Item 1. Financial Statements
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
September 30, 2018
|
|
|
June 30,
2018
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
153,154,657
|
|
|
$
|
150,805,639
|
|
Accounts receivable, net
|
|
|
136,794,689
|
|
|
|
174,460,937
|
|
Inventories
|
|
|
85,975,555
|
|
|
|
53,784,814
|
|
Prepaid expenses and other current assets
|
|
|
3,791,349
|
|
|
|
2,945,247
|
|
Amount due from related parties
|
|
|
249,087
|
|
|
|
235,551
|
|
Advances to suppliers, net
|
|
|
18,497,101
|
|
|
|
25,194,463
|
|
Total Current Assets
|
|
|
398,462,437
|
|
|
|
407,426,651
|
|
|
|
|
|
|
|
|
|
|
Plant, Property and Equipment, Net
|
|
|
29,028,781
|
|
|
|
30,894,683
|
|
Other Assets
|
|
|
284,016
|
|
|
|
294,550
|
|
Other Non-current Assets
|
|
|
14,821,931
|
|
|
|
15,885,696
|
|
Intangible Assets, Net
|
|
|
19,163,847
|
|
|
|
20,317,914
|
|
Goodwill
|
|
|
7,874,421
|
|
|
|
8,166,467
|
|
Total Assets
|
|
$
|
469,635,433
|
|
|
$
|
482,985,960
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
22,463,673
|
|
|
$
|
27,128,921
|
|
Customer deposits
|
|
|
5,785,249
|
|
|
|
7,251,967
|
|
Accrued expenses and other payables
|
|
|
11,029,573
|
|
|
|
10,207,058
|
|
Amount due to related parties
|
|
|
3,232,715
|
|
|
|
3,271,619
|
|
Taxes payable
|
|
|
29,459,231
|
|
|
|
29,952,206
|
|
Short term loans
|
|
|
4,368,000
|
|
|
|
4,726,300
|
|
Interest payable
|
|
|
514,332
|
|
|
|
462,060
|
|
Derivative liability
|
|
|
333
|
|
|
|
66,143
|
|
Total Current Liabilities
|
|
|
76,853,106
|
|
|
|
83,066,274
|
|
|
|
|
|
|
|
|
|
|
Long-term Liabilities
|
|
|
|
|
|
|
|
|
Convertible notes payable
|
|
|
7,210,528
|
|
|
|
7,371,899
|
|
Total Liabilities
|
|
$
|
84,063,634
|
|
|
$
|
90,438,173
|
|
|
|
|
|
|
|
|
|
|
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, 38,896,945 and 38,896,945, shares issued and outstanding as of September 30, 2018 and June
30, 2018, respectively
|
|
|
38,897
|
|
|
|
38,897
|
|
Additional paid-in capital
|
|
|
129,337,035
|
|
|
|
129,337,035
|
|
Statutory reserve
|
|
|
31,580,247
|
|
|
|
30,947,344
|
|
Retained earnings
|
|
|
244,201,627
|
|
|
|
235,822,726
|
|
Accumulated other comprehensive income
|
|
|
(19,586,007
|
)
|
|
|
(3,598,215
|
)
|
Total Stockholders' Equity
|
|
|
385,571,799
|
|
|
|
392,547,787
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
469,635,433
|
|
|
$
|
482,985,960
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
|
Three Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Sales
|
|
|
|
|
|
|
Jinong
|
|
$
|
22,496,533
|
|
|
$
|
26,773,760
|
|
Gufeng
|
|
|
17,473,251
|
|
|
|
18,222,066
|
|
Yuxing
|
|
|
2,387,546
|
|
|
|
1,792,643
|
|
VIEs - others
|
|
|
15,597,476
|
|
|
|
15,340,182
|
|
Net sales
|
|
|
57,954,806
|
|
|
|
62,128,651
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
Jinong
|
|
|
11,203,172
|
|
|
|
13,112,756
|
|
Gufeng
|
|
|
15,304,863
|
|
|
|
15,986,429
|
|
Yuxing
|
|
|
2,047,163
|
|
|
|
1,392,553
|
|
VIEs - others
|
|
|
12,929,968
|
|
|
|
12,693,629
|
|
Cost of goods sold
|
|
|
41,485,166
|
|
|
|
43,185,367
|
|
Gross profit
|
|
|
16,469,640
|
|
|
|
18,943,284
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
3,420,427
|
|
|
|
5,154,197
|
|
Selling expenses - amortization of deferred asset
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
2,309,359
|
|
|
|
6,914,802
|
|
Total operating expenses
|
|
|
5,729,786
|
|
|
|
12,068,999
|
|
Income from operations
|
|
|
10,739,854
|
|
|
|
6,874,285
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
(38,330
|
)
|
|
|
(7,211
|
)
|
Interest income
|
|
|
127,383
|
|
