UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File number 000-28181

ORANCO, INC.

(Exact name of registrant as specified in charter)

(646)7593614

(Registrant’s telephone number, including area code)

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 of 1934 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. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted 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 ☒ No ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Securities registered pursuant to Section 12(b) of the Act:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date

INDEX

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ORANCO, INC.

CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED MARCH 31, 2019

ORANCO, INC.

TABLE OF CONTENTS

ORANCO, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Chinese Renminbi)

The accompanying notes are an integral part of the financial statements. 

ORANCO, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(Chinese Renminbi)

The accompanying notes are an integral part of the financial statements. 

ORANCO, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

(Chinese Renminbi)

The accompanying notes are an integral part of the financial statements.

ORANCO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Chinese Renminbi)

The accompanying notes are an integral part of the financial statements.

ORANCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Chinese Renminbi)

Oranco, Inc. (the “Company”) was incorporated under the laws of the State of Nevada on June 16, 1977. The Company has been in the business of the development of mineral deposits. During 1983 all activities were abandoned, and the Company had remained inactive until June 29, 2018 when it acquired the business of Reliant Galaxy International Limited (“Reliant”). The Company and its subsidiaries (the “Group”) are principally engaged in the trading of spirits in the People’s Republic of China (the “PRC”).

As disclosed in the Form 8-K filed with the Securities and Exchange Commission on October 19, 2018, the Company entered into a business agreement with Guangzhou Silicon Technology Co., Ltd. on August 20, 2018 to have Guangzhou Silicon Technology Co., Ltd. develop an anti-counterfeiting laser recognition proprietary system using blockchain technology.

Details of the subsidiaries are set out in note 20 to the consolidated financial statements.

The Consolidated Financial Statements include the Financial Statements of Oranco, Inc. and the Financial Statements of its wholly-owned subsidiaries.

Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to or has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

The accompanying financial statements have been prepared in accordance with the U.S. generally accepted accounting principles or GAAP. The Company operates in one reportable segment and solely within the PRC. Accordingly, no segment or geographic information has been presented.

Non-controlling interests are shown as a component of shareholders’ equity on the consolidated balance sheet and the share of the net income attributable to non-controlling interests is shown as a component of net income in the consolidated statements of operations.

Business Combinations

The acquisition of other subsidiaries that meet the criteria for business combinations is accounted for using the acquisition method of accounting. The consideration transferred for the acquisition is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group.

The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognizes any non-controlling interest in the acquiree at the non-controlling interest’s proportionate share of the recognized amounts of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred.

Any contingent consideration to be transferred by the Group are recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognized, either in the Statement of Operations or as a change to other comprehensive income. Contingent consideration that is classified as equity is not remeasured, and its subsequent settlement is accounted for within equity. Goodwill is initially measured as the excess of the aggregate of the consideration transferred and the fair value of non-controlling interest over the identifiable net assets acquired and liabilities assumed.

ORANCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED (Unaudited)

(Chinese Renminbi)

Financial instruments of the Group primarily consist of cash and cash equivalents, trade receivables, deposits, prepayments and other receivables, prepaid land lease, trade payables, receipts in advance, accruals and other payables, and bank borrowings. The carrying values of the Group’s financial instruments approximate their fair values, principally because of the short-term maturity of these instruments or their terms.

The Group has no derivative financial instruments.

Cash and cash equivalents consist of cash on hand and highly liquid investments which are unrestricted as to withdrawal or use, and which have maturities of three months or less when purchased.

The Group’s revenues are derived from sales of products recorded net of value added tax (“VAT”). Revenue is recognized when all of the following conditions are met: persuasive evidence of an arrangement exists, delivery of the products has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. These criteria are related to each of the following major revenue generating activities described below.

Trade receivables are stated at the amount the Group expects to collect. The Group maintains allowances for doubtful accounts for estimated losses. Management considers the following factors when determining the collectability of specific accounts: historical experience, creditworthiness of the clients, aging of the receivables and other specific circumstances related to the accounts. Allowance for doubtful accounts is made and recorded into general and administrative expenses based on the aging of trade receivables and on any specifically identified receivables that may become uncollectible. Trade receivables which are deemed to be uncollectible are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company takes a write off of the account balances when the Company can demonstrate all means of collection on the outstanding balances have been exhausted. There is no allowance for doubtful accounts in these consolidated financial statements.

