UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended December 31, 2016

 

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 001-34260

 

CHINA GREEN AGRICULTURE, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   36-3526027
(State or other jurisdiction of   (IRS Employer
incorporation or organization)   Identification No.)

 

  3rd floor, Borough A, Block A. No. 181, South TaibaiRoad,Xi’an, Shaanxi province, PRC 710065  
  (Address of principal executive offices) (Zip Code)  

 

  +86-29-88266368  
  (Issuer's telephone number, including area code)  

 

Indicate by check mark whether the issuer (1) 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 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 ☒ No ☐

 

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 ☐ Accelerated filer ☐

Non-accelerated filer ☐

( Do not check if a smaller reporting company )

Smaller reporting company ☒

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 38,535,161 shares of common stock, $ 0 .001 par value, as of February 7, 2017.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
PART I FINANCIAL INFORMATION 1
     
Item 1. Financial Statements 1
     
  Consolidated Condensed Balance Sheets As of December 31, 2016 and June 30, 2016 (Unaudited) 1
     
  Consolidated Condensed Statements of Income and Comprehensive Income (Loss) For the Three and Six Months Ended December 31, 2016 and 2015 (Unaudited) 2
     
  Consolidated Condensed Statements of Cash Flows For the Six Months Ended December 31, 2016 and 2015 (Unaudited) 3
     
  Notes to Consolidated Condensed Financial Statements As of December 31, 2016 (Unaudited) 4
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
     
Item 4. Controls and Procedures 37
     
PART II OTHER INFORMATION 37
     
Item 6. Exhibits 37
     
Signatures 38
   
Exhibits/Certifications 39

 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CHINA GREEN AGRICULTURE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
             
    December 31, 2016     June 30,
2016
 
             
ASSETS
Current Assets            
Cash and cash equivalents   $ 116,574,852     $ 102,896,486  
Accounts receivable, net     125,035,022       117,055,376  
Inventories     64,255,981       87,436,315  
Prepaid expenses and other current assets     1,725,644       1,329,098  
Advances to suppliers, net     28,707,243       26,863,959  
Total Current Assets     336,298,742       335,581,234  
                 
Plant, Property and Equipment, Net     34,201,866       37,569,739  
Deferred Asset, Net     3,536,984       13,431,621  
Other Assets     309,495       379,047  
Intangible Assets, Net     21,993,441       23,840,048  
Goodwill     7,635,779       7,980,838  
Total Assets   $ 403,976,307     $ 418,782,527  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY  
Current Liabilities                
Accounts payable   $ 5,577,064     $ 5,246,153  
Customer deposits     5,413,319       8,578,341  
Accrued expenses and other payables     9,067,827       16,414,392  
Amount due to related parties     2,726,125       2,473,004  
Taxes payable     1,841,182       4,104,218  
Short term loans     4,463,783       4,665,500  
Interest payable     110,155       -  
Derivative liability     64,780       144,818  
Total Current Liabilities     29,264,235       41,626,426  
                 

Long-term Liabilities

               

Convertible notes payable

   

6,534,263

     

6,671,769

 

Total Liabilities

    35,798,498       48,298,195  
                 
Stockholders' Equity                
Preferred Stock, $.001 par value,  20,000,000 shares authorized, zero shares issued and outstanding     -       -  
Common stock, $.001 par value, 115,197,165 shares authorized, 38,518,605 and 36,978,605 shares issued and outstanding as of December 31, 2016 and June 30, 2016, respectively     38,518       37,648  
Additional paid-in capital     128,876,011       127,593,932  
Statutory reserve     28,317,770       27,203,861  
Retained earnings     233,088,961       221,345,279  
Accumulated other comprehensive loss     (22,143,451 )     (5,696,388 )
Total Stockholders' Equity     368,177,809       370,484,332  
                 
Total Liabilities and Stockholders' Equity   $ 403,976,307     $ 418,782,527  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

  1  

 

 

CHINA GREEN AGRICULTURE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF  INCOME AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
                         
    Three Months Ended
December 31,
    Six Months Ended
December 31,
 
    2016     2015     2016     2015  
Sales                        
 Jinong   $ 26,825,674     $ 31,302,561     $ 58,253,394     $ 66,010,365  
 Gufeng     21,066,559       23,579,674       36,876,073       41,814,506  
 Yuxing     2,454,314       2,083,765       3,809,725       3,325,400  
 VIEs     8,398,466       -       21,690,443       -  
 Net sales     58,745,013       56,966,000       120,629,635       111,150,271  
 Cost of goods sold                                
 Jinong     12,332,360       13,434,686       25,601,590       27,975,071  
 Gufeng     18,138,659       19,712,848       31,523,736       34,458,522  
 Yuxing     1,934,046       1,182,898       2,979,654       1,892,948  
 VIEs     7,159,707       -       17,913,386       -  
 Cost of goods sold     39,564,772       34,330,432       78,018,366       64,326,541  
 Gross profit     19,180,241       22,635,568       42,611,269       46,823,730  
 Operating expenses                                
 Selling expenses     3,965,382       5,285,103       8,977,450       7,628,858  
 Selling expenses - amortization of deferred asset     3,475,438       8,664,752       9,584,220       18,377,467  
 General and administrative expenses     4,633,905       2,905,982       7,865,392       5,659,624  
 Total operating expenses     12,074,725       16,855,837       26,427,062       31,665,949  
 Income from operations     7,105,516       5,779,731       16,184,207       15,157,781  
 Other income (expense)                                
 Other income (expense)     (114,115 )     729       (155,172 )     (3,834 )
 Interest income     76,494       74,270       153,116       152,932  
 Interest expense     (93,246 )     (302,644 )     (231,791 )     (731,679 )
 Total other income (expense)     (130,867 )     (227,645 )     (233,847 )     (582,581 )
 Income before income taxes     6,974,649       5,552,086       15,950,360       14,575,200  
 Provision for income taxes     1,468,638       1,284,551       3,092,769       3,061,993  
 Net income     5,506,011       4,267,535       12,857,591       11,513,207  
 Other comprehensive income (loss)                                
 Foreign currency translation gain (loss)     (1,205,884 )     (7,616,129 )     (16,447,063 )     (22,728,368 )
 Comprehensive income (loss)   $ 4,300,127     $ (3,348,594 )   $ (3,589,472 )   $ (11,215,161 )
                                 
Basic weighted average shares outstanding     37,658,062       36,933,002       37,653,333       36,436,026  
Basic net earnings per share   $ 0.15     $ 0.12     $ 0.34     $ 0.32  
Diluted weighted average shares outstanding     37,658,062       36,933,002       37,653,333       36,436,026  
Diluted net earnings per share     0.15       0.12       0.34       0.32  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

  2  

 

 

CHINA GREEN AGRICULTURE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
    Six Months Ended
December 31,
 
    2016     2015  
Cash flows from operating activities            
Net income   $ 12,857,591     $ 11,513,207  
Adjustments to reconcile net income to net cash provided by operating activities                
Issuance of common stock and stock options for compensation     1,282,949       2,378,736  
Depreciation and amortization     12,115,909       21,445,891  
Loss on disposal of property, plant and equipment     109,304       345  
Amortization of debt discount     155,335       -    
Change in fair value of derivative liability     (75,918 )     -    
Changes in operating assets                
Accounts receivable     (13,419,107 )     (1,295,393 )
Amount due from related parties     -       (154,303 )
Other current assets     (467,184 )     88,817  
Inventories     19,962,979       (23,618,284 )
Advances to suppliers     (3,091,976 )     (9,078,019 )
Other assets     121,719       40,385  
Changes in operating liabilities                
Accounts payable     564,376       130,081  
Customer deposits     (2,875,222 )     16,653,368  
Tax payables     (2,146,115 )     (2,646,182 )
Accrued expenses and other payables     (7,029,002 )     228,171  
Interest payable     113,352       -  
Net cash provided by operating activities     18,178,990       15,686,820  
                 
Cash flows from investing activities                
Purchase of plant, property, and equipment     (74,353 )     (15,665 )
Net cash used in investing activities     (74,353 )     (15,665 )
                 
Cash flows from financing activities                
Proceeds from the sale of common stock     -       -  
Proceeds from loans     -       4,424,000  
Repayment of loans     -       (7,900,000 )
Advance from related party     300,000       200,000  
Net cash provided by financing activities     300,000       (3,276,000 )
                 
Effect of exchange rate change on cash and cash equivalents     (4,726,271 )     (5,810,344 )
Net increase in cash and cash equivalents     13,678,366       6,584,811  
                 
Cash and cash equivalents, beginning balance     102,896,486       92,982,564  
Cash and cash equivalents, ending balance   $ 116,574,852     $ 99,567,375  
                 
Supplement disclosure of cash flow information                
Interest expense paid   $ 231,791     $ 731,679  
Income taxes paid   $ 7,047,713     $ 2,763,253  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

  3  

 

 

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

 

China Green Agriculture, Inc. (the “Company”, “Parent Company” or “Green Nevada”), through its subsidiaries, is engaged in the research, development, production, distribution and sale of humic acid-based compound fertilizer, compound fertilizer, blended fertilizer, organic compound fertilizer, slow-release fertilizers, highly-concentrated water-soluble fertilizers and mixed organic-inorganic compound fertilizer and the development, production and distribution of agricultural products.

 

Unless the context indicates otherwise, as used in the notes to the financial statements of the Company, the following are the references herein of all the subsidiaries of the Company (i) Green Agriculture Holding Corporation (“Green New Jersey”), a wholly-owned subsidiary of Green Nevada, incorporated in the State of New Jersey; (ii) Shaanxi TechTeamJinongHumic Acid Product Co., Ltd. (“Jinong”), a wholly-owned subsidiary of Green New Jersey organized under the laws of the PRC; (iii) Xi’an Hu County Yuxing Agriculture Technology Development Co., Ltd. (“Yuxing”), a Variable Interest Entity (“VIE”) in the in the People’s Republic of China (the “PRC”) controlled by Jinong through a series of contractual agreements; (iv) Beijing Gufeng Chemical Products Co., Ltd., a wholly-owned subsidiary of Jinong in the PRC (“Gufeng”), and (v) Beijing Tianjuyuan Fertilizer Co., Ltd., Gufeng’s wholly-owned subsidiary in the PRC (“Tianjuyuan”). 

 

On June 30, 2016 the Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition agreements and a series of contractual agreements with the shareholders of the following six companies that are organized under the laws of the PRC and would be deemed VIEs: Shaanxi Lishijie Agrochemical Co., Ltd. (“Lishijie”), SongyuanJinyangguangSannong Service Co., Ltd. (“Jinyangguang”), Shenqiu County Zhenbai Agriculture Co., Ltd. (“Zhenbai”), Weinan City Linwei District Wangtian Agricultural Materials Co., Ltd. (“Wangtian”), AksuXindeguo Agricultural Materials Co., Ltd. (“Xindeguo”), and Xinjiang Xinyulei Eco-agriculture Science and Technology co., Ltd. (“Xinyulei”). On January 1, 2017, the Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition agreements and a series of contractual agreements with the shareholders of the following two companies that are organized under the laws of the PRC and would be deemed VIEs Sunwu County Xiangrong Agricultural Materials Co., Ltd. (“Xiangrong”), and Anhui Fengnong Seed Co., Ltd. (“Fengnong”). Please refer to Subsequent event in Note 17.

 

Yuxing, Lishijie, Jinyangguang, Zhenbai, Wangtian, Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred to as the “the VIE Companies”

 

  4  

 

 

The Company’s current corporate structure as of is set forth in the diagram below:

 

 

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principle of consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Green New Jersey, Jinong, Gufeng, Tianjuyuan, Yuxing and the VIE Companies. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

  5  

 

 

VIE assessment

 

A VIE is an entity (1) that has total equity at risk that is not sufficient to finance its activities without additional subordinated financial support from other entities, (2) where the group of equity holders does not have the power to direct the activities of the entity that most significantly impact the entity’s economic performance, or the obligation to absorb the entity’s expected losses or the right to receive the entity’s expected residual returns, or both, or (3) where the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected residual returns of the entity, or both, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights. In order to determine if an entity is considered a VIE, the Company first perform a qualitative analysis, which requires certain subjective decisions regarding its assessments, including, but not limited to, the design of the entity, the variability that the entity was designed to create and pass along to its interest holders, the rights of the parties, and the purpose of the arrangement. If the Company cannot conclude after a qualitative analysis whether an entity is a VIE, it performs a quantitative analysis. The qualitative analysis considered the design of the entity, the risks that cause variability, the purpose for which the entity was created, and the variability that the entity was designed to pass along to its variable interest holders. When the primary beneficiary could not be identified through a qualitative analysis, we used internal cash flow models to compute and allocate expected losses or expected residual returns to each variable interest holder based upon the relative contractual rights and preferences of each interest holder in the VIE’s capital structure.

