 1,444,980     $ 710,352     $ 4,602,303     $ 1,941,431  

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

   
2012
   
2011
 
             
As calculated at the statutory rate
    25.00 %     25.00 %
Other
    (1.11 %)     1.30 %
                 
As reported on the consolidated statements of
 income and other comprehensive income
    23.89 %     26.30 %

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

   
2012
   
2011
 
             
As calculated at the statutory rate
    25.00 %     25.00 %
Other
    (0.45 %)     0.29 %
                 
As reported on the consolidated statements of
 income and other comprehensive income
    24.55 %     25.29 %
 
 
32

 

CHINA MODERN AGRICULTURAL INFORMATION, INC.
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH, 2012 AND 2011 (UNAUDITED)

 
11.
   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 laws of China permit the carry forward of net operating losses for a period of five years.  Undistributed earnings from Xinhua Cattle and Yulong Cattle are not taxable until such earnings are actually distributed.

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

   
March 31,
2012
   
June 30,
2010
 
             
Net operating loss carryforward
  $ 214,790     $ 260,264  
Bargain purchase gain
    (1,430,399 )     -  
Undistributed earnings of subsidiaries
 under PRC law
    (10,657,796 )     (7,340,556 )
                 
Net deferred tax (liabilities)
  $ (11,873,405 )   $ (7,080,292 )

At March 31, 2012 and June 30, 2011, Zhongxian Information had an unused operating loss carry-forward of approximately $860,000 and $1,040,000, respectively, expiring in various years through 2016.

The Company’s tax filings are subject to examination by the tax authorities.  The tax years 2006 to 2011 remain open to examination by tax authorities in the PRC.
 
 
33

 

12.
   CONCENTRATION OF CREDIT RISK

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

Four customers for the sale of milk accounted for approximately 100% of milk sales for the three months ended March 31, 2012 and five customers for the sales of milk accounted for approximately 91% of milk sales for the nine months ended March 31, 2012.  The same five customers also accounted for approximately 67% of accounts receivable at March 31, 2012 and three customers accounted for approximately 95% of accounts receivable at June 30, 2011. Two customers for the sale of milk account for approximately 100% of sales for the three and nine months ended March 31, 2011, respectively.

Six farmers accounted for the notes receivable at June 30, 2011.
 
13.
   STOCK INCENTIVE PLAN

On March 16, 2012, the Board of Directors adopted China Modern Agricultural Information, Inc. Stock Incentive Plan (the “Plan”).  The purpose of the Plan is to attract, motivate and retain top-quality directors, officers, employees, consultants, advisers and independent contractors, provide substantial incentives, to act in the best interests of the stockholders of the Company and to reward extraordinary effort.  The awards under the Plan may be in the form of stock options, restricted stock, restricted stock units or performance share units.  The total number of shares of Stock reserved and available for distribution under the Plan is 3,000,000.

As of March 31, 2012, the Company did not issue any stock options, restricted stock, restricted stock units or performance share units under the Plan.

On April 24, 2012, the Company issued 3,000,000 restricted stock under the Plan to employees.  The shares, with a fair value of $1,200,000 at the grant date, will be fully vested on May 20, 2012 and the fair value of the shares will be expensed in the quarter ending June 30, 2012.
 
 
34

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

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 quarters ended March 31, 2012 and 2011. Such discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this quarterly report.
 
Overview
 
We are a leading producer and distributor of raw fresh milk in China. We have three operating entities with an aggregate fresh milk production capacity of approximately 125 tons (approximately 3,969 gallons) per day. We also have 39 exclusive individual partners with an aggregate fresh milk production capacity of approximately 251 tons per day. We have seven major customers, two of which are the leading dairy companies in China.

We were incorporated on December 22, 2008 under the laws of the State of Nevada.  We were formerly known as Trade Link Wholesalers Inc. (“Trade Link”). On April 4, 2011, the Board of Directors of Trade Link filed an amendment to the Certificate of Incorporation with the State of Nevada and changed our name from Trade Link to China Modern Agricultural Information, Inc.
 
On January 28, 2011, we entered into a Share Exchange Agreement (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 “Securities Exchange”). The shares issued to Value Development’s shareholder 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 stockholders.
 
On January 28, 2011, Value Development completed the acquisition of Jiasheng Consulting.  Jiasheng Consulting entered into a series of agreements (the “Contractual Arrangements”) with Zhongxian Information, Mr. Liu Zhengxin, our Chief Human Resource Officer and holder of 62% equity interest in Zhongxian Information, and Mr. Wang Youliang, our Chief Executive Officer and holder of 38% of 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 service 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, titles and equity interest in Zhongxian Information as security for the collection of such consulting and services fees provided in that certain equity pledge agreement.
 