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average method. The components of inventories include raw materials, processing cost of finished goods and purchase cost of products. The Group routinely evaluate the net realizable value of the inventories in light of current market conditions and market trends and record a write-down against the cost of inventories should the net realizable value falls below the cost. 

ORANCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED (Unaudited)

(Chinese Renminbi)

Property, plant and equipment are carried at cost less accumulated depreciation and any recorded impairment. Depreciation is calculated on a straight-line basis over the following estimated useful lives:

Repairs and maintenance are expensed as incurred and asset improvements are capitalized. Consideration is given at each balance sheet date to determine whether there is any indication of impairment of the carrying amounts of the property, plant and equipment. The indication could be an unfavorable development of a business or severe economic slowdown as well as reorganization of the operation. In assessing value in use, the estimated future cash flows are discounted to their present value, based on the time value of money and the risks specific to the country where the assets are located.

VAT on sales is charged at 17% on revenue from product sales and is subsequently paid to the PRC tax authorities after netting input VAT on purchases. The excess of output VAT over input VAT is recognized in other payables, and the excess of input VAT over output VAT is recognized in other receivables in the consolidated balance sheets.

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over the lease periods.

Substantially all of the Group’s operations are conducted in China and as a result, the functional and reporting currency of the Group is the Chinese Renminbi.

Monetary assets and liabilities denominated in currencies other than the applicable functional currencies are translated into the functional currencies at the prevailing rates of exchange at the balance sheet date. Transactions in currencies other than the functional currency are converted into the functional currency at the applicable rates of exchange prevailing at the transaction dates. Transaction gains and losses are recognized in the consolidated statements of operations.

In translating the financial statements of the Company’s subsidiaries outside the PRC into the reporting currency, assets and liabilities are translated from the subsidiaries’ functional currencies to the reporting currency at the exchange rate at the balance sheet date. Equity amounts are translated at historical exchange rates; revenues, expenses, and other gains and losses are translated using the average rate for the period. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income/(loss) in the consolidated statements of operations. During 2018 and 2017, such translation adjustments were not material.

ORANCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED (Unaudited)

(Chinese Renminbi)

Income taxes are provided for in accordance with the laws and regulations applicable to the Group as enacted by the relevant tax authorities. The impact of an uncertain income tax position on the income tax return is recognized at the largest amount that is more-likely-than-not to be sustained upon audit of the related tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Group records interest and penalties related to unrecognized tax benefits (if any) in interest expenses and general and administrative expenses, respectively.

On December 22, 2017, the United States enacted TCJA which instituted fundamental changes to the taxation of multinational corporations, including a reduction the U.S. corporate income tax rate to 21% beginning in 2018. The TCJA also requires a one-time transition tax on the mandatory deemed repatriation of the cumulative earnings of the Company’s foreign subsidiary as of December 31, 2017. To determine the amount of this transition tax, the Company must determine the amount of earnings generated since inception by the relevant foreign subsidiary, as well as the amount of non-U.S. income taxes paid on such earnings, in addition to potentially other factors. The Company acquired the foreign operations on 29 June 2018, hence the Company does not have any qualifying earnings or profits from its foreign subsidiary under the transition tax calculation thus no transition tax is payable.

The Group defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

The Group’s financial instruments include cash and cash equivalents, term deposits, trade and other receivables, and trade and other payables. The Group considers the carrying amounts approximate fair value because of the short maturity of these financial instruments.

In a business combination achieved in stages, the Group remeasures its previously held equity interest in the acquire immediately before obtaining control at its acquisition-date fair value and the re-measurement gain or loss, if any, is recognized in earnings.

When accounting for a transfer of assets or exchange of shares between entities under common control of the Group, the carrying amounts of the assets and liabilities transferred shall remain unchanged subsequent to the transaction, and no gain or loss shall be recorded in the Group’s consolidated statements of operations.

In the normal course of business, the Group is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, and non-income tax matters. An accrual for a loss contingency is recognized when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. If a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, is disclosed. 

ORANCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED (Unaudited)

(Chinese Renminbi)

On July 1, 2018, we adopted ASU No. 2014-09, “Revenue from Contracts with Customers” and the related amendments using the modified retrospective method. The adoption of ASC 606 had no impact on total reported revenues, costs and net income.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations: Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017, and early adoption is permitted. The Company adopted this standard on July 1, 2018 and will apply the standard to any future business combinations.