 

Use of estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amount of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those results.

 

Cash and cash equivalents and concentration of cash

 

For statement of cash flows purposes, the Company considers all cash on hand and in banks, certificates of deposit with state owned banks in the Peoples Republic of China (“PRC”) and banks in the United States, and other highly-liquid investments with maturities of six months or less, when purchased, to be cash and cash equivalents. The Company maintains large sums of cash in three major banks in China. The aggregate cash in such accounts and on hand as of December 31, 2016 and June 30, 2016 were $116,574,852 and $102,896,486, respectively. In addition, the Company also had $20,538 and $167,495 in cash in two banks in the United States as of December 31, 2016 and June 30, 2016, respectively. Cash overdraft as of balance sheet date will be reflected as liabilities in the balance sheet. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.

 

Accounts receivable

 

The Company's policy is to maintain reserves for potential credit losses on accounts receivable. Management regularly reviews the composition of accounts receivable and analyzes customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves at each year-end. Accounts considered uncollectible are written off through a charge to the valuation allowance. As of December 31, 2016 and June 30, 2016, the Company had accounts receivable of $125,035,022 and $117,055,376, net of allowance for doubtful accounts of $4,343,762 and $397,123, respectively. The Company adopts no policy to accept product returns post to the sales delivery.

 

Inventories

 

Inventory is valued at the lower of cost (determined on a weighted average basis) or market. Inventories consist of raw materials, work in process, finished goods and packaging materials. The Company reviews its inventories regularly for possible obsolete goods and establishes reserves when determined necessary.

 

  6  

 

 

Deferred asset

 

Deferred assets represent amounts that the distributors owed to the Company in their marketing efforts and developing standard stores to expand the Company’s products’ competitiveness and market shares. The amount owed to the Company to assist its distributors will be expensed over three years which is the term as stated in the cooperation agreement, as long as the distributors are actively selling the Company’s products. For the six months ended December 31, 2016 and 2015, the Company amortized $9,584,220 and $21,430,699, respectively, of the deferred assets. If a distributor breaches, defaults, or terminates the agreement with the Company within the three-year period, the outstanding unamortized portion of the amount owed will become payable to the Company immediately. The Company’s Chairman, Mr. Li, guaranteed to the Company of amounts remaining unpaid due from distributors.

 

The deferred assets consist of items inside the distributors’ stores such as furniture, racks, cabinets, and display units, and items outside or attached to the distributors’ stores such as signage and billboards. These types of assets would be capitalized as fixed assets if the Company actually owned the stores or utilized the assets for its own operations. These assets would also be capitalized as leasehold improvements if the Company leased these stores from the distributors. Therefore, the Company believes that under the U.S. generally accepted accounting principles, these types of assets purchases are properly capitalized. In addition, the Company believes that these assets are properly classified as deferred assets because if a distributor breaches, defaults, or terminates the agreement with the Company within a three-year period, a proportionate amount expended by the Company is to be repaid by the distributor. The Chairman of the Board of directors of the Company guaranteed to the Company of amounts remaining unpaid due from distributors.

 

The assets inside the distributors’ stores are custom made to fit the layout of each individual store and the signage and billboards are also custom designed to fit the specific location. The assets were purchased by the Company directly from the manufacturers and installed in the distributors’ stores. The Company wants to maintain control over the quality of the items being purchased as well as making them uniform among all the distributor locations.

 

Intangible Assets

 

The Company records intangible assets acquired individually or as part of a group at fair value. Intangible assets with definitive lives are amortized over the useful life of the intangible asset, which is the period over which the asset is expected to contribute directly or indirectly to the entity’s future cash flows. The Company evaluates intangible assets for impairment at least annually and more often whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.

 

Customer deposits

 

Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as customer deposits. When all revenue recognition criteria are met, the customer deposits are recognized as revenue. As of December 31, 2016 and June 30, 2016, the Company had customer deposits of $5,413,319 and $8,578,341, respectively.

 

Earnings per share

 

Basic earnings per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.

 

  7  

 

 

The components of basic and diluted earnings per share consist of the following:

 

    Three Months Ended
December 31,
 
    2016     2015  
Net Income for Basic Earnings Per Share   $ 5,506,011     $ 4,267,535  
Basic Weighted Average Number of Shares     37,658,062       36,933,002  
Net Income Per Share – Basic   $ 0.15     $ 0.12  
Net Income for Diluted Earnings Per Share   $ 5,506,011     $ 4,267,535  
Diluted Weighted Average Number of Shares     37,658,062       36,933,002  
Net Income Per Share – Diluted   $ 0.15     $ 0.12  

 

    Six Months Ended
December 31,
 
    2016     2015  
Net Income for Basic Earnings Per Share   $ 12,857,591     $ 11,513,207  
Basic Weighted Average Number of Shares     37,653,333       36,436,026  
Net Income Per Share – Basic   $ 0.34     $ 0.32  
Net Income for Diluted Earnings Per Share   $ 12,857,591     $ 11,513,207  
Diluted Weighted Average Number of Shares     37,653,333       36,436,026  
Net Income Per Share – Diluted   $ 0.34     $ 0.32  

 

Recent accounting pronouncements

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. This pronouncement is effective for annual reporting periods beginning after December 15, 2016, and is to be applied using one of two retrospective application methods, with early application not permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its consolidated financial statements.

 

  8  

 

 

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes . The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. This update is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company does not anticipate the adoption of this ASU will have a significant impact on its consolidated financial position, results of operations, or cash flows.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . The guidance in ASU No. 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 13) . ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share Based Payment Accounting , to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance will be effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of the adoption of this newly issued guidance to its consolidated financial statements.

  

On November 17, 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. It is intended to reduce diversity in the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. The new standard requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for annual periods beginning after December 15, 2017 including interim periods within those fiscal years. Earlier adoption is permitted. The Company maintains restricted cash balances and upon adoption of this standard, the Company will show restricted cash as part of cash and restricted cash equivalents.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Clarifying the Definition of a Business, which clarifies and provides a more robust framework to use in determining when a set of assets and activities is a business. The amendments in this update should be applied prospectively on or after the effective date. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those periods. Early adoption is permitted for acquisition or deconsolidation transactions occurring before the issuance date or effective date and only when the transactions have not been reported in issued or made available for issuance financial statements. The Company does not expect the adoption to have any significant impact on its Consolidated Financial Statements.

 

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods. Early adoption is permitted for interim or annual goodwill impairment test performed on testing dates after January 1, 2017. The Company will apply this guidance to applicable impairment tests after the adoption date.

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future financial statements.

 

NOTE 3 - INVENTORIES

 

Inventories consisted of the following:

 

    December 31,     June 30,  
    2016     2016  
Raw materials   $ 23,724,037     $ 29,926,762  
Supplies and packing materials   $ 599,843     $ 444,373  
Work in progress   $ 422,539     $ 408,820  
Finished goods   $ 39,509,562     $ 56,656,360  
Total   $ 64,255,981     $ 87,436,315  

 

  9  

 

 

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following:

 

    December 31,     June 30,  
    2016     2016  
Building and improvements   $ 40,614,431     $ 42,489,975  
Auto     899,674       937,642  
Machinery and equipment     17,993,602       19,015,420  
Agriculture assets     732,865       765,983  
Total property, plant and equipment     60,240,572       63,209,020  
Less: accumulated depreciation     (26,038,706 )     (25,639,281 )
Total   $ 34,201,866     $ 37,569,739  

 

NOTE 5 - INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

    December 31,     June 30,  
    2016     2016  
Land use rights, net   $ 9,816,682     $ 10,381,215  
Technology patent, net     4,053       4,462  
Customer relationships, net     5,515,101       6,403,343  
Non-compete agreement     797,090       925,678  
Trademarks     5,860,515       6,125,350  
Total   $ 21,993,441     $ 23,840,048  

 

LAND USE RIGHT

 

On September 25, 2009, Yuxing was granted a land use right for approximately 88 acres (353,000 square meters or 3.8 million square feet) by the People’s Government and Land & Resources Bureau of Hu County, Xi’an, Shaanxi Province. The fair value of the related intangible asset was determined to be the respective cost of RMB73,184,895 (or $10,538,113). The intangible asset is being amortized over the grant period of 50 years using the straight line method.

  

On August 13, 2003, Tianjuyuan was granted a certificate of Land Use Right for a parcel of land of approximately 11 acres (42,726 square meters or 459,898 square feet) at Ping Gu District, Beijing. The purchase cost was recorded at RMB1,045,950 (or $150,609). The intangible asset is being amortized over the grant period of 50 years.

 

On August 16, 2001, Jinong received a land use right as a contribution from a shareholder, which was granted by the People’s Government and Land & Resources Bureau of Yangling District, Shaanxi Province. The fair value of the related intangible asset at the time of the contribution was determined to be RMB7,285,099 (or $1,049,003). The intangible asset is being amortized over the grant period of 50 years.

 

  10  

 

 

The Land Use Rights consisted of the following:

 

    December 31,     June 30,  
    2016     2016  
Land use rights   $ 11,737,725     $ 12,268,150  
Less: accumulated amortization     (1,921,043 )     (1,886,935 )
Total land use rights, net   $ 9,816,682     $ 10,381,215  

 

TECHNOLOGY PATENT

 

On August 16, 2001, Jinong was issued a technology patent related to a proprietary formula used in the production of humid acid. The fair value of the related intangible asset was determined to be the respective cost of RMB 5,875,068 (or $845,969) and is being amortized over the patent period of 10 years using the straight line method. This technology patent has been fully amortized.

 

On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The fair value on the acquired technology patent was estimated to be RMB9,200,000 (or $1,324,736) and is amortized over the remaining useful life of six years using the straight line method.

 

The technology know-how consisted of the following:

 

    December 31,     June 30,  
    2016     2016  
Technology know-how   $ 2,174,973     $ 2,273,260  
Less: accumulated amortization     (2,170,920 )     (2,268,798 )
Total technology know-how, net   $ 4,053     $ 4,462  

 

CUSTOMER RELATIONSHIP

 

On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The fair value on the acquired customer relationships was estimated to be RMB65,000,000 (or $9,360,000) and is amortized over the remaining useful life of ten years. On June 30, 2016, the Company acquired the VIE Companies. The fair value on the acquired customer relationships was estimated to be RMB16,442,531 (or $2,367,609) and is amortized over the remaining useful life of seven to ten years.

 

    December 31,     June 30,  
    2016     2016  
Customer relationships   $ 11,727,154     $ 12,257,100  
Less: accumulated amortization     (6,212,053 )     (5,853,757 )
Total customer relationships, net   $ 5,515,101     $ 6,403,343  

   

NON-COMPETE AGREEMENT

 

On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The fair value on the acquired non-compete agreement was estimated to be RMB1,320,000 (or $190,080) and is amortized over the remaining useful life of five years using the straight line method.  On June 30, 2016, the Company acquired the VIE Companies. The fair value on the acquired non-compete agreements were estimated to be RMB6,150,683 (or $885,698) and is amortized over the remaining useful life of five years using the straight line method.

 

    December 31,     June 30,  
    2016     2016  
Non-compete agreement   $ 1,075,726     $ 1,124,338  
Less: accumulated amortization     (278,636 )     (198,660 )
Total non-compete agreement, net   $ 797,090     $ 925,678  

 

  11  

 

 

TRADEMARKS

 

On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The preliminary fair value on the acquired trademarks was estimated to be RMB40,700,000 (or $5,860,515) and is subject to an annual impairment test.

 

AMORTIZATION EXPENSE

 

Estimated amortization expenses of intangible assets for the next five twelve months periods ended December 31, 2016, are as follows:

 

Years Ending December 31,   Expense ($)  
2017     1,635,094  
2018     1,635,094  
2019     1,635,094  
2020     1,635,094  
2021     1,078,551  

 

NOTE 6 - ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables consisted of the following:

 

    December 31,     June 30,  
    2016     2016  
Payroll payable   $ 77,039     $ 58,704  
Welfare payable     147,829       154,510  
Accrued expenses     4,574,577       4,450,306  
Other payables     4,147,620       11,624,653  
Other levy payable     120,762       126,219  
Total   $ 9,067,827     $ 16,414,392  

 

  12  

 

 

NOTE 7 - AMOUNT DUE TO RELATED PARTIES

 

As of December 31, 2016 and June 30, 2016, the amount due to related parties was $2,726,125 and $2,473,004, respectively.  As of December 31, 2016 and June 30, 2016, $1,007,951 and $1,092,243, respectively were amounts that Gufeng borrowed from a related party, Xi’an Techteam Science & Technology Industry (Group) Co. Ltd., a company controlled by Mr. Tao Li, Chairman and CEO of the Company, representing unsecured, non-interest bearing loans that are due on demand.  These loans are not subject to written agreements.

