NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX-MONTH PERIODS ENDED SEPTEMBER 30, 2021 AND 2020
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1.
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These
financial statements, including the consolidated balance sheet as of March 31, 2021, which
was derived from audited financial statements, do not include all the information and notes
required by US Generally Accepted Accounting Principles for complete financial statements
and should be read in conjunction with the consolidated financial statements and accompanying
notes included in the Company’s annual report on Form 20-F for the fiscal year ended
March 31, 2021.
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2.
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In
the opinion of management, all adjustments (consisting of normal, recurring adjustments)
considered necessary for a fair presentation have been included. Operating results for the
interim periods presented are not necessarily indicative of the results that may be expected
for the full year ending March 31, 2022.
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The Company was engaged in two business
segments - sale of nervonic acid-based health supplements and sale of acer truncatum seedlings
- for the six-month periods ended September 30, 2021 and 2020.
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Six-month Period Ended
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September
30, 2021
(Unaudited)
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September
30, 2020
(Unaudited)
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Net Sales
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|
|
|
|
|
|
|
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Sale of nervonic acid-based health supplements
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$
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621,933
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|
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$
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464,297
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|
|
|
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Sale of acer truncatum seedlings
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310,713
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|
|
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199,796
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|
|
|
|
|
|
|
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Total
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$
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932,646
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$
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664,093
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|
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|
|
|
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|
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Cost of Sales
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|
|
|
|
|
|
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Sale of nervonic acid-based health supplements
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$
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39,887
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$
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86,716
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|
|
|
|
|
|
|
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Sale of acer truncatum seedlings
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206,459
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|
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114,640
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|
|
|
|
|
|
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Total
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$
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246,346
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$
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201,356
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|
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|
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Gross Profit
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|
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|
|
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Sale of nervonic acid-based health supplements
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$
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582,046
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$
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377,581
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|
|
|
|
|
|
|
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Sale of acer truncatum seedlings
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104,254
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85,156
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|
|
|
|
|
|
|
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Total
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$
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686,300
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|
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$
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462,737
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|
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4.
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Stock-based
Compensation
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On
July 15, 2021, the Company issued cashless options (the “Options”) to purchase 600,000 ordinary shares of the Company at
$0.50 per share to Ms. Fung Ming Pang, our CFO and director. The Options vested 50% immediately upon issuance and 50% on July 15, 2022
and are exercisable for five years after the date of vesting.
As
of September 30, 2021, there were 300,000 Options issued and outstanding. The fair value of these Options was calculated using Black
Scholes model with the following assumptions:
Valuation
date
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July
15, 2021
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Market
price per share (USD/share)
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$1.70
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Exercise
price per share (USD/share)
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$0.50
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Risk
free rate
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0.78%
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Dividend
yield
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0.00%
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Expected
term (years)
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5.00
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Expected
volatility
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201.69%
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Value
per option (USD/option)
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$1.679
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The
non-cash stock-based compensation expense of $503,700 was included in general and administrative expenses for the six-month period ended
September 30, 2021 whereas there was no such expense for the six-month period ended September 30, 2020.
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5.
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Related
Party Transaction
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For
the six-month period ended September 30, 2021 and 2020, the Company generated sales of $310,713 and nil respectively from Dunhua Bao
Feng Seedling Co., Limited, over which Mr. Yu Chang, father of Ms. Ting-ting Chang, CEO and director of the Company, has significant
influence. As of September 30, 2021 and March 31, 2021, amount due from Dunhua Bao Feng Seedling Co., Limited, included in the accounts
receivable of consolidated balance sheets, was $440,949 and nil, respectively.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis
of the results of operations of the Company for the six-month period ended September 30, 2021 and for the comparable period ended September
30, 2020, and its financial condition as of September 30, 2021, should be read in conjunction with the Company’s unaudited Consolidated
Statements of Income and Comprehensive Income for the six-month periods ended September 30, 2021 and 2020, and its unaudited Consolidated
Balance Sheet as of September 30, 2021 and the notes thereto that are included elsewhere in this Report
on Form 6-K. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements because of several factors, including those set forth under the “Risk Factors,”
“Cautionary Notice Regarding Forward-Looking Statements” and “Business” sections in this Prospectus. We
use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,”
“will,” “should,” “could” and similar expressions to identify forward-looking statements.