The adoption of the standard in the consolidated financial statements for the financial year ended June 30, 2019 will have no significant impact to the provision for income taxes and will have no impact to the net cash used in, or generated by, operating, investing, or financing activities in the Group’s consolidated statements of cash flows.   

In August 2016, FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The standard provides new authoritative guidance addressing eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain transactions are presented and classified in the statement of cash flows. The standard is effective for the Group in the first quarter of the fiscal year 2019. The Company does not expect the adoption of this standard to have a significant impact on its consolidated financial statements.

In February 2016, FASB issued ASU No. 2016-02, Leases. The standard increases transparency and comparability among organizations by requiring companies to recognize leased assets and related liabilities on the balance sheet and disclose key information about leasing arrangements. This standard is effective for the Group in the first quarter of the fiscal year 2020. The Group is evaluating the impact the adoption of this standard will have on its consolidated financial statements.

The Group is finalizing the impact of the standard on its consolidated financial statements and disclosures, as well as changes to its systems, processes, and internal controls. The Company’s preliminary assessments are subject to change.

ORANCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED (Unaudited)

(Chinese Renminbi)

Revenue represents the invoiced spirits products sold to the external customers less discounts, returns, and surcharges.

All revenue is derived in China.

A concentration analysis of the revenue is as follows:

An analysis of other income is as follows:

ORANCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED (Unaudited)

(Chinese Renminbi)

The following expenses are included in the selling and distribution expenses: 

Property, plant and equipment, net, consist of the following: 

Prepaid land lease, net, consists of the following: 

The carrying amounts of the prepaid land lease are analyzed as: 

Prepaid land lease represents the cost of the rights of the use of the land in respect of leasehold land in the People’s Republic of China, on which the Group’s buildings are situated.

The lease term is 70 years, ending in 2082.

ORANCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED (Unaudited)

(Chinese Renminbi)

Inventories consist of the following:

No allowance for doubtful debts has been made for both years.

The Group normally allows credit terms to well-established customers ranging from 30 to 150 days. The Group seeks to maintain strict control over its trade receivables. Overdue trade receivables are reviewed regularly by the Board of Directors.

ORANCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED (Unaudited)

(Chinese Renminbi)

Cash held in banks earns interest at floating rates based on daily bank deposit rates.

For the larger suppliers, the Group makes payment in advance for the inventories. For the smaller suppliers, the Group obtains credit terms ranging from 30 to 90 days.

A concentration analysis of the suppliers based on the purchases made during the six-month periods is as follows:

ORANCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED (Unaudited)

(Chinese Renminbi)

Receipts in advance, accruals and other payables consist of the following:

The amount due to a director is interest-free, unsecured and not repayable on demand.

Renminbi 94,051,934 of the amount due to a director relates to Reliant’s acquisition of Sure Rich Investment (Group) Limited. The amount is due to the seller of Sure Rich Investment (Group) Limited, who is also a director of Reliant and the Company.

Note:

ORANCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED (Unaudited)

(Chinese Renminbi)

Each share has a nominal value of US$0.001 per share.

The shares to be issued as consideration for business acquisition are the 321,296,000 new shares at $0.001 per share as part of the consideration of the acquisition of Reliant Galaxy International Limited. The aggregated nominal value of the shares is US$321,296.

ORANCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED (Unaudited)

(Chinese Renminbi)

The Company is subject to taxes in the USA. The Company has had no taxable income under Federal or State tax laws. The Company has loss carryforwards totaling $359,065 that may be offset against future federal income taxes. If not used, the carryforwards will expire 20 years after they are incurred.

The Company’s subsidiary in the BVI is not subject to taxation.

The Company’s Hong Kong subsidiary is subject to taxes in Hong Kong. The Hong Kong subsidiary has had no taxable income.

The Company’s PRC subsidiaries are subject to taxes in China. The applicable PRC statutory income tax rate is 25% according to the Enterprise Income Tax Law.

A reconciliation of the income tax expenses in China is set out below:

As stipulated by the PRC state regulations, the subsidiaries in the PRC participate in the state-run defined contribution retirement scheme. All employees are entitled to an annual pension payment equal to a fixed proportion of the average basic salary of the geographical area of their last employment at their retirement date. The PRC subsidiaries are required to make contributions to the local social security bureau at 29.4% to 37.4% of the previous year’s average basic salary amount of the geographical area where the employees are under employment with the PRC subsidiaries. The Group has no obligation for the payment of pension benefits beyond the annual contributions as set out above.