 

At the end of December 2015, Yuxing entered into a sales agreement with the Company’s affiliate, 900LH.com Food Co., Ltd. ("900LH.com", previously announced as Xi'an Gem Grain Co., Ltd) pursuant to which Yuxing is to supply various vegetables to 900LH.com for its incoming seasonal sales at the holidays and year ends (the “Sales Agreement”). The contingent contracted value of the Sales Agreement is RMB 25,500,000 (approximately $3,671,822). For the six months ended December 31, 2016, Yuxing has sold approximately $839,562 products to 900LH.com.

   

On June 29, 2016, Jinong signed an office lease with Kingtone Information Technology Co., Ltd. (“Kingtone Information”), where Mr. Tao Li, Chairman and CEO of the Company, serves as its Chairman. Pursuant to the lease, Jinong rented 612 square meters (approximately 6,588 square feet) of office space from Kingtone Information. The lease provided for a two-year term effective as of July 1, 2016 with monthly rent of RMB26,684 (approximately $3,842).

 

NOTE 8 - LOAN PAYABLES

 

As of December 31, 2016, the short-term loan payables consisted of three loans which mature on dates ranging from January 19, 2016 through July 28, 2017 with interest rates ranging from 4.87% to 5.22%. The loans No. 1 and 2 below are collateralized by Tianjuyan’s land use right and building ownership right. The loans No. 3 is guaranteed by Jinong’s credit.

 

No.   Payee   Loan period per agreement   Interest Rate     December 31,
2016
 
1   Agriculture Bank of China-Pinggu Branch   May 18, 2016 – Mar. 17, 2017     4.87 %   $ 1,871,909  
2   Agriculture Bank of China-Pinggu Branch   Jan. 19, 2016 – Jan. 17, 2017     5.00 %     1,151,944  
3   Beijing Bank-Pinggu Branch   July 28, 2016 – July 28, 2017     5.22 %     1,439,930  
    Total               $ 4,463,783  

 

As of June 30, 2016, the short-term loan payables consisted of three loans which mature on dates ranging from May 18, 2016 through March 17, 2017 with interest rates ranging from 4.87% to 5.82%. The loans No. 1 and 3 below are collateralized by Tianjuyan’s land use right and building ownership right. The loans No. 2 is guaranteed by Jinong’s credit.

 

No.   Payee   Loan period per agreement   Interest Rate     June 30,
2016
 
1   Agriculture Bank of China-Pinggu Branch   May. 18, 2016 – Mar. 17, 2017     4.87 %   $ 1,956,500  
2   Beijing Bank-Pinggu Branch   Aug. 11, 2015 – Aug. 2, 2016     5.82 %     1,505,000  
3   Agriculture Bank of China-Pinggu Branch   Jan. 19, 2016 – Jan. 17, 2017     5.00 %     1,204,000  
    Total               $ 4,665,500  

 

The interest expense from short-term loans was $231,791 and $731,679 for the six months ended December 31, 2016 and 2015, respectively.

 

  13  

 

 

NOTE 9 - CONVERTIBLE NOTES PAYABLE

 

In connection with the acquisition of the VIE Companies, the Company subsidiary, Jinong, issued to the VIE Companies shareholders convertible notes payable in the aggregate amount of RMB 51,000,000 ($7,344,000) with a term of three years and an annual interest rate of 3%. The convertible notes take priority over the preferred stock and common stock of Jinong, and any other class or series of capital stocks Jinong issues in the future in terms of interests and payments in the event of any liquidation, dissolution or winding up of Jinong. On or after the third anniversary of the issuance date of the note, noteholders may request Jinong to process the note conversion to convert the note into shares of the Company’s common stock. The notes cannot be converted prior to the mature date. The per share conversion price of the notes is the higher of the following: (i) $5.00 per share or (ii) 75% of the closing price of the Company’s common stock on the date the noteholder delivers the conversion notice.

 

 The Company determined that the fair value of the convertible notes payable was RMB 45,379,032 ($6,534,263) and RMB 44,330,692 ($6,383,620) as of December 31, 2016 and June 30, 2016, respectively, which was due to the lower than market interest rate and the conversion feature. The difference between the fair value of the notes and the face amount of the notes will be amortized to interest expense over the three year life of the notes. As of December 31, 2016, the amortization of this discount into interest expenses was $1,048,340.

 

NOTE 10 - TAXES PAYABLE

 

Enterprise Income Tax

 

Effective January 1, 2008, the Enterprise Income Tax (“EIT”) law of the PRC replaced the tax laws for Domestic Enterprises (“DEs”) and Foreign Invested Enterprises (“FIEs”). The EIT rate of 25% replaced the 33% rate that was applicable to both DEs and FIEs. The two year tax exemption and three year 50% tax reduction tax holiday for production-oriented FIEs was eliminated. Since January 1, 2008, Jinong became subject to income tax in China at a rate of 15% as a high-tech company, as a result of the expiration of its tax exemption on December 31, 2007. Accordingly, it made provision for income taxes for the six months ended December 31, 2016 and 2015 of $1,879,465 and $1,805,667, respectively, which is mainly due to the operating income from Jinong. Gufeng is subject to 25% EIT rate and thus it made provision for income taxes of $792,503 and $1,256,325 for the six months ended December 31, 2016 and 2015, respectively.

 

Value-Added Tax

 

All of the Company’s fertilizer products that are produced and sold in the PRC were subject to a Chinese Value-Added Tax (VAT) of 13% of the gross sales price. On April 29, 2008, the PRC State of Administration of Taxation (SAT) released Notice #56, “ Exemption of VAT for Organic Fertilizer Products ”, which allows certain fertilizer products to be exempt from VAT beginning June 1, 2008. The Company submitted the application for exemption in May 2009, which was granted effective September 1, 2009, continuing through December 31, 2015. On August 10, 2015 and August 28, 2015, the SAT released Notice #90. “ Reinstatement of VAT for Fertilizer Products ”, and Notice #97, “ Supplementary Reinstatement of VAT for Fertilizer Products ”, which restore the VAT of 13% of the gross sales price on certain fertilizer products includes non organic fertilizer products starting from September 1, 2015, but granted tax payers a reduced rate of 3% from September 1, 2015 through June 30, 2016.

 

Income Taxes and Related Payables

 

Taxes payable consisted of the following:

 

    December 31,     June 30,  
    2016     2016  
VAT provision   $ (255,765 )   $ 2,218  
Income tax payable     1,482,816       3,445,480  
Other levies     614,131       656,520  
Total   $ 1,841,182     $ 4,104,218  

 

  14  

 

 

The provision for income taxes consists of the following:

 

    December 31,
2016
    June 30,
2016
 
Current tax - foreign   $ 3,092,769     $ 7,371,967  
Deferred tax     -       -  
    $ 3,092,769     $ 7,371,967  

 

Tax Rate Reconciliation

 

Our effective tax rates were approximately 19.4% and 26.7% for six months ended December 31, 2016 and 2015, respectively. Substantially all of the Company’s income before income taxes and related tax expense are from PRC sources. Actual income tax benefit reported in the consolidated statements of income and comprehensive income differ from the amounts computed by applying the US statutory income tax rate of 34% to income before income taxes for the six months ended December 31, 2016 and 2015 for the following reasons:

 

December 31, 2016                                    
    China     United States              
    15% - 25%     34%     Total        
                                     
Pretax income (loss)   $ 17,806,630               (1,856,270 )           $ 15,950,360          
                                                 
Expected income tax expense (benefit)     4,451,658       25.0 %     (631,132 )     34.0 %     3,820,526          
High-tech income benefits on Jinong     (1,139,344 )     (6 )%     -       -       (1,139,344 )        
Losses from subsidiaries in which no benefit is recognized     (219,544 )     (1 )%     -       -       (219,544 )        
Change in valuation allowance on deferred tax asset from US tax benefit     -               631,132       (34.0 )%     631,132          
Actual tax expense   $ 3,092,769       17 %   $ -       - %   $ 3,092,769       19.4 %

 

December 31, 2015                                    
    China     United States              
    15% - 25%     34%     Total        
                                     
Pretax income (loss)   $ 14,575,200               (3,107,045 )           $ 11,468,155          
                                                 
Expected income tax expense (benefit)     3,643,800       25.0 %     (1,056,395 )     34.0 %     2,587,405          
High-tech income benefits on Jinong     (1,145,841 )     (7.9 )%     -       -       (1,145,841 )        
Losses from subsidiaries in which no benefit is recognized     564,034       3.9 %     -       -       564,034          
Change in valuation allowance on deferred tax asset from US tax benefit     -               1,056,395       (34.0 )%     1,056,395          
Actual tax expense   $ 3,061,993       21 %   $ -       - %   $ 3,061,993       26.7 %

 

  15  

 

 

NOTE 11 - STOCKHOLDERS’ EQUITY

 

Common Stock

 

On September 30, 2014, the Company granted an aggregate of 1,750,000 shares of restricted stock under the 2009 Plan to certain executive officers, directors and employees, among which (i) 240,000 shares of restricted stock to Mr. Tao Li, the CEO; (ii) 100,000 shares of restricted stock to Mr. Ken Ren, the CFO, (iii) 40,000 shares of restricted stock to Mr. Yizhao Zhang, 30,000 shares of restricted stock to Ms. Yiru Shi, and 20,000 shares of restricted stock to Mr. Lianfu Liu, each an independent director of the Company; and (iv) 1,320,000 shares of restricted stock to key employees.   The stock grants are subject to time-based vesting schedules, vesting in various installments until March 31, 2015 for the CFO and the three independent directors, until June 30, 2015 for the CEO and until December 31, 2016 for the employees. The value of the restricted stock awards was $3,675,000 and is based on the fair value of the Company’s common stock on the grant date. This amount is being amortized to compensation expense over the vesting periods for the various awards. As of June 30, 2016 the unamortized portion of the compensation expense was $235,264 which was fully amortized to expense during the period ended December 31, 2016.

 

On September 28, 2015, the Company granted an aggregate of 1,000,000 shares of restricted stock under the 2009 Plan to certain key employees. The stock grants are subject to time-based vesting schedules, vesting in various installments until June 30, 2016. The value of the restricted stock awards was $1,660,000 and is based on the fair value of the Company’s common stock on the grant date. This amount is being amortized to compensation expense over the vesting periods for the various awards.

 

On June 26, 2016, the Company granted an aggregate of 670,000 shares of restricted stock under the 2009 Plan to certain key employees. The stock grants vest immediately. The value of the restricted stock awards was $897,800 and is based on the fair value of the Company’s common stock on the grant date.

 

On December 30, 2016, the Company granted an aggregate of 870,000 shares of restricted stock under the 2009 Plan to certain key employees. The stock grants vest immediately. The value of the restricted stock awards was $1,044,000 and is based on the fair value of the Company’s common stock on the grant date.

 

The following table sets forth changes in compensation-related restricted stock awards during years ended December 31, 2016 and 2015:

 

          Fair     Grant Date  
    Number of     Value of     Fair Value  
    Shares     Shares     Per share  
Outstanding (unvested) at June 30, 2016     588,000     $ 235,264          
Granted     870,000       1,044,000     $       -  
Forfeited     -                  
Vested     (1,458,000 )     (1,279,264 )        
Outstanding (unvested) at December 31, 2016     -     $ -          

 

As of December 31, 2016, the unamortized expense related to the grant of restricted shares of common stock was nil. The fair value of the restricted common stock awards was based on the closing price of the Company’s common stock on the grant date. The fair value of the common stock awarded is amortized over the various vesting terms of each grant.

  

  16  

 

 

Preferred Stock

 

Under the Company’s Articles of Incorporation, the Board has the authority, without further action by stockholders, to designate up to 20,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges, qualifications and restrictions granted to or imposed upon the preferred stock, including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preference and sinking fund terms, any or all of which may be greater than the rights of the common stock. If the Company sells preferred stock under its registration statement on Form S-3, it will fix the rights, preferences, privileges, qualifications and restrictions of the preferred stock of each series in the certificate of designation relating to that series and will file the certificate of designation that describes the terms of the series of preferred stock the Company offers before the issuance of the related series of preferred stock.

 

As of December 31, 2016, the Company has 20,000,000 shares of preferred stock authorized, with a par value of $.001 per share, of which no shares are issued or outstanding.

 

NOTE 12 - CONCENTRATIONS

 

Market Concentration

 

All of the Company's revenue-generating operations are conducted in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC's economy.