Zhongxian Information was incorporated in China in January 2005 with registered capital of 10 million Renminbi.  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.

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) 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, northeast of 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 Development

Sale of Milk Cows

In June 2011, we 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, we sold 5,635 milk cows to 20 local farmers with a 10% down payment with monthly installments plus interest at 7% on any remaining principal payment over a period of the remaining useful life of the cows sold. In September 2011, we 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 receivable related to the sales of cows is included in notes receivable in the accompanying consolidated balance sheets as of March 31, 2012 and June 30, 2011.  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. Pursuant to the agreements with these local farmers entered in August and September 2011, we are also entitled to 30% of the monthly milk sales generated by the cows sold. The 30% monthly payments represent the monthly installments for the purchase price of cows sold and commissions for our assistance in arranging for the sale of the milk. We also entered into agreements with local farmers for a 30% commission of their monthly milk sales generated by the cows sold in June 2011. No sales of milk cows occurred in the quarter ended March 31, 2012.  By the end of March 2012, we had 13,509 cows, among which, 8,824 cows continue to be fed by local farmers, 400 cows are fed by our variable interest entity Xinhua Cattle, and 4,279 cows are fed by Yulong Cattle.
 
 
35

 
 
Starting with the quarter ended September 30, 2011, the food costs for feeding cows increased significantly. The food costs paid to the farmers for feeding cows per month increased from RMB 200 to RMB 280, RMB 280 to RMB 350, RMB 300 to RMB 380 and RMB 450 to RMB 540 for baby cows, pre-adult cows, young cows and milk cows respectively. This was the main reason we disposed of a large number of our cows and rented the grassland. This new business model provides us with a new revenue stream for which we incur very little in direct cost, as the milk production is entirely the responsibility of the local farmers.

Factors Affecting our Results of Operations
 
Our operating results are primarily affected by the following present factors:

o           Dairy Industry Growth. We believe the market for dairy products in China for the long term will be growing rapidly, driven by China’s economic growth, improved living quality and increased penetration of infant formula. We believe the demand of raw fresh milk will be increasing rapidly driven by the above factors.

o           Production Capacity. Our revenue largely depends on our production capacity. The production capacity in this industry is determined by variety, aging and number of adult cows. Accordingly, we acquired Yulong Cattle in November 2011 which increased our number of the cows by 3,800 and improved our production capacity by approximately 90 tons per day.

o           Raw Material Supply and Prices. The per unit costs of fresh raw milk are affected by the price volatility of raw material and feeding expenses in the China markets. For instance, the total food costs and feeding expenses paid to farmers increased by 17% in the quarter ended September 30, 2011. In response to the increase of costs, we leased the 16,666,750 square meters grassland in October 2011, and we believe we can start to produce hay, one of the major raw materials on the leased grassland, in the near future.

Results of Operations
 
The following tables present certain consolidated statements of income and other comprehensive income of operations information. Financial information is presented for the quarters ended March 31, 2012 and 2011 respectively.
 
Comparison of Three Month Periods Ended March 31, 2012 and 2011

The following table sets forth certain information regarding our results of operations for the three months ended March 31, 2012 and 2011. 
 
   
For the three months ended March 31,
 
   
 
   
 
   
Change
 
   
2012
   
2011
   
Amount
   
%
 
Revenue
    9,406,033       6,805,786       2,600,247       38 %
Cost of goods sold
    3,360,430       3,426,988       (66,558 )     (2 )%
Gross profit
    6,045,603       3,378,798       2,666,805       79 %
 
    64.27 %     49.65 %     14.63 %     40 %
Operating expenses
    290,544       677,453       (386,909 )     (57 )%
Operating income/(loss)
    5,755,059       2,701,345       3,053,714       113 %
Other income and expenses
    294,144       -       294,144       100 %
Income before income tax
    6,049,203       2,701,345       3,347,858       124 %
Provision for income tax
    1,444,980       710,352       734,628       103 %
Net income before noncontrolling interests
    4,604,223       1,990,993       2,613,230       131 %
Noncontrolling interests
    39,050       33,480       5,570       17 %
Net income attributable to controlling interests
    4,565,173       1,957,513       2,607,660       133 %
 
 
36

 
 