OVERVIEW
Nature
of operations
Zhong
Yuan Bio-Technology Holdings Limited (“ZY Holdings” or the “Company”), through its subsidiaries, is engaged in
the business of developing and marketing nervonic acid-based health supplements and sales of acer truncatum seedlings. ZY Holdings together
with its subsidiaries are collectively referred to as the “Company.”
Share
Exchange
On August 31, 2019,
ZY Holdings closed on a share exchange (the “Share Exchange”) with Zhong Yuan Investment Limited (“Zhong Yuan Investment”),
a Seychelles company limited by shares. Prior to the exchange, Zhong Yuan Investment owned 100% of the shares of China Bio-Technology
Holdings Limited (“China Bio”), a company organized under the laws of the Republic of Seychelles. Under the Share Exchange
Agreement, ZY Holdings issued 161,500,000 shares to Zhong Yuan Investment in exchange for a 100% equity interest in China Bio. As a result
of the Share Exchange, China Bio is now a wholly owned subsidiary of ZY Holdings. Immediately following the closing of the Share Exchange,
the Company had 170,000,000 shares of common stock outstanding, 95% of which were owned by Zhong Yuan Investment.
The Share Exchange
has been accounted for as a reverse acquisition using the purchase method of accounting, with no goodwill being recognized. ZY Holdings
(the legal acquirer) has been considered the accounting acquiree and China Bio (the legal acquiree) the accounting acquirer.
Reorganization
of China Bio
In and around January
2018 China Bio completed a reorganization of its legal structure. The reorganization involved the incorporation of China Bio and its wholly
owned subsidiaries, Zhong Yuan Bio-Technology (Hong Kong) Limited (“ZY HK,” previously known as Hua Hong Powerloop Technology
(Hong Kong) Limited, a holding company incorporated on June 13, 2016 under the laws of Hong Kong) and Zhong Yuan Bio-Technology (Shenzhen)
Company Limited (“ZY Shenzhen,” a holding company established on June 10, 2014 under the laws of the People’s Republic
of China (“PRC”) and previously known as Shenzhen Chuang Feng Clear Energy Company Limited) and the transfer of all equity
ownership of Bao Feng Bio-Technology (Beijing) Limited (“BF Beijing”, previously known as Beijing Yuan Bao Feng Century Agricultural
Technology Limited, an operating company incorporated on August 30, 2012 under the laws of the PRC) to ZY Shenzhen from the former shareholders
of BF Beijing.
On January 19,
2018, ZY Shenzhen entered into an agreement to acquire 100% of the equity ownership of BF Beijing for a total cash consideration of $1,351,500
(RMB8,500,000) from the former shareholders of BF Beijing. To fund ZY Shenzhen’s acquisition of BF Beijing, these former shareholders
agreed to provide an interest-free loan to China Bio which in turn provided an interest-free loan to ZY Shenzhen of the same amount of
$1,351,500 (RMB8,500,000). For the purpose of this transaction, in January 2018, these former shareholders had established a majority
ownership in China Bio whose shares were issued and paid up by way of capitalization of the said interest-free loan of $1,351,500 provided
by these former shareholders. China Bio indirectly holds a 100% equity interest in ZY Shenzhen through ZY HK. On February 13, 2019, ZY
Shenzhen received approval from the Economic and Trade Bureau of Beijing, the PRC, of the acquisition of BF Beijing.
Since China Bio
and its subsidiaries have effectively been controlled by the same group of shareholders before and after the reorganization, they are
considered under common control. The above-mentioned transactions have been accounted for as recapitalization of BF Beijing with no adjustment
to the historical basis of the assets and liabilities of BF Beijing and the operations were consolidated as though the transaction occurred
as of the beginning of the first accounting period presented in these financial statements.
Reverse
Stock Split
On
July 24, 2020, the Company completed a one-for-ten reverse stock split of the Company’s ordinary shares (the “Reverse Stock
Split”). As a result of the Reverse Stock Split, the authorized share capital of the Company was decreased from 500,000,000 ordinary
shares with a par value of $0.0001 each to 50,000,000 ordinary shares with a par value of $0.001 each, and the number of issued and outstanding
ordinary shares was decreased from 171,450,000 shares to 17,145,000 shares.
Private
Placement
On
December 13, 2019, the Company closed on the sale of 1,450,000 Ordinary Shares, at a purchase price of $0.10 per Share, pursuant to a
private securities offering.
On
November 17, 2020, the Company sold 50,000 Ordinary Shares (post-Reverse Stock Split), at a purchase price of $1.00 per Share, pursuant
to a private securities offering.