 

The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among other things, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by, among other things, changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation.

 

Vendor and Customer Concentration

 

There were two vendors from which the Company purchased 20.1% and 14.6% of its raw materials for the three month ended December 31, 2016. Total purchase from these two venders amounted to $10,100,403 as of December 31, 2016. 

 

There were two vendors from which the Company purchased 29.8% and 16.4% of its raw materials for the three months ended December 31, 2015. Total purchase from these two vendors amounted to $40,065,118 as of December 31, 2015.  

 

None customer accounted over 10% of the Company’s sales for the three months ended December 31, 2016. 

 

One customer was accounted for 26.6% of the Company’s sales for the three months ended December 31, 2015.

 

  17  

 

 

NOTE 13 - SEGMENT REPORTING

 

As of December 31, 2016, the Company was organized into four main business segments based on location and product, including fertilizer production with Jinong, fertilizer production with Gufeng , agricultural products production with Yuxing and distribution of agricultural products with the acquisition of the VIE Companies completed as of June 30, 2016. Each of the four operating segments referenced above has separate and distinct general ledgers. The chief operating decision maker (“CODM”) receives financial information, including revenue, gross margin, operating income and net income produced from the various general ledger systems to make decisions about allocating resources and assessing performance; however, the principal measure of segment profitability or loss used by the CODM is net income by segment

 

    Three Months Ended
December 31,
    Six Months Ended
December 31,
 
Revenues from unaffiliated customers:   2016     2015     2016     2015  
Jinong   $ 26,825,674     $ 31,302,561     $ 58,253,394     $ 66,010,365  
Gufeng     21,066,559       23,579,674       36,876,073       41,814,506  
Yuxing     2,454,314       2,083,765       3,809,725       3,325,400  
VIES     8,398,466       -       21,690,443       -  
Consolidated   $ 58,745,013     $ 56,966,000     $ 120,629,635     $ 111,150,271  
                                 
Operating income :                                
Jinong   $ 5,740,784     $ 3,698,620     $ 12,120,004     $ 11,654,274  
Gufeng     1,906,816       3,052,879       2,991,899       5,662,832  
Yuxing     330,780       511,213       487,810       917,510  
VIES     637,284       -       2,440,764       -  
Reconciling item (1)     -       -       -       -  
Reconciling item (2)     -       297,606       -       (219,754 )
Reconciling item (2)--stock compensation     (1,510,148 )     (1,780,587 )     (1,856,270 )     (2,857,081 )
Consolidated   $ 7,105,516     $ 5,779,731     $ 16,184,207     $ 15,157,781  
                                 
Net income:                                
Jinong   $ 4,849,485     $ 3,187,514     $ 10,195,773     $ 10,000,365  
Gufeng     1,268,439       2,049,897       1,984,925       3,670,264  
Yuxing     330,509       513,099       487,589       919,384  
VIES     567,726       -       2,045,574       -  
Reconciling item (1)     -       5       -       29  
Reconciling item (2)     (1,510,148 )     (1,477,980 )     (1,856,270 )     (3,076,835 )
Consolidated   $ 5,506,011     $ 4,272,535     $ 12,857,591     $ 11,513,207  
                                 
Depreciation and Amortization:                                
Jinong   $ 3,675,142     $ 9,358,107     $ 9,988,231     $ 19,292,089  
Gufeng     631,041       728,466       1,258,350       1,474,061  
Yuxing     306,210       336,433       620,126       679,741  
VIES     123,070       -       249,202       -  
Consolidated   $ 4,735,463     $ 10,423,006     $ 12,115,909     $ 21,445,891  
                                 
Interest expense:                                
Jinong     55,979       -       113,352       -  
Gufeng     58,306       302,644       118,439       731,679  
Consolidated   $ 114,285     $ 302,644     $ 231,791     $ 731,679  
                                 
Capital Expenditure:                                
Jinong   $ 571     $ 6,643     $ 1,793     $ 6,643  
Gufeng     556       -       4,999       1,770  
Yuxing     -       6,449       548       7,252  
VIES     -       -       -       -  
Consolidated   $ 1,127     $ 13,092     $ 7,340     $ 15,665  

 

  18  

 

 

    As of  
    December 31,     June 30,  
    2016     2016  
Identifiable assets:            
Jinong   $ 194,544,513     $ 198,599,977  
Gufeng     143,819,547       149,891,328  
Yuxing     41,925,427       45,448,157  
VIES June 30, 2016     23,666,211       24,675,499  
Reconciling item (1)     23,487       170,444  
Reconciling item (2)     (2,878 )     (2,878 )
Consolidated   $ 403,976,307     $ 418,782,527  

 

(1)    Reconciling amounts refer to the unallocated assets or expenses of Green New Jersey.

(2)    Reconciling amounts refer to the unallocated assets or expenses of the Parent Company.

 

NOTE 14 - COMMITMENTS AND CONTINGENCIES

 

On June 29, 2016, Jinong signed an office lease with Kingtone Information.  Pursuant to the lease, Jinong rented 612 square meters (approximately 6,588 square feet) of office space from Kingtone Information. The lease provided for a two-year term effective as of July 1, 2016 with monthly rent of $3,525 (RMB 24,480).

 

In January 2008, Jintai signed a ten-year land lease with Xi’an Jinong Hi-tech Agriculture Demonstration Zone for a monthly rent of $749 (RMB 5,200).

 

In February 2004, Tianjuyuan signed a fifty-year lease with the village committee of Dong Gao Village and Zhen Nan Zhang Dai Village in the Beijing Ping Gu District, at a monthly rent of $426 (RMB 2,958).

 

Accordingly, the Company recorded an aggregate of $28,198 and $28,261 as rent expenses for the six months ended December 31, 2016 and 2015, respectively. Rent expenses for the next five years ended December 31, are as follows:

 

Years ending December 31,      
2017   $ 56,396  
2018     47,411  
2019     47,411  
2020     47,411  
2021     47,411  

 

  19  

 

 

NOTE 15 - BUSINESS COMBINATIONS

 

On June 30, 2016, the Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition agreements and also into a series of contractual agreements to qualify as VIEs with the shareholders of the VIE Companies.

 

Jinong, the VIE Companies, and the shareholders of the VIE Companies also entered into a series of contractual agreements for the VIE Companies to qualify as VIEs (the “VIE Agreements”). The VIE Agreements are as follows:

 

Entrusted Management Agreements

 

Pursuant to the terms of certain Entrusted Management Agreements dated June 30, 2016, between Jinong and the shareholders of the VIE Companies (the “Entrusted Management Agreements”), the VIE Companies and their shareholders agreed to entrust the operations and management of its business to Jinong. According to the Entrusted Management Agreement, Jinong possesses the full and exclusive right to manage the VIE Companies’ operations, assets and personnel, has the right to control all of the VIE Companies' cash flows through an entrusted bank account, is entitled to the VIE Companies' net profits as a management fee, is obligated to pay all of the VIE Companies’ payables and loan payments, and bears all losses of the VIE Companies. The Entrusted Management Agreements will remain in effect until (i) the parties mutually agree to terminate the agreement; (ii) the dissolution of the VIE Companies; or (iii) Jinong acquires all of the assets or equity of the VIE Companies (as more fully described below under “Exclusive Option Agreements”).

 

Exclusive Technology Supply Agreements

 

Pursuant to the terms of certain Exclusive Technology Supply Agreements dated June 30, 2016, between Jinong and the VIE Companies (the “Exclusive Technology Supply Agreements”), Jinong is the exclusive technology provider to the VIE Companies. The VIE Companies agreed to pay Jinong all fees payable for technology supply prior to making any payments under the Entrusted Management Agreement. The Exclusive Technology Supply Agreements shall remain in effect until (i) the parties mutually agree to terminate the agreement; (ii) the dissolution of the VIE Companies; or (iii) Jinong acquires the VIE Companies (as more fully described below under “Exclusive Option Agreements”).

 

Shareholder’s Voting Proxy Agreements

 

Pursuant to the terms of certain Shareholder’s Voting Proxy Agreements dated June 30, 2016, among Jinong and the shareholders of the VIE Companies (the “Shareholder’s Voting Proxy Agreements”), the shareholders of the VIE Companies irrevocably appointed Jinong as their proxy to exercise on such shareholders’ behalf all of their voting rights as shareholders pursuant to PRC law and the Articles of Association of the VIE Companies, including the appointment and election of directors of the VIE Companies. Jinong agreed that it shall maintain a board of directors, the composition and appointment of which shall be approved by the Board of the Company. The Shareholder’s Voting Proxy Agreements will remain in effect until Jinong acquires all of the assets or equity of the VIE Companies.

 

Exclusive Option Agreements

 

Pursuant to the terms of certain Exclusive Option Agreements dated June 30, 2016, among Jinong, the VIE Companies, and the shareholders of the VIE Companies (the “Exclusive Option Agreements”), the shareholders of the VIE Companies granted Jinong an irrevocable and exclusive purchase option (the “Option”) to acquire the VIE Companies’ equity interests and/or remaining assets, but only to the extent that the acquisition does not violate limitations imposed by PRC law on such transactions. The Option is exercisable at any time at Jinong’s discretion so long as such exercise and subsequent acquisition of the VIE Companies does not violate PRC law. The consideration for the exercise of the Option is to be determined by the parties and memorialized in the future by definitive agreements setting forth the kind and value of such consideration. Jinong may transfer all rights and obligations under the Exclusive Option Agreements to any third parties without the approval of the shareholders of the VIE Companies so long as a written notice is provided. The Exclusive Option Agreements may be terminated by mutual agreements or by 30 days written notice by Jinong.

 

  20  

 

 

Equity Pledge Agreements

 

Pursuant to the terms of certain Equity Pledge Agreements dated June 30, 2016, among Jinong and the shareholders of the VIE Companies (the “Pledge Agreements”), the shareholders of the VIE Companies pledged all of their equity interests in the VIE Companies to Jinong, including the proceeds thereof, to guarantee all of Jinong's rights and benefits under the Entrusted Management Agreements, the Exclusive Technology Supply Agreements, the Shareholder’ Voting Proxy Agreements and the Exclusive Option Agreements. Prior to termination of the Pledge Agreements, the pledged equity interests cannot be transferred without Jinong's prior written consent. The Pledge Agreements may be terminated only upon the written agreement of the parties.

 

Non-Compete Agreements

 

Pursuant to the terms of certain Non-Compete Agreements dated June 30, 2016, among Jinong and the shareholders of the VIE Companies (the “Non-Compete Agreements”), the shareholders of the VIE Companies agreed that during the period beginning on the initial date of their services with Jinong, and ending five (5) years after termination of their services with Jinong, without Jinong’s prior written consent, they will not provide services or accept positions including but not limited to partners, directors, shareholders, managers, proxies or consultants, provided by any profit making organizations with businesses that may compete with Jinong. They will not solicit or interfere with any of the Jinong’s customers, or solicit, induce, recruit or encourage any person engaged or employed by Jinong to terminate his or her service or engagement. In the event that the shareholders of the VIE Companies breach the non-compete obligations contained therein, Jinong is entitled to all loss and damages; in the event that the damages are difficult to determine, remedies bore the shareholders of the VIE Companies shall be no less than 50% of the salaries and other expenses Jinong provided in the past.

 

The Company entered into these VIE Agreements as a way for the Company to have more control over the distribution of its products. The transactions are accounted for as business combinations in accordance with ASC 805. A summary of the purchase price allocations at fair value is below:

 

Cash   $ 708,737  
Accounts receivable     6,422,850  
Advances to suppliers     1,803,180  
Prepaid expenses and other current assets     807,645  
Inventories     7,787,043  
Machinery and equipment     140,868  
Intangible assets     270,900  
Other assets     3,404,741  
Good will     3,158,179  
Accounts payable     (3,962,670 )
Customer deposits     (3,486,150 )
Accrued expenses and other payables     (4,653,324 )
Taxes payable     (16,912 )
Purchase price   $ 12,385,087  

 

A summary of the purchase consideration paid for the VIE Companies is below:

 

Cash   $ 5,568,500  
Convertible notes     6,671,769  
Derivative liability     144,818  
    $ 12,385,087  

 

The cash component of the purchase price for these acquisitions was paid in September 2016.

 

NOTE 16 - VARIABLE INTEREST ENTITIES

 

In accordance with accounting standards regarding consolidation of variable interest entities, VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which a company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

 

Green Nevada through one of its subsidiaries, Jinong, entered into a series of agreements (the “VIE Agreements”) with Yuxing for it to qualify as a VIE, effective June 16, 2013.