Revenues
 
The revenue was primarily generated from sales of natural milk and natural milk sales commission from farmers to which we sold cows. We had total revenues of $9,406,033 for the quarter ended March 31, 2012, an increase of $2,600,247 or 38%, compared to $6,805,786 for the quarter ended March 31, 2011. Although the changing of our business operating activities lead to the decrease in revenue of Xinhua, the successful acquisition of Yulong in the prior quarter lead to an increase in total revenue. For the three months ended March 31, 2012, our revenue stream comprised sales of natural milk and sales commission from farmers. In comparison, for the three months ended March 31, 2011, our revenue was solely comprised of sales of natural milk. The following table shows the different revenue sources:
 
   
For the three months ended March 31,
 
   
 
   
 
   
Change
 
   
2012
   
2011
   
Amount
   
%
 
Sales of natual milk
    6,425,656       6,805,786       (380,130 )     (6 )%
Sales commissions
    2,980,377       -       2,980,377       100 %
  Total revenue
    9,406,033       6,805,786       2,600,247       38 %

For the quarter ended March 31, 2012, our revenue generated from natural milk selling was $6,425,656 which represented a decrease of $380,130 or 6% compared to $6,805,786 for the quarter ended March 31, 2011. The main reason for the decrease was due to the decrease in number of our milk cows. The following table sets forth certain information regarding the number of milk cows and the revenue per cow:

   
For the three months ended March 31,
 
   
 
   
 
   
Change
 
   
2012
   
2011
   
Amount
   
%
 
Sales of natual milk
    6,425,656       6,805,786       (380,130 )     (6 )%
Average number of milk cows
    5,354       10,762       (5,408 )     (50 )%
Revenue from per milk cow
    1,200       632       568       90 %
 
As we disposed of a large number of milk cows to local farmers in June, August and September of 2011, the average number of milk cows for the quarter ended March 31, 2012 decreased from 10,762 to 5,354 compared to the quarter ended March 31, 2011. In contrast to the decrease in number of milk cows, the revenue per milk cow per quarter increased from $632 for the three months ended March 31, 2011 to $1,200 for the three months ended March 31, 2012, an increase by $568 or 90%. Three reasons caused the increase in revenue from milk cow per quarter. First, the sales price was increased from RMB 1.95 per kg for the three months ended March 31, 2011 to RMB 3.35 per kg, an increase of approximately RMB 1.40 or 72%. Second, we disposed of inferior domestic cows and kept superior imported Holstein cows which are still fed by Xinhua Cattle.  Third, the addition of the milk cows owned by Yulong Cattle and the sale of our previously owned milk cows brought down the average age of our milk cows mix.  The decrease in sales of natural milk was partially offset by sales commission from the local farmers of $2,980,377 for the three months ended March 31, 2012 and has become one of our main revenue streams.
 
 
37

 
 
Gross profit
 
Our cost of goods sold consists of feeding food, feeding expenses and other direct production overhead which includes labor costs, depreciation and water & electricity, etc. Our operating activities changed since the quarter ended September 30, 2011 which resulted in reduced direct costs especially in feeding food costs because the milk production and distribution are now entirely the responsibility of the local farmers. The change in our operating activities to the new program has resulted in a marked improvement in our margins.  For the quarter ended March 31, 2012, our cost of goods sold was reduced to $3,360,430 which represented a decrease of $66,558 or 2% compared to $3,426,988 for the quarter ended March 31, 2011.The decrease was primarily due to the decrease in the number of adult cows. The following table sets forth certain information regarding the number of milk cows and the cost per cow:
 
   
For the three months ended March 31,
 
               
Change
 
   
2011
   
2010
   
Amount
   
%
 
Cost of goods sold
    3,360,430       3,426,988       (66,558 )     (2 )%
Average number of milk cows
    5,354       10,762       (5,408 )     (50 )%
Cost per milk cow
    628       318       309       97 %
 
The increase in cost per milk cow for the three months ended March 31, 2012 continued to be primarily caused by the reasons below:

·  
Increase in the price of raw materials and feeding expenses
·  
The fixed costs allocated to a small number of adult cows caused the increase in unit cost;
·  
We changed the cost allocation method that more costs were allocated to adult cows;
·  
Not only did the food costs and feeding expenses increase, but also the auxiliary production costs increased as well, e.g, medicine, salary, etc;
·  
The acquisition of Yulong Cattle caused the increase in unit cost due to the lower gross profit margin of Yulong Cattle.

Gross profit margin
 
Our gross profit margin increased to 64% for the quarter ended March 31, 2012 from 50% for the quarter ended March 31, 2011, primarily due to the change of our operating activities where the new revenue stream reduced direct costs especially in feeding food costs because the milk production and distribution are entirely the responsibility of the local farmers. However, the gross profit margin from natural milk sales decreased from 50% to 47% due to the increase in raw materials and feeding expenses, although the sales price was significantly increased. We believe that the price of the raw materials will keep increasing in the future and that is one of the reasons we disposed of a large number of adult cows.
 