|
|
87,914
|
|
Interest expense
|
|
|
(162,686
|
)
|
|
|
(179,575
|
)
|
Total other income (expense)
|
|
|
(73,633
|
)
|
|
|
(98,872
|
)
|
Income before income taxes
|
|
|
10,666,221
|
|
|
|
6,775,413
|
|
Provision for income taxes
|
|
|
1,654,416
|
|
|
|
1,722,655
|
|
Net income from continuing operations
|
|
|
9,011,805
|
|
|
|
5,052,758
|
|
Net income from discontinued operation, net of tax
|
|
|
-
|
|
|
|
42,070
|
|
Net income
|
|
|
9,011,805
|
|
|
|
5,094,828
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
(15,987,792
|
)
|
|
|
240,218
|
|
Comprehensive income (loss)
|
|
$
|
(6,975,987
|
)
|
|
$
|
5,335,046
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
38,896,945
|
|
|
|
38,185,277
|
|
Basic net earnings per share-from continue operations
|
|
$
|
0.23
|
|
|
$
|
0.13
|
|
Basic net earnings per share-from discontinue operations
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
38,896,945
|
|
|
|
38,185,277
|
|
Diluted net earnings per share-from continue operations
|
|
$
|
0.23
|
|
|
|
0.13
|
|
Diluted net earnings per share-from discontinue operations
|
|
|
-
|
|
|
|
-
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Three Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
|
$
|
9,011,805
|
|
|
$
|
5,094,828
|
|
Income from discontinued operations, net of income taxes
|
|
|
-
|
|
|
|
42,070
|
|
Income from continued operations, net of income taxes
|
|
|
9,011,805
|
|
|
|
5,052,758
|
|
Adjustments to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,226,500
|
|
|
|
1,900,626
|
|
Gain (Loss) on disposal of property, plant and equipment
|
|
|
4,451
|
|
|
|
15,109
|
|
Amortization of debt discount
|
|
|
103,219
|
|
|
|
105,293
|
|
Change in fair value of derivative liability
|
|
|
(101,807
|
)
|
|
|
(79,343
|
)
|
Changes in operating assets
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
31,722,160
|
|
|
|
37,881,192
|
|
Amount due from related parties
|
|
|
(22,165
|
)
|
|
|
(121,120
|
)
|
Other current assets
|
|
|
1,012,668
|
|
|
|
1,531,095
|
|
Inventories
|
|
|
(34,434,298
|
)
|
|
|
(41,278,460
|
)
|
Advances to suppliers
|
|
|
5,850,761
|
|
|
|
5,052,781
|
|
Other assets
|
|
|
(1,472,705
|
)
|
|
|
447,190
|
|
Changes in operating liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(3,737,493
|
)
|
|
|
4,461,065
|
|
Customer deposits
|
|
|
(1,218,707
|
)
|
|
|
(1,197,303
|
)
|
Tax payables
|
|
|
(457,945
|
)
|
|
|
(1,973,188
|
)
|
Accrued expenses and other payables
|
|
|
962,954
|
|
|
|
237,624
|
|
Interest payable
|
|
|
69,442
|
|
|
|
70,836
|
|
Net cash provided by continued operating activities
|
|
|
8,518,839
|
|
|
|
12,106,155
|
|
Net cash provided by (used in) discontinued operation
|
|
|
-
|
|
|
|
(10,782
|
)
|
Net cash provided by operating activities
|
|
|
8,518,839
|
|
|
|
12,095,373
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of plant, property, and equipment
|
|
|
(31,273
|
)
|
|
|
(5,929
|
)
|
Change in construction in process
|
|
|
-
|
|
|
|
(11,280
|
)
|
Net cash used in investing activities
|
|
|
(31,273
|
)
|
|
|
(17,209
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from loans
|
|
|
-
|
|
|
|
1,802,500
|
|
Repayment of loans
|
|
|
(191,056
|
)
|
|
|
(3,156,300
|
)
|
Net cash used in financing activities
|
|
|
(191,056
|
)
|
|
|
(1,353,800
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate change on cash and cash equivalents
|
|
|
(5,947,491
|
)
|
|
|
134,551
|
|
Net increase in cash and cash equivalents
|
|
|
2,349,019
|
|
|
|
10,858,915
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning balance
|
|
|
150,805,639