According to the relevant rules and regulations of the PRC, the PRC subsidiaries and their employees are each required to make contributions to an accommodation fund at 9% of the salaries and wages of the employees which are administered by the Public Accumulation Funds Administration Centre. There is no further obligation for the Group except for such contributions to the accommodation fund. The Group had no significant obligation apart from the contributions as stated above.

ORANCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED (Unaudited)

(Chinese Renminbi)

The Group has total future minimum lease payments under non-cancellable operating lease payable as follows: 

The Group is the lessee of a few office premises and staff residence held under operating leases. The leases typically run for an initial period of one to five years.

The Group made sales to Fuqing Jing Hong Trading Co., Ltd, the director of which was a family member of the CEO Mr. Yang Peng. The family resigned from Fuqing Jing Hong Trading Co., Ltd on June 28, 2018, hence Fuqing Jing Hong ceased to be a related party on June 28, 2018.

Management is of the opinion that these related party transactions were conducted in the normal course of business of the Group with standard sales terms and conditions.

At the end of each reporting period, neither the Group nor the Company had any significant contingent liabilities.

ORANCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED (Unaudited)

(Chinese Renminbi)

Notes:

ORANCO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED (Unaudited)

(Chinese Renminbi)

Notes:

ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

On June 29, 2018, Oranco, Inc. completed and closed a share exchange (the “Share Exchange”) under a Share Exchange Agreement (the “Share Exchange Agreement”), entered into by (i) Oranco, Inc. ( “the Company”); (ii) Reliant Galaxy International Limited, a British Virgin Islands company with limited liability ( “Reliant”); (ii) and the shareholders of Reliant (“Sellers”) pursuant to which Reliant became a wholly owned subsidiary of ours. Pursuant to the Share Exchange Agreement, the Company acquired from the Sellers all of the issued and outstanding equity interests of Reliant in exchange for 349,296,000 newly-issued shares of common stock; 28,000,000 were issued at the closing date of June 29, 2018, and the remaining 321,296,000 shares shall be issued at the completion of the increase of the Company’s authorized shares (the “Common Stock”). As a result of the Share Exchange, the Sellers, as the former shareholders of Reliant, became the controlling shareholders of the Company. The Share Exchange was accounted for under the business combination under common control method of accounting.

On September 1, 2018, Fenyang Huaxin Spirit Development Co.. Ltd., a subsidiary of the Company, acquired 20% equity interest in Guangzhou Silicon Technology Co., Ltd., a company established in the People’s Republic of China. The acquisition of 20% equity interest in Guangzhou Silicon Technology Co., Ltd. was accounted for as an interest in an associate

Results of Operations

(a) For the three months ended March 31, 2019 and 2018

Overview

Revenue

For the three months ended March 31, 2019 and 2018, revenue generated from our Fenjiu liquor wholesale business was RMB28,977,713 and RMB21,217,155, respectively, which represented an increase of RMB7,760,558 or 36.6%. The increase of revenue generated from our Fenjiu liquor wholesale business was mainly due to the increased sales volume of our Fenjiu liquor products. Our brand identity has contributed to the success of our Fenjiu liquor wholesale business. Our brand positively affected our sales.

For the three months ended March 31, 2019 and 2018, revenue generated from our imported wine wholesale business was RMB3,677,163 and RMB4,868,238, respectively, which represented a decrease of RMB1,191,075 or 24.5%. The Company adopted a strategy to focus on selling products with relatively higher profit margins and to reduce selling products with relatively lower profit margins. This accounts for the reduction in this revenue stream. The weightings on these products were different for the three months ended March 31, 2019 and 2018. The overall sales was decreased.

Cost of Sales

For the three months ended March 31, 2019 and 2018, cost of sales from our Fenjiu liquor wholesale business was RMB7,809,057 and RMB5,347,144, respectively, which represented an increase of RMB2,461,913 or 46.0%. The increase of cost of sales was mainly due to the increased sales volume.

For the three months ended March 31, 2019 and 2018, cost of sales from our imported wine wholesale business was RMB992,423 and RMB1,567,162, respectively, which represented a decrease of RMB574,739 or 36.7%. The Company adopted a strategy to focus on selling products with relatively higher profit margins and to reduce selling products with relatively lower profit margins. This accounts for the reduction in this revenue stream. The weightings on these products were different for the three months ended March 31, 2019 and 2018. The overall cost of sales was decreased.