Operating expenses
 
Our operating expenses decreased to $290,544 for the quarter ended March 31, 2012 from $677,453 for the quarter ended March 31, 2011. It decreased by $386,909 or 57%. The main operating expenses consist of human resources, depreciation, professional service fees for filings required by U.S. securities laws, consulting expenses to a Chinese financial advisory company and business taxes, etc. Due to the new revenue stream introduced, we incurred $166,096 in business tax for the quarter ended March 31, 2012. We classified it as a selling expense which is included in operating expenses. During the quarter ended March 31, 2011, we expensed $456,600 to an advisory firm to assist the Company in locating a public shell for the reverse merger and related financial matters. This is the main reason for the decrease in operating expenses during the quarter ended March 31, 2012.
 
Operating income
 
As a result of the foregoing, we had operating income of $5,755,059 for the three month period ended March 31, 2012, representing an increase of $3,053,714, as compared to an operating income of $2,701,345 for the three month period ended March 31, 2011.
 
 
38

 
 
Non-operating income
 
Non operating income consists primarily of interests charged on the outstanding notes from the local farmers, government subsidies and the loss on disposal of biological properties. For the quarter ended March 31, 2012, the annual interest income was $193,596 on the outstanding notes receivable from the farmers, government subsidies of $109,830 and a loss of $9,282 on the disposal of biological properties.
 
Net Income
 
Our 99% owned subsidiary, Xinhua Cattle and 100% owned subsidiary, Yulong Cattle 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. Heilongjiang Zhongxian Information Co., Ltd is subject to an Enterprise Income Tax of 25% and files its own tax returns. Income tax was $1,444,980 and $710,352 for the quarter ended March 31, 2012 and 2011, respectively. Net income after income taxes was $4,604,223 and $1,990,993 for the quarter ended March 31, 2012 and 2011, respectively which represented an increase in $2,613,230 or 131%. As we own 99% of Xinhua Cattle’s shares, noncontrolling interests attributed to the minority interest shareholder was $39,050 and $33,480 for the quarters ended March 31, 2012 and 2011, respectively. Our net income attributable to the Company was $4,565,173 representing $0.09 per share and $1,957,513 representing $0.05 per share for the quarters ended March 31, 2012 and 2011, respectively.
 
Our reporting currency is U.S. dollar. Our local currency, Renminbi (RMB), is the 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 amounts 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 quarters ended March 31, 2012 and 2011, foreign currency translation adjustments of $230,436 and $75,969 have been reported as other comprehensive income in the consolidated statements of income and other comprehensive income.

Comparison of Nine Month Periods Ended March 31, 2012 and 2011
 
The following table sets forth certain information regarding our results of operations for the nine months ended March 31, 2012 and 2011.
 
   
For the nine months ended March 31,
 
   
 
   
 
   
Change
 
   
2012
   
2011
   
Amount
   
%
 
Revenue
    19,504,313       17,201,388       2,302,925       13 %
Cost of goods sold
    6,522,244       8,652,287       (2,130,043 )     (25 )%
Gross profit
    12,982,069       8,549,101       4,432,968       52 %
 
    66.56 %     49.70 %     16.86 %     34 %
Operating expenses
    680,811       872,831       (192,020 )     (22 )%
Operating income/(loss)
    12,301,258       7,676,270       4,624,988       60 %
Other income and expenses
    6,448,119       -       6,448,119       100 %
Income before income tax
    18,749,377       7,676,270       11,073,107       144 %
Provision for income tax
    4,602,303       1,941,431       2,660,872       149 %
Net income before noncontrolling interests
    14,147,074       5,734,839       8,412,235       147 %
Noncontrolling interests
    104,525       84,091       20,434       24 %
Net income attributable to controlling interests
    14,042,549       5,650,748       8,391,801       149 %
 
 
39

 
 
Revenues
 
Revenues were primarily generated from sales of natural milk and natural milk sales commissions received from the local farmers. We had total revenues of $19,504,313 for the nine months ended March 31, 2012, an increase of $2,302,925 or 13%, compared to $17,201,388 for the nine months ended March 31, 2011. The increase in revenue was primarily due to the changing of our business operating activities and the successful acquisition of Yulong. For the nine months ended March 31, 2012, our revenue stream comprised of sales of natural milk and sales commissions from farmers. In comparison, for the nine months ended March 31, 2011, our revenue was solely comprised of sales of natural milk. The following table shows the different revenue sources:
 