Cancellation
of shares
On
November 17, 2020, the Company acquired 25,000 Ordinary Shares (post-Reverse Stock Split) from one of the shareholders of the Company
at total consideration of $25,000. These shares were thereafter cancelled.
On
November 18, 2020, the Company acquired 25,000 Ordinary Shares (post-Reverse Stock Split) from one of the shareholders of the Company
at total consideration of $25,000. These shares were thereafter cancelled.
Acquisition
of Dandong Bao Feng Seedling Technology Co., Limited (“Dandong BF”)
On December 31,
2020, Bao Feng completed its acquisition of a 100% equity interest in Dandong BF from Yu Chang, the record owner of 41.6% of the outstanding
shares of Zhong Yuan Investment and father of Ting-ting Chang, our CEO and director, for a total consideration of RMB10,500,000 (approximately
$1,500,000). A deposit of RMB3,160,000 (approximately $465,460 as of September 30, 2020) was paid upon signing of the Equity Transfer
Agreement on March 1, 2020. The balance of RMB7,340,000 (approximately $1,082,000 as of September 30, 2020) was settled by offsetting
the amounts due from related companies of which Yu Chang is the owner and director. Dandong BF was incorporated in the PRC on March 11,
2019 and is principally engaged in the research, development and growing of Acer Truncatum seeds in Dandong city, Liaoning Province, in
the north-eastern region of the PRC. Dandong BF has approximately 3,000,000 acer truncatum trees that are grown on land that is subject
to 10-year leases that commenced on January 1, 2019 and terminate on December 31, 2028. This acquisition allows the Company to control
the supply and ensure the quality of its acer truncatum seeds and seedlings, the important raw material of nervonic acid.
RESULTS
OF OPERATION
The following
discussion should be read in conjunction with the consolidated financial statements of the Company that
are included in this Report on Form 6-K.
For
the six-month periods ended September 30, 2021 and 2020
Revenue
Total revenue
was $932,646 and $664,093 for the six-month periods ended September 30, 2021 and 2020 respectively. The increase of $268,553 or 40.4%
was mainly attributable to the increase in sales of nervonic acid-based health supplements by $157,636 or 34.0% over the period and the
increase in sales of acer truncatum seedlings by $110,917 or 55.5% over the period. The increase in sales of nervonic acid-based health
supplements resulted from the increase in sale channels in 2021, whereas the increase in sales of acer truncatum seedlings resulted from
the acquisition of a 100% interest in Dandong BF on December 31, 2020 that provides the Company with more inventory of acer truncatum
seedlings for external sales.
Cost
of sales
Total cost of
sales was $246,346 for the six-month period ended September 30, 2021, as compared to $201,356 for the comparable period in 2020. The increase
in total cost of sales of $44,990 or 22.3% resulted from the increase in the cost of sales of acer truncatum seedlings by $91,819 or 80.1%,
offset by the decrease in the cost of sales of nervonic acid-based health supplements of $46,829 or 54.0%. The significant increase in
the cost of sales of acer truncatum seedlings was due to higher inventory costs of acer truncatum seedlings of Dandong BF as compared
to BF Beijing. However, the cost of sales of nervonic acid-based health supplements decreased over the period because of the increase
in sales of new products introduced in 2021 which have higher profit margins and lower manufacturing costs, as compared to the older products.
Gross
Profit
Total
gross profit increased from $462,737 for the six-month period ended September 30, 2020 to $686,300 for the six-month period ended September
30, 2021 because of the increase in total revenue and improvement of overall gross profit margin from 69.7% for the six-month period
ended September 30, 2020 to 73.6% for the six-month period ended September 30, 2021.
Gross
profit for sales of nervonic acid-based health supplements for the six-month period ended September 30, 2021 and 2020 was $582,046 and
$377,581, respectively, an increase of $204,465 or 54.2%, because the increase in sales over the period was greater than the increase
in cost of sales. Gross profit margin increased from 81.3% for the six-month period ended September 30, 2020 to 93.6% for the six-month
period ended September 30, 2021 due to the introduction of new products in 2021 that have higher profit margins than the older products.
Gross
profit for sales of acer truncatum seedlings was $104,254 and $85,156 for the six-month periods ended September 30, 2021 and 2020,
respectively whereas gross profit margin was 33.6% and 42.6% for the six-month periods ended September 30, 2021 and 2020 respectively.