Gross Profit

Gross profit from our Fenjiu liquor wholesale business increased by RMB5,298,645 or 33.4% for the three months ended March 31, 2019, as compared to the same period of 2018. The Company increased sales volume of our products primarily due to the contribution of our brand identity. The overall gross profit contribution percentage of Fenjiu liquor wholesale business was so stable that 73.1% was recorded for the three months ended March 31, 2019, as comparted to 74.8% for the same period of 2018.

Gross profit from our imported wine wholesale business decreased by RMB616,336 or 18.7% for the three months ended March 31, 2019, as compared to the same period of 2018. The gross profit contribution percentage of imported wine wholesale business was 73.0% for the three months ended March 31, 2019, as compared to 67.8%. for the same period of 2018. The increase represents that the Company adopted its strategy to focus on selling products with relatively higher profit margins and to reduce selling products with relatively lower profit margins.

Selling and Distribution Expenses

For the three months ended March 31, 2019, our selling and distribution expenses were RMB884,727, representing a decrease of RMB125,732, or 12.4%, as compared to the same period of 2018. The decrease was primarily due to freight expense and packaging cost during the three months ended March 31, 2019, as compared to the same period of 2018.

Administrative Expense

For the three months ended March 31, 2019, our administrative expenses were RMB1,338,458, representing an increase of RMB568,717 or 73.9%, as compared to the same period of 2018. The increase was primarily due to salaries and foreign exchange differences.

Other Income

For the three months ended March 31, 2019, our other income was RMB32,471, representing an increase of RMB21,182 or 187.6%, as compared to the same period of 2018. The increase was primarily due to the increased bank interest income.

Interest and Other Financial Charges

For the three months ended March 31, 2019, our interest and other financial charges were RMB7,198 as compared to interest and other financial charges of RMB9,395 in the same period of 2018. The decrease in interest and other financial charges was primarily due to decreased bank borrowings.

Income Taxes

For the three months ended March 31, 2019 and 2018, our income taxes increased by RMB656,506 or 13.7% to RMB5,432,298 for the three months ended March 31, 2019 from RMB4,775,792 for the three months ended March 31, 2018. The increase in the income taxes was primarily due to increased taxable income and higher tax disallowable expenses for the period indicated.

(b) For the nine months ended March 31, 2019 and 2018

Overview

Revenue

For the nine months ended March 31, 2019 and 2018, revenue generated from our Fenjiu liquor wholesale business was RMB87,738,861 and RMB71,044,181, respectively, which represented an increase of RMB16,694,680 or 23.5%. The increase of revenue generated from our Fenjiu liquor wholesale business was mainly due to the increased sales volume of our Fenjiu liquor products. Our brand identity has contributed to the success of our Fenjiu liquor wholesale business. Our brand positively affected our sales.

For the nine months ended March 31, 2019 and 2018, revenue generated from our imported wine wholesale business was RMB8,298,780 and RMB12,214,056, respectively, which represented a decrease of RMB3,915,276 or 32.1%. The Company adopted a strategy to focus on selling products with relatively higher profit margins and to reduce selling products with relatively lower profit margins. This accounts for the reduction in this revenue stream. The weightings on these products were different for the nine months ended March 31, 2019 and 2018. The overall sales was decreased.

Cost of Sales

For the nine months ended March 31, 2019 and 2018, cost of sales from our Fenjiu liquor wholesale business was RMB22,157,376 and RMB19,242,361, respectively, which represented an increase of RMB2,915,015 or 15.1%. The increase of cost of sales was mainly due to the increased sales volume.

For the nine months ended March 31, 2019 and 2018, cost of sales from our imported wine wholesale business was RMB2,237,871 and RMB3,760,416, respectively, which represented a decrease of RMB1,522,545 or 40.5%. The Company adopted a strategy to focus on selling products with relatively higher profit margins and to reduce selling products with relatively lower profit margins. This accounts for the reduction in this revenue stream. The weightings on these products were different for the nine months ended March 31, 2019 and 2018. The overall cost of sales was decreased.

Gross Profit

Gross profit from our Fenjiu liquor wholesale business increased by RMB13,779,665 or 26.6% for the nine months ended March 31, 2019, as compared to the same period of 2018. The Company increased sales volume of our products primarily due to the contribution of our brand identity. The overall gross profit contribution percentage of Fenjiu liquor wholesale business was so stable that 74.7% was recorded for the nine months ended March 31, 2019, as comparted to 72.9% for the same period of 2018.