   
For the nine months ended March 31,
 
   
 
   
 
   
Change
 
   
2012
   
2011
   
Amount
   
%
 
Sales of natual milk
    12,778,783       17,201,388       (4,422,605 )     (26 )%
Sales commissions
    6,725,530       -       6,725,530       100 %
Total revenue
    19,504,313       17,201,388       2,302,925       13 %

For the nine months ended March 31, 2012, the revenue generated from natural milk sales was $12,778,783, a decrease of $4,422,605 or 26% compared to $17,201,388 for the nine months ended March 31, 2011, despite the factor that the milk sales of Yulong Cattle for the post-acquisition period from November 24, 2011 to March 31, 2012 was included in our revenue for the nine months ended March 31, 2012. The main reason for the decrease was due to the reduction in the number of milk cows. The following table sets forth certain information of regarding the number of milk cows and the revenue per cow:
 
   
For the nine months ended March 31,
 
   
 
   
 
   
Change
 
   
2012
   
2011
   
Amount
   
%
 
Sales of natual milk
    12,778,783       17,201,388       (4,422,605 )     (26 )%
Average number of milk cows
    4,202       9,279       (5,077 )     (55 )%
Revenue from per milk cow
    3,041       1,854       1,187       64 %

As we disposed of a large number of milk cows to the local farmers in June, August and September of 2011, the average number of milk cows for the nine months ended March 31, 2012 decreased from 9,279 to 4,202 compared to the nine months ended March 31, 2011. In contrast to the decrease in number of milk cows, the revenue per milk cow increased to $3,041 for the nine months ended March 31, 2012 from $1,854 for the nine months ended March 31, 2011, an increase of $1,187 or 64%. The reasons for the increase in revenue from milk cow for the nine months are the same as the reasons above for the three months ended March 31, 2012 and 2011.  The decrease in sales of natural milk was partially offset by sales commissions received from local farmers of $6,725,530 for the nine months ended March 31, 2012 and has become one of our main revenue streams. 
 
 
40

 
 
Gross profit
 
Our cost of goods sold consists of feeding food, feeding expenses and other direct production overhead which includes labor costs, depreciation and water & electricity, etc. As our operating activities were changed in the prior quarter, it resulted in reduced direct costs especially in feeding food costs because the milk production and distribution are entirely the responsibility of the local farmers. The change in our operating activities to the new program has resulted in a marked improvement in our margins.  For the nine ended March 31, 2012, our cost of goods sold was reduced to $6,522,244 which represented a decrease of $2,130,043 or 39% compared to $8,652,287 for the nine months ended March 31, 2011.The decrease was primarily due to the decrease in the number of adult cows. The following table sets forth certain information regarding the number of milk cows and the cost per cow:
 
   
For the nine months ended March 31,
 
               
Change
 
   
2012
   
2011
   
Amount
   
%
 
Cost of goods sold
    6,522,244       8,652,287       (2,130,043 )     (39 )%
Average number of milk cows
    4,202       9,279       (5,077 )     (58 )%
Cost per milk cow
    1,552       932       620       44 %
 
The increase in cost per milk cow for the nine months ended March 31, 2012 was primarily due to the increase in the prices of raw materials and feeding expenses.
 
Gross profit margin
 
Our gross profit margin increased to 67% for the nine months ended March 31, 2012 from 50% for the nine months ended March 31, 2011 which was primarily due to the change of our operating activities as the new revenue stream reduced our direct costs especially in feeding food costs because the milk producing and distribution are entirely the responsibility of the local farmers.
 
Operating expenses
 
Our operating expenses decreased to $680,811 for the nine months ended March 31, 2012 from $872,831 for the nine months ended March 31, 2011. It was decreased by $192,020 or 22%. The primary operating expenses consist of human resources, depreciation, professional service fees for filings required by U.S. securities laws, professional consulting expenses from a financial advisory company and business taxes, etc. Due to the new revenue stream introduced, we incurred $376,630 of business tax for the nine months ended March 31, 2012. We classified it as a selling expense which is included in operating expenses. During the nine months ended March 31, 2011, we recognized $456,600 in consulting expenses with an advisory firm that assisted the Company in locating a public shell for the reverse merger and related financial matters. This is the main reason for the decrease in operating expenses during the nine months ended March 31, 2012.
 
Operating income
 
As a result of the foregoing, we had operating income of $12,301,258 for the nine months period ended March 31, 2012, representing an increase of $4,624,988, as compared