The increase in gross profit of $19,098 or 22.4% was due to the increase in sales of acer truncatum seedlings over the period. However,
the decrease in gross profit margin of 9% was mainly because the Company purchased one lot of acer truncatum seedlings at a bulk purchase
discount and re-sold at the normal market price during the six-month period ended September 30, 2020, whereas acer truncatum seedling
sales for the six-month period ended September 30, 2021 were from acer truncatum seedlings grown by Dandong BF, a newly acquired subsidiary
of the Company.
Total
Operating Expenses
Total
operating expenses increased from $662,351 for the six-month period ended September 30, 2020 to $1,274,649 for the six-month period ended
September 30, 2021. The significant increase of $612,298 or 92.4% was attributable to the increase in general and administrative expenses
of $622,506 and increase in research and development expenses of $7,266 which were offset by the decrease in selling and marketing expenses
of $17,474 over the period.
|
a)
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General
and Administrative Expenses
|
Total general and
administrative expenses for the six-month period ended September 30, 2021 was $879,443 that included a non-cash stock-based compensation
charge of $503,700, as compared to $256,937 for the six-month period ended September 30, 2020. Excluding the non-cash stock-based compensation
charge results in general and administrative expenses of $375,743 for the six-month ended September 30, 2021. That increase of $118,806
or 46.2% over the period was mainly attributable to legal, professional and application fees incurred in connection with the listing of
the Company’s shares on the OTCQB market on July 15, 2021.
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b)
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Research
and Development Expenses
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Total
research and development expenses for the six-month period ended September 30, 2021 was $121,375, as compared to $114,109 for the comparable
period in 2020. The increase by $7,266 or 6.4% over the period was mainly attributable to the increase in patent registration related
expenses.
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c)
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Selling
and Marketing Expenses
|
Total selling and
marketing expenses was $273,831 and $291,305 for the six-month periods ended September 30, 2021, and 2020 respectively. The decrease of
$17,474 or 6.0% mainly resulted from the reduction in physical promotion activities over the period.
Other
Income (Expenses), net
Other
income (expenses), net increased from $13,738 for the six-month period ended September 30, 2020 to $119,211 for the six-month period
ended September 30, 2021. The significant increase of $105,473 or 767.7% was mainly due to the inclusion of $119,847 from technical support
service income that was derived from laboratory testing services to other biotech companies using the Company’s patented testing
methodology in 2021, whereas there was no such income in 2020.
Net
Loss – GAAP and Non-GAAP
Net loss
for the six-month periods ended September 30, 2021 and 2020 was as follows
|
|
Six-month Period Ended
|
|
|
September 30, 2021
(Unaudited)
|
|
September 30, 2020
(Unaudited)
|
|
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Net loss under US GAAP
|
|
$
|
(489,630
|
)
|
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$
|
(197,137
|
)
|
Adjustment:
|
|
|
|
|
|
|
|
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Non-cash stock-based compensation charge
|
|
|
503,700
|
|
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|
—
|
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Net income (loss) as Non-GAAP calculation
|
|
$
|
14,070
|
|
|
$
|
(197,137
|
)
|
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Management
believes that providing the adjusted non-GAAP calculation of Net income (loss) provides a better period-to-period comparison for the
reader.
For
the six-month period ended September 30, 2021, the Company had a net loss of $489,630 compared to a net loss of $197,137 for the comparable
period in the prior year. The increase in net loss of $292,493 resulted primarily from a charge
relating to stock-based compensation offset by increases in revenue and gross profit over the period and inclusion of technical
support service income of $119,847 during the six-month period ended September 30, 2021. After
excluding the non-cash stock-based compensation charge of $503,700, the Company had non-GAAP net income of $14,070, as compared to a
net loss of $197,137 for the six-month period ended September 30, 2020. The turnaround from net loss to non-GAAP net income by
$211,207 over the period was mainly due to the increases in revenue and gross profit over the period and inclusion of technical support
service income of $119,847 during the six-month period ended September 30, 2021.
Liquidity
and Capital Resources
As
of September 30, 2021, the Company had cash of $7,163, total current assets of $2,503,029 and total current liabilities of $527,995.
Net current assets were $1,975,034 and working capital ratio was 4.7. As of September 30, 2021, the Company’s total assets and
total liabilities amounted to $3,452,568 and $1,929,772 respectively. As of September 30, 2021, the Company’s total stockholders’
equity amounted to $1,522,796 and its gearing ratio (bank loan divided by stockholders’ equity) was 53.5%.
Off-Balance
Sheet Arrangements
The
Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or
future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to investors.