 

The Company has concluded, based on the contractual arrangements, that Yuxing is a VIE and that the Company’s wholly-owned subsidiary, Jinong, absorbs a majority of the risk of loss from the activities of Yuxing, thereby enabling the Company, through Jinong, to receive a majority of Yuxing expected residual returns.

 

On June 30, 2016, the Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition agreements and also into a series of contractual agreements to qualify as VIEs with the shareholders of the VIE Companies.

 

  21  

 

 

Jinong, the VIE Companies, and the shareholders of the VIE Companies also entered into a series of contractual agreements for the VIE Companies to qualify as VIEs (the “VIE Agreements”).

 

As a result of these contractual arrangements, with Yuxing and the VIE Companies the Company is entitled to substantially all of the economic benefits of Yuxing and the VIE Companies. The following financial statement amounts and balances of the VIEs were included in the accompanying consolidated financial statements as of December 31, 2016 and June 30, 2016:

 

    December 31,     June 30,  
    2016     2016  
             
ASSETS            
Current Assets            
Cash and cash equivalents   $ 1,030,482     $ 1,017,841  
Accounts receivable, net     9,596,532       7,050,201  
Inventories     23,999,754       26,370,202  
Other current assets     1,709,991       1,875,912  
Advances to suppliers     2,119,048       4,900,524  
Total Current Assets     38,455,807       41,214,680  
                 
Plant, Property and Equipment, Net     12,292,713       13,377,817  
Other assets     216,136       334,264  
Intangible Assets, Net     12,017,863       12,913,776  
Goodwill     3,021,632       3,158,179  
Total Assets   $ 66,004,151     $ 70,998,716  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current Liabilities                
Accounts payable   $ 4,308,607     $ 3,840,052  
Customer deposits     1,803,140       3,486,150  
Accrued expenses and other payables     3,304,318       5,580,642  
Amount due to related parties     39,722,237       43,478,158  
Total Current Liabilities     49,560,557       56,385,002  
                 
Stockholders' equity     16,443,594       14,613,714  
                 
Total Liabilities and Stockholders' Equity   $ 66,004,151     $ 70,998,716  

  

    Three months ended
December 31,
    Six months ended
December 31,
 
    2016     2015     2016     2015  
Revenue   $ 10,852,779     $ 2,083,765     $ 25,500,167     $ 3,325,400  
Expenses     9,954,543       1,570,665       22,967,005       2,406,015  
Net income (loss)   $ 898,236     $ 513,100     $ 2,533,162     $ 919,385  

 

NOTE 17 – SUBSEQUENT EVENTS

 

On January 1, 2017, the Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition agreements and a series of contractual agreements with the shareholders of the following two companies that are organized under the laws of the PRC and would be deemed VIEs Sunwu County Xiangrong Agricultural Materials Co., Ltd. (“Xiangrong”), and Anhui Fengnong Seed Co., Ltd. (“Fengnong”). Jinong, entered into (i) Strategic Acquisition Agreements (the “SAA”), and (ii) Agreements for Convertible Notes (the “ACN”), with the shareholders of the two companies (“Targets”). The transaction represented by the SAA, ACN and the VIE Agreements as defined below are collectively referred to as the “Strategic Acquisitions.”

 

 

Company Name

  Business Scope   Cash Payment for Acquisition (USD)     Principal of Notes for Acquisition (USD)  
Sunwu County Xiangrong Agricultural Materials Co., Ltd.   Sales of pesticides, agricultural chemicals, chemical fertilizers, agricultural materials; Manufacture and sales of mulches.   $ 576,000     $ 864,000  
Anhui Fengnong Seed Co., Ltd.   Wholesale and retail sales of pesticides; Sales of chemical fertilizers, packaged seeds, agricultural mulches, micronutrient fertilizers, compound fertilizers and plant growth regulators   $ 576,000     $ 864,000  
Total       $ 1,152,000     $ 1,728,000  

 

 

  22  

 

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as the slow-down of the macro-economic environment in China and its impact on economic growth in general, the competition in the fertilizer industry and the impact of such competition on pricing, revenues and margins, the weather conditions in the areas where our customers are based, the cost of attracting and retaining highly skilled personnel, the prospects for future acquisitions, and the factors set forth elsewhere in this report, our actual results may differ materially from those anticipated in these forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will in fact occur. You should not place undue reliance on the forward-looking statements contained in this report.

 

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by U.S. federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Further, the information about our intentions contained in this report is a statement of our intention as of the date of this report and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices, and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.

 

Unless the context indicates otherwise, as used in the notes to the financial statements of the Company, the following are the references herein of all the subsidiaries of the Company (i) Green Agriculture Holding Corporation (“Green New Jersey”), a wholly-owned subsidiary of Green Nevada, incorporated in the State of New Jersey; (ii) Shaanxi TechTeamJinongHumic Acid Product Co., Ltd. (“Jinong”), a wholly-owned subsidiary of Green New Jersey organized under the laws of the People’s Republic of China (the “PRC”); (iii) Xi’an Hu County Yuxing Agriculture Technology Development Co., Ltd. (“Yuxing”), a Variable Interest Entity (“VIE”) in the PRC controlled by Jinong through a series of contractual agreements; (iv) Beijing Gufeng Chemical Products Co., Ltd., a wholly-owned subsidiary of Jinong in the PRC (“Gufeng”), (v) Beijing Tianjuyuan Fertilizer Co., Ltd., Gufeng’s wholly-owned subsidiary in the PRC (“Tianjuyuan”), Shaanxi Lishijie Agrochemical Co., Ltd.(“Lishijie”), a VIE in the PRC controlled by Jinong, SongyuanJinyangguangSannong Service Co., Ltd., (“Jinyangguang”), a VIE in the PRC controlled by Jinong, Shenqiu County Zhenbai Agriculture Co., Ltd. (“Zhenbai”), a VIE in the PRC controlled by Jinong, Weinan City Linwei District Wangtian Agricultural Materials Co., Ltd. (“Wangtian”), a VIE in the PRC controlled by Jinong, AksuXindeguo Agricultural Materials Co., Ltd. (“Xindeguo”), a VIE in the PRC controlled by Jinong, Xinjiang Xinyulei Eco-agriculture Science and Technology co., Ltd. (“Xinyulei”), a VIE in the PRC controlled by Jinong. Sunwu County Xiangrong Agricultural Materials Co., Ltd. (“Xiangrong”). Anhui Fengnong Seed Co., Ltd.(“Fengnong”). Yuxing, Lishijie, Jinyangguang, Zhenbai, Wangtian, Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred to as the “the VIE Companies”

 

Unless the context otherwise requires, all references to (i) “PRC” and “China” are to the People’s Republic of China; (ii) “U.S. dollar,” “$” and “US$” are to United States dollars; and (iii) “RMB”, “Yuan” and Renminbi are to the currency of the PRC or China.

 

Overview

 

We are engaged in the research, development, production and sale of various types of fertilizers and agricultural products in the PRC through our wholly-owned Chinese subsidiaries, Jinong and Gufeng (including Gufeng’s subsidiary Tianjuyuan), and our VIE Companies. Our primary business is fertilizer products, specifically humic-acid based compound fertilizer produced by Jinong and compound fertilizer, blended fertilizer, organic compound fertilizer, slow-release fertilizer, highly-concentrated water-soluble fertilizer and mixed organic-inorganic compound fertilizer produced by Gufeng. In addition, through Yuxing, we develop and produce various agricultural products, such as top-grade fruits, vegetables, flowers and colored seedlings. Also through the VIE Companies, we have entered the distribution business of agricultural business. For financial reporting purposes, our operations are organized into four business segments: fertilizer products (Jinong), fertilizer products (Gufeng), agricultural products (Yuxing) and fertilizer product distribution (VIE Companies).

 

  23  

 

 

The fertilizer business conducted by Jinong and Gufeng generated approximately 78.9% and 97.0% of our total revenues for the six months ended December 31, 2016 and 2015, respectively. Yuxing serves as a research and development base for our fertilizer products. The VIE Companies serves as in-house distribution channels for our fertilizer products, forming a vertical business integration.

 

Fertilizer Products

 

As of December 31, 2016, we had developed and produced a total of 668 different fertilizer products in use, of which 132 were developed and produced by Jinong and 332 by Gufeng, and 224 by the VIE companies.

 

Below is a table that shows the metric tons of fertilizer sold by Jinong and Gufeng and the revenue per ton for the periods indicated:

 

    Three Months Ended December 31,     Change from 2015 to 2016  
    2016     2015     Amount     %  
    (metric tons)              
Jinong     8,955       9,539       (584 )     (6.1 )%
Gufeng     63,167       62,775       392       0.6 %
      72,122       72,314       (192 )        

 

      Three Months Ended December 31,  
      2016       2015  
      (revenue per ton)  
Jinong   $ 2,996     $ 3,374  
Gufeng     334       367  

 

      Six Months Ended
December 31,
      Change from 2015 to 2016  
      2016       2015       Amount       %  
      (metric tons)                  
Jinong     18,635       19,603       (968 )     (4.9 )%
Gufeng     108,698       108,397       301       0.3 %
      127,333       128,000       (667 )        

 

     

Six Months Ended
December 31,

 
      2016       2015  
      (revenue per ton)  
Jinong   $ 3,126     $ 3,406  
Gufeng     339       384  

 

For the three months ended December 31, 2016, we sold approximately 72,122 metric tons of fertilizer products, as compared to 72,314 metric tons for the three months ended December 31, 2015. For the three months ended December 31, 2016, Jinong sold approximately 8,955 metric tons of fertilizer products, a decrease of 584 metric tons, or 6.1%, as compared to 9,539 metric tons for the three months ended December 31, 2015. For the three months ended December 31, 2016, Gufeng sold approximately 63,167 metric tons of fertilizer products, as compared to 62,775 metric tons for the three months ended December 31, 2015.

 

For the six months ended December 31, 2016, we sold approximately 127,333 metric tons of fertilizer products, as compared to 128,000 metric tons for the six months ended December 31, 2015. For the six months ended December 31, 2016, Jinong sold approximately 18,635 metric tons of fertilizer products, a decrease of 968 metric tons, or 4.9%, as compared to 19,603 metric tons for the six months ended December 31, 2015. For the six months ended December 31, 2016, Gufeng sold approximately 108,698 metric tons of fertilizer products, as compared to 108,397 metric tons for the six months ended December 31, 2015. 

 

  24  

 

 

Our sales of fertilizer products to five provinces accounted for approximately 49.8% of our fertilizer revenue for the three months ended December 31, 2016. Specifically, the provinces and their respective percentage contributed to our fertilizer revenues were: Hebei (18.3%), Heilongjiang (10.8%), Shaanxi (8.5%), Liaoning (6.0%), and Inner Mongolia (6.1%).

 

As of December 31, 2016, we had a total of 1,919 distributors covering 27 provinces, four autonomous regions and three central government-controlled municipalities in China. Jinong had 1,086 distributors in China. Jinong’s sales are not dependent on any single distributor or any group of distributors. Jinong’s top five distributors accounted for 2.6% of its fertilizer revenues for the three months ended December 31, 2016. Gufeng had 305 distributors, including some large state-owned enterprises. Gufeng’s top five distributors accounted for 77.3% of its revenues for the three months ended December 31, 2016.

 

Agricultural Products

 

Through Yuxing, we develop, produce and sell high-quality flowers, green vegetables and fruits to local marketplaces and various horticulture and planting companies. We also use certain of Yuxing’s greenhouse facilities to conduct research and development activities for our fertilizer products. The three PRC provinces that accounted for 85.5% of our agricultural products revenue for the three months ended December 31, 2016 were Shaanxi (74.8%), Sichuan (6.5%), and Gansu (4.2%).

 

Recent Developments

 

New products and distributors

 

During the three months ended December 31, 2016, Jinong did not launch any new fertilizer product. However, Jinong added 2 new distributors during this period. Gufeng did not launch any new fertilizer products, but added four new distributors during the three months ended December 31, 2016.

 

Strategic Acquisitions

 

As previously reported, on January 1, 2017, through Jinong, as authorized by our board of directors and Jinong, we entered into (i) Strategic Acquisition Agreements (the “SAA”), and (ii) Agreements for Convertible Notes (the “ACN”), with the shareholders of the companies as listed below (the “Targets”). The transaction represented by the SAA, ACN and the VIE Agreements as defined below are collectively referred to as the “Strategic Acquisitions.”