Gross profit from our imported wine wholesale business decreased by RMB2,392,731 or 28.3% for the nine months ended March 31, 2019, as compared to the same period of 2018. The gross profit contribution percentage of imported wine wholesale business was 73.0% for the nine months ended March 31, 2019, as compared to 69.2%. for the same period of 2018. The increase represents that the Company adopted its strategy to focus on selling products with relatively higher profit margins and to reduce selling products with relatively lower profit margins.

Selling and Distribution Expenses

For the nine months ended March 31, 2019, our selling and distribution expenses were RMB3,020,324, representing a decrease of RMB317,719, or 9.5%, as compared to the same period of 2018. The decrease was primarily due to freight expense and packaging cost during the nine months ended March 31, 2019, as compared to the same period of 2018.

Administrative Expense

For the nine months ended March 31, 2019, our administrative expenses were RMB6,159,429, representing an increase of RMB2,473,367 or 67.1%, as compared to the same period of 2018. The increase was primarily due to salaries, foreign exchange differences and professional fees for share exchange of Reliant Galaxy International Limited.

Other Income

For the nine months ended March 31, 2019, our other income was RMB90,807, representing a decrease of RMB40,640 or 30.9%, as compared to the same period of 2018. The decrease was primarily due to the decreased write-back of other receivables.

Interest and Other Financial Charges

For the nine months ended March 31, 2019, our interest and other financial charges were RMB41,238 as compared to interest and other financial charges of RMB1,768,720 in the same period of 2018. The decrease in interest and other financial charges was primarily due to decreased bank borrowings.

Income Taxes

For the nine months ended March 31, 2019 and 2018, our income taxes increased by RMB3,400,101 or 26.9% to RMB16,024,012 for the nine months ended March 31, 2019 from RMB12,623,911 for the nine months ended March 31, 2018. The increase in the income taxes was primarily due to increased taxable income and higher tax disallowable expenses for the period indicated.

Liquidity and Capital Resources

Operating Activities

Operating activities generated RMB28,889,057 and RMB44,657,519 of cash in the nine months of 2019 and 2018, respectively. The decrease of RMB15,768,462 in 2019 was primarily a result of change in net operating assets in 2019 when compared with 2018.

Activity from trade receivables included a net decrease of RMB33,352,881 compared to a net decrease of RMB1,228,086 for the nine months ended 31 March 2019 and 2018, respectively.

Activity from deposits, prepayments and other receivables included a net increase of RMB11,945,528 compared to a net increase of RMB17,736,741 for the nine months ended 31 March 2019 and 2018, respectively.

Activity from receipts in advance, accruals and other payables included a net increase of RMB743,376 compared to a net decrease of RMB8,114,271 for the nine months ended 31 March 2019 and 2018, respectively.

Activity from current tax liabilities included a net increase of RMB2,598,923 compared to a net decrease of RMB2,148,514 for the nine months ended 31 March 2019 and 2018, respectively.

Investing Activities

Investing activities used RMB250,000 and RMB407,687 for the nine months ended 31 March 2019 and 2018, respectively.

Cash of RMB250,000 used for investing activities in 2019 was primarily related to the acquisition of the interest in an associate.

Cash of RMB407,687 used for investing activities in 2018 was primarily related to the payments for acquisition of property, plant, and equipment.

Financing Activities

Financing activities provided RMB2,250,000 for the nine months ended 31 March 2019 and used RMB27,000,000 for the first nine months ended 31 March 2018.

Cash of RMB2,250,000 provided in 2019 were primarily related to net proceeds of bank borrowings.

Cash of RMB27,000,000 used in 2018 were primarily related to net repayment of bank borrowings.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Control and Procedures. 

We are required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer (also our principal executive officer) and our chief financial officer (also our principal financial and accounting officer) to allow for timely decisions regarding required disclosure.

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company’s management, including the Company’s Chief Executive Officer (“CEO”) (the Company’s principal executive officer) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2019 to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. The principal basis for this conclusion is the lack of segregation of duties within our financial function and the lack of an operating Audit Committee.

Changes in internal control over financial reporting

There was no change in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected or is reasonably likely to materially affect, our internal controls over financial reporting.

PART 2 - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None.

ITEM 1A. RISK FACTORS.

Not applicable to a smaller reporting company.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

There were no unregistered sales of the Company’s equity securities during the three months ended March 31, 2019 that were not previously disclosed in reports filed with the SEC.   

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS 

(a) Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.  

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