 

Company Name   Business Scope  

Cash Payment for Acquisition

(RMB [1] )

   

Principal of Notes for Acquisition

(RMB)

 
Sunwu County Xiangrong Agricultural Materials Co., Ltd.   Sales of pesticides, agricultural chemicals, chemical fertilizers, agricultural materials; Manufacture and sales of mulches.     4,000,000       6,000,000  
Anhui Fengnong Seed Co., Ltd.   Wholesale and retail sales of pesticides; Sales of chemical fertilizers, packaged seeds, agricultural mulches, micronutrient fertilizers, compound fertilizers and plant growth regulators     4,000,000       6,000,000  
Total         8,000,000       12,000,000  

 

[1] RMB: Abbreviation for renminbi, the official currency of the People’s Republic of China where Jinong and the Targets operate. The exchange rate between RMB and U.S. dollars on January 1, 2017 is RMB1=US$0.144, according to the exchange rate published by Bank of China.

 

Pursuant to the SAA and the ACN, the shareholders of the Targets, while be in possession of the equity interests and will continue to be the legal owners of such interests, agreed to pledge and entrust all of their equity interests, including the proceeds thereof but excluding any claims or encumbrances, and the operations and management of its business to Jinong, in exchange of an aggregated amount of RMB8,000,000 (approximately $1,152,000) to be paid by Jinong within three days following the execution of the SAA, ACN and the VIE Agreements, and convertible notes with an aggregated face value of RMB12,000,000 (approximately $1,728,000) with an annual fixed compound interest rate of 3% and term of three years.

 

  25  

 

 

Results of Operations

 

Three months ended December 31, 2016 Compared to the Three months ended December 31, 2015.

 

    Three Months Ended December 31,              
    2016     2015     Change$     Change%  
Sales                        
Jinong   $ 26,825,674     $ 31,302,561       (4,476,887 )     -14.3 %
Gufeng     21,066,559       23,579,674       (2,513,115 )     -10.7 %
Yuxing     2,454,314       2,083,765       370,549       17.8 %
VIEs     8,398,466       -                  
Net sales     58,745,013       56,966,000       1,779,013       3.1 %
Cost of goods sold                                
Jinong     12,332,360       13,434,686       (1,102,326 )     -8.2 %
Gufeng     18,138,659       19,712,848       (1,574,189 )     -8.0 %
Yuxing     1,934,046       1,182,898       751,148       63.5 %
VIEs     7,159,707       -                  
Cost of goods sold     39,564,772       34,330,432       5,234,340       15.2 %
Gross profit     19,180,241       22,635,568       (3,455,327 )     -15.3 %
Operating expenses                                
Selling expenses     3,965,382       5,285,103       (1,319,721 )     -25.0 %
Selling expenses - amortization of deferred asset     3,475,438       8,664,752       (5,189,314 )     -59.9 %
General and administrative expenses     4,633,905       2,905,982       1,727,923       59.5 %
Total operating expenses     12,074,725       16,855,837       (4,781,112 )     -28.4 %
Income from operations     7,105,516       5,779,731       1,325,785       22.9 %
Other income (expense)                                
Other income (expense)     (114,115 )     729       (114,844 )     -15753.6 %
Interest income     76,494       74,270       2,224       3.0 %
Interest expense     (93,246 )     (302,644 )     209,398       -69.2 %
Total other income (expense)     (130,867 )     (227,645 )     96,778       -42.5 %
Income before income taxes     6,974,649       5,552,086       1,422,563       25.6 %
Provision for income taxes     1,468,638       1,284,551       184,087       14.3 %
Net income     5,506,011       4,267,535       1,238,476       29.0 %
Other comprehensive income (loss)                                
Foreign currency translation gain (loss)     (1,205,884 )     (7,616,129 )     6,410,245       -84.2 %
Comprehensive income (loss)   $ 4,300,127     $ (3,348,594 )     7,648,721       -228.4 %
                                 
Basic weighted average shares outstanding     37,658,062       36,933,002       725,060       2.0 %
Basic net earnings per share   $ 0.15     $ 0.12       0       26.5 %
Diluted weighted average shares outstanding     37,658,062       36,933,002       725,060       2.0 %
Diluted net earnings per share     0.15       0.12       0       26.5 %

 

Net Sales

 

Total net sales for the three months ended December 31, 2016 were $58,745,013, an increase of $1,779,013, or 3.1%, from $56,966,000 for the three months ended December 31, 2015.

 

This increase was largely due to the inclusion of VIEs’ net sales during the three months ended December 31, 2016, which contributed approximately $8.4 million, or 14.3%, of the total net sales. The total net sales without including VIEs’ net sales for the three months ended December 31, 2016 were $50,346,547, a decrease of $6,619,453, or 11.6%, from the same period a year ago.

 

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For the three months ended December 31, 2016, Jinong’s net sales decreased by $4,476,887, or 14.3%, to $26,825,674 from $31,302,561 for the three months ended December 31, 2015. This decrease was mainly attributable to the decrease in Jinong’s sales volume, which was result of Jinong’s implementation of its new sales strategy that further focuses on producing high-margin liquid fertilizer during the last three months.

 

For the three months ended December 31, 2016, Gufeng’s net sales were $21,066,559, a decrease of $2,513,115 or 10.7% from $23,579,674 for the three months ended December 31, 2015. This decrease was mainly attributable to Gufeng’s lowering selling prices to answer to market demand during the three months ended December 31, 2016.

 

For the three months ended December 31, 2016, Yuxing’s net sales were $2,454,314, an increase of $370,549 or 17.8%, from $2,083,765 during the three months ended December 31, 2015. The increase was mainly attributable to the increase in market demand and the higher prices on Yuxing’s top-grade flowers.

 

Cost of Goods Sold

 

Total cost of goods sold for the three months ended December 31, 2016 was $39,564,772, an increase of $5,234,340, or 15.2%, from $34,330,432 for the three months ended December 31, 2015. The increase was mainly due to the production and sale of VIEs’ products, which accounted for $7,159,707, or 18.1% of total cost of goods sold. The total cost of goods sold without including VIEs’ cost of goods sold for the three months ended December 31, 2016 was $32,405,065, a decrease of $1,925,367, or 5.6%, from the same period a year ago. 

 

Cost of goods sold by Jinong for the three months ended December 31, 2016 was $12,332,360, a decrease of $1,102,326, or 8.2%, from $13,434,686 for the three months ended December 31, 2015. The decrease in cost of goods sold was primarily attributable to the decreased in net sales during the last three months.

 

Cost of goods sold by Gufeng for the three months ended December 31, 2016 was $18,138,659, a decrease of $1,574,189, or 8.0%, from $19,712,848 for the three months ended December 31, 2015. This decrease was primarily attributable to the less products sold during the last three months. 

 

For the three months ended December 31, 2016, cost of goods sold by Yuxing was $1,934,046, an increase of $751,148, or 63.5%, from $1,182,898 for the three months ended December 31, 2015. This increase was mainly due to the increase in Yuxing’s net sales and the labor cost.

 

Gross Profit

 

Total gross profit for the three months ended December 31, 2016 decreased by $3,455,327 to $19,180,241, as compared to $22,635,568 for the three months ended December 31, 2015. Gross profit margin was 32.6% and 39.7% for the three months ended December 31, 2016 and 2015, respectively. The decrease in gross profit margin was mainly due to the Jinong, Gufeng and Yuxing’s decreased gross margins for the three months ended December 31, 2016, compared to the same period last year.

 

Gross profit generated by Jinong decreased by $3,374,561, or 18.9%, to $14,493,314 for the three months ended December 31, 2016 from $17,867,875 for the three months ended December 31, 2015. Gross profit margin from Jinong’s sales was approximately 54.0% and 57.1% for the three months ended December 31, 2016 and 2015, respectively. The decrease in gross profit margin was mainly due to the higher raw material cost and packaging cost.

 

For the three months ended December 31, 2016, gross profit generated by Gufeng was $2,927,900, a decrease of $938,926, or 24.3%, from $3,866,826 for the three months ended December 31, 2015. Gross profit margin from Gufeng’s sales was approximately 13.9% and 16.4% for the three months ended December 31, 2016 and 2015, respectively. The decrease in gross profit percentage was mainly due to the increased weight for lower-margin products sales in Gufeng’s total sales answering to market demand.

 

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For the three months ended December 31, 2016, gross profit generated by Yuxing was $520,268, a decrease of $380,599, or 42.2% from $900,867 for the three months ended December 31, 2015.  The gross profit margin was approximately 21.2% and 43.2% for the three months ended December 31, 2016 and 2015, respectively. The decrease in gross profit margin was mainly due to the higher labor cost during the three months ended December 31, 2016. 

 

Gross profit generated by VIEs were $1,238,759 with a gross profit margin of approximately 14.7% for the three months ended December 31, 2016.

 

Selling Expenses

 

Our selling expenses consisted primarily of salaries of sales personnel, advertising and promotion expenses, freight-out costs and related compensation. Selling expenses were $3,965,382, or 6.8%, of net sales for the three months ended December 31, 2016, as compared to $5,285,103 or 9.3% of net sales for the three months ended December 31, 2015, a decrease of $1,319,721, or 25.0%. The selling expenses of VIEs were $248,248, or 3.0%, of VIEs’ net sales. The selling expenses of Yuxing were $11,264 or 0.5% of Yuxing’s net sales for the three months ended December 31, 2016, as compared to $135,466, or 6.5% of Yuxing’s net sales for the three months ended December 31, 2015. The selling expenses of Gufeng were $68,080 or 0.3% of Gufeng’s net sales for the three months ended December 31, 2016, as compared to $110,972, or 0.5% of Gufeng’s net sales for the three months ended December 31, 2015. The selling expenses of Jinong for the three months ended December 31, 2016 were $3,637,790 or 13.6% of Jinong’s net sales, as compared to selling expenses of $5,038,665, or 16.1% of Jinong’s net sales for the three months ended December 31, 2015.

 

Selling Expenses – amortization of deferred assets

 

Our selling expenses - amortization of our deferred assets were $3,475,438, or 5.9%, of net sales for the three months ended December 31, 2016, as compared to $8,664,752 or 15.2% of net sales for the three months ended December 31, 2015, a decrease of $5,189,314, or 59.9%. This decrease was due to the fact that some of the deferred assets were fully amortized and therefore no amortization was recorded on the fully amortized assets during the three months ended December 31, 2016. 

 

General and Administrative Expenses

 

General and administrative expenses consisted primarily of related salaries, rental expenses, business development, depreciation and travel expenses incurred by our general and administrative departments and legal and professional expenses including expenses incurred and accrued for certain litigations. General and administrative expenses were $4,633,905, or 7.9% of net sales for the three months ended December 31, 2016, as compared to $2,905,982, or 5.1%, of net sales for the three months ended December 31, 2015, an increase of $1,727,923, or 59.5%. The increase in general and administrative expenses was mainly due to VIEs, which had $208,164 general and administrative expenses during the last three months.

 

Total Other Expenses

 

Total other expenses consisted of income from subsidies received from the PRC government, interest income, interest expenses and bank charges. The total other expense for the three months ended December 31, 2016 was $130,867, as compared to $227,645 for the three months ended December 31, 2015, a decrease of $96,778, or 42.5%. The decrease in total other expense was partly resulted from interest expense decreased by $209,398 or 69.2%, to $130,867 during the three months ended December 31, 2016 as compared to $302,644 during the three months ended December 31, 2015, due to a lesser amount of short-term loans.

 

Income Taxes

 

Jinong is subject to a preferred tax rate of 15% as a result of its business being classified as a High-Tech project under the PRC Enterprise Income Tax Law (“EIT”) that became effective on January 1, 2008. Jinong incurred income tax expenses of $891,953 for the three months ended December 31, 2016, as compared to $584,959 for the three months ended December 31, 2015, an increase of $306,994, or 52.5%.

 

Gufeng, subject to a tax rate of 25%, incurred income tax expenses of $484,768 for the three months ended December 31, 2016, as compared to $699,591 for the three months ended December 31, 2015, a decrease of $214,823, or 30.7%.

 

Yuxing has no income tax for the three months ended December 31, 2016 as a result of being exempted from paying income tax due to the fact its products fall into the tax exemption list set out in the EIT.

 

Net Income

 

Net income for the three months ended December 31, 2016 was $5,506,011, an increase of $1,238,476, or 29.0%, compared to $4,267,535 for the three months ended December 31, 2015. Net income as a percentage of total net sales was approximately 9.4% and 7.5% for the three months ended December 31, 2016 and 2015, respectively.

 

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Six months ended December 31, 2016 Compared to the Six months ended December 31, 2015.

 

    Six Months Ended
December 31,
             
    2016     2015     Change $     Change %  
Sales                        
Jinong   $ 58,253,394     $ 66,010,365       (7,756,971 )     -11.8 %
Gufeng     36,876,073       41,814,506       (4,938,433 )     -11.8 %
Yuxing     3,809,725       3,325,400       484,325       14.6 %
VIEs     21,690,443       -                  
Net sales     120,629,635       111,150,271       9,479,364       8.5 %
Cost of goods sold                                
Jinong     25,601,590       27,975,071       (2,373,481 )     -8.5 %
Gufeng     31,523,736       34,458,522       (2,934,786 )     -8.5 %
Yuxing     2,979,654       1,892,948       1,086,706       57.4 %
VIEs     17,913,386       -                  
Cost of goods sold     78,018,366       64,326,541       13,691,825       21.3 %
Gross profit     42,611,269       46,823,730       (4,212,461 )     -9.0 %
Operating expenses                                
Selling expenses     8,977,450       7,628,858       1,348,592       17.7 %
Selling expenses - amortization of deferred asset     9,584,220       18,377,467       (8,793,247 )     -47.8 %
General and administrative expenses     7,865,392       5,659,624       2,205,768       39.0 %
Total operating expenses     26,427,062       31,665,949       (5,238,887 )     -16.5 %
Income from operations     16,184,207       15,157,781       1,026,426       6.8 %
Other income (expense)                                
Other income (expense)     (155,172 )     (3,834 )     (151,338 )     3947.3 %
Interest income     153,116       152,932       184       0.1 %
Interest expense     (231,791 )     (731,679 )     499,888       -68.3 %
Total other income (expense)     (233,847 )     (582,581 )     348,734       -59.9 %
Income before income taxes     15,950,360       14,575,200       1,375,160       9.4 %
Provision for income taxes     3,092,769       3,061,993       30,776       1.0 %
Net income     12,857,591       11,513,207       1,344,384       11.7 %
Other comprehensive income (loss)                                
Foreign currency translation gain (loss)     (16,447,063 )     (22,728,368 )     6,281,305       -27.6 %
Comprehensive income (loss)   $ (3,589,472 )   $ (11,215,161 )     7,625,689       -68.0 %
                                 
Basic weighted average shares outstanding     37,653,333       36,436,026       1,217,307       3.3 %
Basic net earnings per share   $ 0.34     $ 0.32       0       8.1 %
Diluted weighted average shares outstanding     37,653,333       36,436,026       1,217,307       3.3 %
Diluted net earnings per share     0.34       0.32       0       8.1 %

 

Net Sales

 

Total net sales for the six months ended December 31, 2016 were $120,629,635, an increase of $9,479,364, or 8.5%, from $111,150,271 for the six months ended December 31, 2015.

 

This increase was largely due to the inclusion of VIEs’ net sales during the six months ended December 31, 2016, which contributed approximately $21.7 million, or 18.0%, of the total net sales. The total net sales without including VIEs’ net sales for the six months ended December 31, 2016 were $98,939,192, a decrease of $12,211,079, or 11.0%, from the same period a year ago.

 

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For the six months ended December 31, 2016, Jinong’s net sales decreased of $7,756,971, or 11.8%, to $58,253,394 from $66,010,365 for the six months ended December 31, 2015. This decrease was mainly attributable to the decrease in Jinong’s sales volume, which was result of Jinong’s implementation of its new sales strategy that further focuses on producing high-margin liquid fertilizer during the last six months.

 

For the six months ended December 31, 2016, Gufeng’s net sales were $36,876,073, a decrease of $4,938,433 or 11.8% from $41,814,506 for the six months ended December 31, 2015. This decrease was mainly attributable to Gufeng’s lowering selling prices to answer to market demand during the six months ended December 31, 2016.

 

For the six months ended December 31, 2016, Yuxing’s net sales were $3,809,725, an increase of $484,325 or 14.6%, from $3,325,400 during the six months ended December 31, 2015. The increase was mainly attributable to the increase in market demand and higher prices on Yuxing’s top-grade flowers.

 

Cost of Goods Sold

 

Total cost of goods sold for the six months ended December 31, 2016 was $78,018,366, an increase of $13,691,825, or 21.3%, from $64,326,541 for the six months ended December 31, 2015. This increase was mainly due to the production and sale of VIEs’ products, which accounted for $17,913,386, or 23.0% of total cost of goods sold. The total cost of goods sold without including VIEs’ cost of goods sold for the three months ended December 31, 2016 was $60,104,980, a decrease of $4,221,561, or 6.6%, from the same period a year ago.

 

Cost of goods sold by Jinong for the six months ended December 31, 2016 was $25,601,590, a decrease of $2,373,481, or 8.5%, from $27,975,071 for the six months ended December 31, 2015. The decrease was primarily attributable to its lower net sales.

 

Cost of goods sold by Gufeng for the six months ended December 31, 2016 was $31,523,736, a decrease of $2,934,786, or 8.5%, from $34,458,522 for the six months ended December 31, 2015. This decrease was primarily attributable to the less products sold during the last six months. .

 

For the six months ended December 31, 2016, cost of goods sold by Yuxing was $2,979,654, an increase of $1,086,706, or 57.4%, from $1,892,948 for the six months ended December 31, 2015. This increase was mainly due to the increase in Yuxing’s net sales and the higher labor costs.

 

Gross Profit

 

Total gross profit for the six months ended December 31, 2016 decreased by $4,212,461 to $42,611,269, as compared to $46,823,730 for the six months ended December 31, 2015. Gross profit margin was 35.3% and 42.1% for the six months ended December 31, 2016 and 2015, respectively.

 

Gross profit generated by Jinong decreased by $5,383,490, or 14.2%, to $32,651,804 for the six months ended December 31, 2016 from $38,035,294 for the six months ended December 31, 2015. Gross profit margin from Jinong’s sales was approximately 56.1% and 57.6% for the six months ended December 31, 2016 and 2015, respectively. The decrease in gross profit margin was mainly due to higher raw material cost and higher packaging cost.  

 

For the six months ended December 31, 2016, gross profit generated by Gufeng was $5,352,337, a decrease of $2,003,647, or 27.2%, from $7,355,984 for the six months ended December 31, 2015. Gross profit margin from Gufeng’s sales was approximately 14.6% and 17.6% for the six months ended December 31, 2016 and 2015, respectively. The decrease in gross profit percentage was mainly due to the increased weight for lower-margin products sales in Gufeng’s total sales answering to market demand.

 

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For the six months ended December 31, 2016, gross profit generated by Yuxing was $830,071, a decrease of $602,381, or 42.1% from $1,432,452for the six months ended December 31, 2015.  The gross profit margin was approximately 21.8% and 43.1% for the six months ended December 31, 2016 and 2015, respectively. The decrease in gross profit margin was mainly due to the higher labor cost during the six months ended December 31, 2016.Gross profit generated by VIEs were $3,777,057 with a gross profit margin of approximately 17.4% for the six months ended December 31, 2016.

 

Selling Expenses

 

Our selling expenses consisted primarily of salaries of sales personnel, advertising and promotion expenses, freight-out costs and related compensation. Selling expenses were $8,977,450, or 7.4%, of net sales for the six months ended December 31, 2016, as compared to $7,628,858 or 6.9% of net sales for the six months ended December 31, 2015, an increase of $1,348,592, or 17.7%. This increase was primarily due to Jinong, and the inclusion of VIEs’ selling expenses for the six months ended December 31, 2016. The selling expenses of VIEs were $602,156, or 2.8%, of VIEs’ net sales. The selling expenses of Yuxing were $18,975 or 0.5% of Yuxing’s net sales for the six months ended December 31, 2016, as compared to $143,171, or 4.3% of Yuxing’s net sales for the six months ended December 31, 2015. The selling expenses of Gufeng were $213,408 or 0.6% of Gufeng’s net sales for the six months ended December 31, 2016, as compared to $263,657, or 0.6% of Gufeng’s net sales for the six months ended December 31, 2015. The selling expenses of Jinong for the six months ended December 31, 2016 were $8,142,911 or 14.0% of Jinong’s net sales, as compared to selling expenses of $7,222,030, or 10.9% of Jinong’s net sales for the six months ended December 31, 2015. The increase in Jinong’s selling expenses was due to Jinong’s expanded marketing efforts and the increase in shipping costs.

 

Selling Expenses – amortization of deferred assets

 

Our selling expenses - amortization of our deferred assets were $9,584,220, or 7.9%, of net sales for the six months ended December 31, 2016, as compared to $18,377,467 or 16.5% of net sales for the six months ended December 31, 2015, a decrease of $8,793,247, or 47.8%. This decrease was due to the fact that some of the deferred assets were fully amortized and therefore no amortization was recorded on the fully amortized assets during the six months ended December 31, 2016. 

 

General and Administrative Expenses

 

General and administrative expenses consisted primarily of related salaries, rental expenses, business development, depreciation and travel expenses incurred by our general and administrative departments and legal and professional expenses including expenses incurred and accrued for certain litigations. General and administrative expenses were $7,865,392, or 6.5% of net sales for the six months ended December 31, 2016, as compared to $5,659,624, or 5.1%, of net sales for the six months ended December 31, 2015, an increase of $2,205,768, or 39.0%. The increase in general and administrative expenses was mainly due to VIEs, which had $734,137 general and administrative expenses during the last three months.

 

Total Other Expenses

 

Total other expenses consisted of income from subsidies received from the PRC government, interest income, interest expenses and bank charges. The total other expense for the six months ended December 31, 2016 was $233,847, as compared to $582,581 for the six months ended December 31, 2015, a decrease of $348,734, or 59.9%. The decrease in total other expense was partly resulted from interest expense decreased by $499,888 or 68.3%, to $231,791 during the six months ended December 31, 2016 as compared to $731,679 during the six months ended December 31, 2015, due to a lesser amount of short-term loans.

 

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Income Taxes

 

Jinong is subject to a preferred tax rate of 15% as a result of its business being classified as a High-Tech project under the PRC Enterprise Income Tax Law (“EIT”) that became effective on January 1, 2008. Jinong incurred income tax expenses of $1,879,465 for the six months ended December 31, 2016, as compared to $1,805,667 for the six months ended December 31, 2015, an increase of $73,798, or 4.1%.

 

Gufeng, subject to a tax rate of 25%, incurred income tax expenses of $792,503 for the six months ended December 31, 2016, as compared to $1,256,325 for the six months ended December 31, 2015, a decrease of $463,822, or 36.9%.

 

Yuxing has no income tax for the six months ended December 31, 2016 as a result of being exempted from paying income tax due to its products fall into the tax exemption list set out in the EIT.

 

Net Income

 

Net income for the six months ended December 31, 2016 was $12,857,591, an increase of $1,344,384, or 11.7%, compared to $11,513,207 for the six months ended December 31, 2015. Net income as a percentage of total net sales was approximately 10.7% and 10.4 % for the six months ended December 31, 2016 and 2015, respectively.

 

Discussion of Segment Profitability Measures

 

As of December 31, 2016, we were engaged in the following businesses: i) the production and sale of fertilizers through Jinong and Gufeng, ii) the production and sale of high-quality agricultural products by Yuxing, and iii) the distribution of agricultural products through the VIE Companies For financial reporting purpose, our operations were organized into four main business segments based on locations and products: Jinong (fertilizer production), Gufeng (fertilizer production), Yuxing (agricultural products production) and VIE Companies (agricultural products distribution). Each of the segments has its own annual budget with regard to development, production and sales.

 

Each of the four operating segments referenced above has separate and distinct general ledgers. The chief operating decision maker (“CODM”) makes decisions with respect to resources allocation and performance assessment upon receiving financial information, including revenue, gross margin, operating income and net income produced from the various general ledger systems; however, net income by segment is the principal benchmark to measure profit or loss adopted by the CODM.

 

For Jinong, the net income increased by $195,406 or 2.0% to $10,195,772 for the six months ended December 31, 2016 from $10,000,366 for the six months ended December 31, 2015.

 

For Gufeng, the net income decreased by $1,685,340 or 45.9% to $1,984,925 for the six months ended December 31, 2016 from $3,670,265 for the six months ended December 31, 2015.

 

For Yuxing, the net income increased by $431,526 or 46.9% to $487,859 for the six months ended December 31, 2016 from $919,385 for the six months ended December 31, 2015.

 

For the VIE Companies, as we did not have such business segment during the six months ended December 31, 2015, the net income increased by $2,045,574 or 100% during the six months ended December 31, 2016.

 

Liquidity and Capital Resources

 

Our principal sources of liquidity include cash from operations, borrowings from local commercial banks and net proceeds of offerings of our securities consummated in July 2009 and November/December 2009 (collectively the “Public Offerings”).

 

As of December 31, 2016, cash and cash equivalents were $116,574,852, an increase of 13,678,366, or 13.3%, from $102,896,486 as of June 30, 2016.

 

We intend to use our working capital to acquire new businesses, upgrade production lines and complete Yuxing’s new greenhouse facilities for agriculture products located on 88 acres of land in Hu County, 18 kilometers southeast of Xi’an city. Our liquidity needs have generally consisted of working capital necessary to finance receivables, raw material and finished goods inventory. We believe that we have sufficient cash on hand and positive projected cash flow from operations to support our business growth for the next twelve months to the extent we do not have further significant acquisitions or expansions. However, if events or circumstances occur and we do not meet our operating plan as expected, we may be required to seek additional capital and/or to reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives. Notwithstanding the foregoing, we may seek additional financing as necessary for expansion purposes and when we believe market conditions are most advantageous, which may include additional debt and/or equity financings. There can be no assurance that any additional financing will be available on acceptable terms, if at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.

 

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The following table sets forth a summary of our cash flows for the periods indicated:

 

    Six Months Ended
December 31,
 
    2016     2015  
Net cash provided by operating activities   $ 18,178,990     $ 15,686,820  
Net cash used in investing activities     (74,353 )     (15,665 )
Net cash provided by (used in) financing activities     300,000       (3,276,000 )
Effect of exchange rate change on cash and cash equivalents     (4,726,271 )     (5,810,344 )
Net increase (decrease) in cash and cash equivalents     13,678,366       6,584,811  
Cash and cash equivalents, beginning balance     102,896,486       92,982,564  
Cash and cash equivalents, ending balance   $ 116,574,852     $ 99,567,375  

 

Operating Activities

 

Net cash provided by operating activities was $18,178,990 for the six months ended December 31, 2016, an increase of $2,492,170, or 15.9%, compared to $15,686,820 for the six months ended December 31, 2015. The increase was mainly attributable to the decrease in net income, account receivable and customer deposit, offset by an increase in inventories and advance to suppliers during the six months ended December 31, 2016 as compared to the same period in 2015.

 

Investing Activities

 

Net cash used in investing activities for the six months ended December 31, 2016 was $74,353, an increase of $58,688, or 374.6% from $15,665 for the six months ended December 31, 2015. During the six months ended December 31, 2016, we purchased more plants, property and equipments compared to the same period last year.

 

Financing Activities

 

Net cash provided by financing activities for the six months ended December 31, 2016 was $300,000, compared to cash used in financing activities of $3,276,000 for the six months ended December 31, 2015, which was largely due to we had nil proceeds and repayment of loans for the three months ended December 31, 2016.

 

As of December 31, 2016 and June 30, 2016, our loans payable were as follows:

 

    December 31,
2016
    June 30,
2016
 
Short term loans payable:   $ 4,463,783     $ 4,665,500  
Total   $ 4,463,783     $ 4,665,500  

 

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Accounts Receivable

 

We had accounts receivable of $125,035,022 as of December 31, 2016, as compared to $117,055,376 as of June 30, 2016, an increase of $7,979,646 or 6.8%, which was mainly attributable to Gufeng. As of December 31, 2016, Gufeng had account receivable of $64,297,179, an increase of $16,951,117, comparing to $47,346,062 as of June 30, 2016.

 

Allowance for doubtful accounts in account receivable for the six months ended December 31, 2016 was $4,343,762, from $397,123 as of June 30, 2016. And the allowance for doubtful accounts as a percentage of accounts receivable was 3.0% as of December 31, 2016 and 0.3% as of June 30, 2016.

 

Deferred assets

 

We had deferred assets of $3,536,984 as of December 31, 2016, as compared to $13,431,621 as of June 30, 2016. We have been assisting our distributors in certain marketing efforts and developing standard stores to enhance our competitive advantages and market shares since December 31, 2015. Based on the distributor agreements, the amount owed by the distributors in certain marketing efforts and store development will be expensed over three years as long as the distributors are actively selling our products. If a distributor defaults, breaches, or terminates the agreement with us earlier than the realization of contractual terms, the unamortized portion of the amount owed by the distributor has to be refunded to us immediately. The Company’s Chairman and CEO, Mr. Li, provided credit backup to guarantee toward potential losses to the Company of any amounts due from distributors in this matter.

 

Inventories

 

We had an inventory of $64,255,981 as of December 31, 2016, as compared to $87,436,315 as of June 30, 2016, a decrease of $23,180,334, or 26.5%.  The decrease was primarily attributable to Gufeng’s inventory. Gufeng’s inventory was $38,703,152 as of December 31, 2016, compared to $60,183,741 as of June 30, 2016. 

 

Advances to Suppliers

 

We had advances to suppliers of $28,707,243 as of December 31, 2016 as compared to $26,863,959 as of June 30, 2016, representing an increase of $1,843,284 or 6.9% which was due to the large acquisition of raw material during the last six months. To ensure our ability to deliver compound fertilizer to the distributor timely prior to the planting season, we need to have sufficient raw material in stock to stabilize the production. To build up the inventory, we typically make advance payment to the suppliers to secure the supply of raw material of basic fertilizer. Our inventory level may fluctuate from time to time, depending how fast the raw material gets consumed and replenished during the production process, and how fast the finished goods get sold. The replenishment of raw material relies on the management’s estimate of numerous factors, including but not limited to, the raw material’s future price, and spot price along with their volatility, as well as the seasonal demand and future price of finished fertilizer products. Such estimate may not be accurate, and the purchase decision of raw materials based on the estimate can cause excessive inventories in slow sales and insufficient inventories in peak times.

 

Accounts Payable

 

We had accounts payable of $5,577,064 as of December 31, 2016 as compared to $5,246,153 as of June 30, 2016, representing an increase of $330,911, or 6.3%. The increase was primarily due to the VIEs, which had $4,308,607 accounts payable as of December 31, 2016.

 

Unearned Revenue (Customer Deposits)

 

We had unearned revenue of $5,413,319 as of December 31, 2016 as compared to $8,578,341 as of June 30, 2016, representing a decrease of $3,165,022, or 36.9%.  The decrease was mainly attributable to Gufeng’s $2,427,946 unearned revenue as of December 31, 2016, compared to $4,381,169 unearned revenue as of June 30, 2016, caused by the advancement deposits made by client. This decrease was seasonal fluctuation and we expect to deliver products to our customers during the next three months at which time we will recognize the revenue.

 

We do not have any off-balance sheet arrangements.

 

  34  

 

 

Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See Note 2 to our consolidated financial statements, “Basis of Presentation and Summary of Significant Accounting Policies.” We believe that the following paragraphs reflect the most critical accounting policies that currently affect our financial condition and results of operations:

 

Use of estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amount of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those estimates.

 

Revenue recognition

 

Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, we have no other significant obligations and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

 

Our revenue consists of invoiced value of goods, net of a value-added tax (VAT). No product return or sales discount allowance is made as products delivered and accepted by customers are normally not returnable and sales discounts are normally not granted after products are delivered.

 

Cash and cash equivalents

 

For statement of cash flows purposes, we consider all cash on hand and in banks, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents.

 

Accounts receivable

 

Our policy is to maintain reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Any accounts receivable of Jinong and Gufeng that is outstanding for more than 180 days will be accounted as allowance for bad debts, and any accounts receivable of Yuxing that is outstanding for more than 90 days will be accounted as allowance for bad debts.

 

Deferred assets

 

Deferred assets represent amounts the Company advanced to the distributors in their marketing and stores development to expand our competitive advantage and market shares. Based on the distributor agreements, the amount owed by the distributors in certain marketing efforts and store development will be expensed over three years as long as the distributors are actively selling our products. If a distributor defaults, breaches, or terminates the agreement with us earlier than the realization the contractual terms, the unamortized portion of the amount owed by the distributor has to be refunded to us immediately. The Company’s Chairman and CEO, Mr. Li, provided credit backup guarantee toward potential losses to the Company of any amounts due from distributors in this matter.  

 

Segment reporting

 

FASB ASC 280 requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

 

As of December 31, 2016, we were organized into three main business segments: Jinong (fertilizer production), Gufeng (fertilizer production) and Yuxing (agricultural products production).

 

  35  

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Disclosures About Market Risk

 

We may be exposed to changes in financial market conditions in the normal course of business. Market risk generally represents the risk that losses may occur as a result of movements in interest rates and equity prices. We currently do not, in the normal course of business, use financial instruments that are subject to changes in financial market conditions.

 

Currency Fluctuations and Foreign Currency Risk

 

Substantially all of our revenues and expenses are denominated in RMB. However, we use U.S. dollar for financial reporting purposes. Conversion of RMB into foreign currencies is regulated by the People’s Bank of China through a unified floating exchange rate system. Although the PRC government has stated its intention to support the value of RMB, there can be no assurance that such exchange rate will not again become volatile or that RMB will not devalue significantly against U.S. dollar. Exchange rate fluctuations may adversely affect the value, in U.S. dollar terms, of our net assets and income derived from our operations in the PRC.

 

Our reporting currency is U.S. dollar. Except for U.S. holding companies, all of our consolidated revenues, consolidated costs and expenses, and our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. dollars and RMB. If RMB depreciates against U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. Assets and liabilities are translated at the exchange rates as of the balance sheet dates, revenues and expenses are translated at the average exchange rates, and shareholders’ equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of shareholders’ equity. As of December 31, 2016, our accumulated other comprehensive income was $22.1 million. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk. The value of RMB against U.S. dollar and other currencies is affected by, among other things, changes in the PRC’s political and economic conditions. In 2016, China’s currency dropped by a cumulative 6.8% against the U.S. dollar. The effect on trade can be substantial. Moreover, it is possible that, in the future, PRC authorities may lift restrictions on fluctuations in RMB exchange rate and lessen intervention in the foreign exchange market.

 

Interest Rate Risk

 

We deposit surplus funds with Chinese banks earning daily interest. We do not invest in any instruments for trading purposes. All of our outstanding debt instruments carry fixed rates of interests. The amount of short-term debt outstanding as of December 31, 2016 and June 30, 2016 was $4.5 million and $4.7 million, respectively. We are exposed to interest rate risk primarily with respect to our short-term bank loans. Although the interest rates, which are based on the banks’ prime rates with respect to our short-term loans, are fixed for the terms of the loans, the terms are typically three to twelve months for short-term bank loans and interest rates are subject to change upon renewal. There were no material changes in interest rates for short-term bank loans renewed during the three months ended December 31, 2016. The original loan term on average is one year, and the remaining average life of the short term-loans is approximately five months.

 

Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.

 

Credit Risk

 

We have not experienced significant credit risk, as most of our customers are long-term customers with superior payment records. Our receivables are monitored regularly by our credit managers.

 

Inflation Risk

 

Inflationary factors such as increases in the cost of our products and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.

 

  36  

 

 

Item 4. Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures

 

At the conclusion of the period ended December 31, 2016 we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, our CEO and CFO concluded that as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective and adequately designed to ensure that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that such information was accumulated and communicated to our management, including our CEO and CFO, in a manner that allowed for timely decisions regarding required disclosure.

 

(b) Changes in internal controls

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There are no other actions, suits, proceedings, inquiries or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect. 

 

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 December 31, 2016, that were not otherwise disclosed in a Current Report on Form 8-K.  

 

Item 3. Defaults Upon Senior Securities

 

There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company. 

 

Item 4.   Mine Safety Disclosures

 

Not applicable. 

 

Item 5. Other Information

 

There is no other information required to be disclosed under this item which was not previously disclosed.

 

Item 6. Exhibits

 

The exhibits required by this item are set forth in the Exhibit Index attached hereto.

 

  37  

 

 

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.

 

  CHINA GREEN AGRICULTURE, INC.
     
Date: February 14, 2017 By: /s/ Tao Li
  Name: Tao Li
  Title: Chief Executive Officer
    (principal executive officer)
     
Date: February 14, 2017

By:

Name:

Title:

/s/ Zhuoyu “Richard” Li

Zhuoyu “Richard” Li

President

(deputy executive officer)

     
Date: February 14, 2017 By: /s/ Ken Ren
  Name: Ken Ren
  Title: Chief Financial Officer
    (principal financial officer and
principal accounting officer)

 

  38  

 

 

EXHIBIT INDEX

 

No.   Description
     
10.1**   Form Entrust Management Agreement
     
10.2**   Form Exclusive Option Agreement
     
10.3**   Form Exclusive Product Supply Agreement
     
10.4**   Form Non-Competition Agreement
     
10.5**   Form Pledge of Equity Agreement
     
10.6**   Form Shareholder’s Voting Proxy Agreement
     
10.7**   Form Strategic Acquisition Contract
     
21.1*   List of Subsidiaries of the Company
     
31.1*   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2*   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1+   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2+   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS*   XBRL Instance Document
     
101.SCH*   XBRL Taxonomy Extension Schema Document
     
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

*     Filed herewith

**   To be filed by amendment

+     In accordance with the SEC Release 33-8238, deemed being furnished and not filed. 

 

 

39

 

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