|
|
|
|
123,050,548
|
|
Cash and cash equivalents, ending balance
|
|
$
|
153,154,657
|
|
|
$
|
133,909,463
|
|
|
|
|
|
|
|
|
|
|
Supplement disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Interest expense paid
|
|
$
|
106,597
|
|
|
$
|
725,317
|
|
Income taxes paid
|
|
$
|
2,118,026
|
|
|
$
|
3,695,843
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
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 this Report, 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 TechTeam Jinong Humic 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”), Songyuan Jinyangguang Sannong Service Co., Ltd. (“Jinyangguang”), Shenqiu County
Zhenbai Agriculture Co., Ltd. (“Zhenbai”), Weinan City Linwei District Wangtian Agricultural Materials Co., Ltd. (“Wangtian”),
Aksu Xindeguo 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”).
On November 30, 2017, the Company, through
its wholly-owned subsidiary Jinong, discontinued the strategic acquisition agreements and the series of contractual agreements
with the shareholders of Zhenbai.
Yuxing, Lishijie, Jinyangguang, Wangtian,
Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred to as the “the VIE Companies”; Lishijie,
Jinyangguang, Zhenbai, Wangtian, Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred to as “the
sales VIEs” or “the sales VIE companies”.
The Company’s corporate structure as of September 30,
2018 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,
and the VIE Companies. All significant inter-company accounts and transactions have been eliminated in consolidation.
Effective June 16, 2013, Yuxing was converted
from being a wholly-owned foreign enterprise 100% owned by Jinong to a domestic enterprise 100% owned one natural person, who is
not affiliated to the Company (“Yuxing’s Owner”). Effective the same day, Yuxing’s Owner entered into a
series of contractual agreements with Jinong pursuant to which Yuxing became the VIE of Jinong.
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 performs 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 three 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 September 30,
2018 and June 30, 2018 were $153,154,657 and $150,805,639, respectively. The Company had $153,141,535 and $150,785,737 in cash
in banks in China, and $13,122 and $19,902 in cash in two banks in the United States as of September 30, 2018 and June 30,
2018, respectively. Cash overdrafts as of a 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 September 30, 2018, and June 30, 2018, the Company had accounts receivable of $136,794,689 and $174,460,937, net of allowance
for doubtful accounts of $24,387,808 and $24,551,796, respectively.
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.
At September 30, 2018 and 2017, the Company had no reserve for obsolete goods.
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. The Company has not recorded impairment of
intangible assets as of September 30, 2018 and 2017 respectively.
Customer deposits
Payments received before all 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 September 30,
2018, and June 30, 2018, the Company had customer deposits of $5,785,249 and $7,251,967, respectively.
Earnings per share
Basic earnings per share are 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.
The components of basic and diluted earnings per share consist
of the following:
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Net Income for Basic Earnings Per Share
|
|
$
|
9,011,805
|
|
|
$
|
5,094,828
|
|
Basic Weighted Average Number of Shares
|
|
|
38,896,945
|
|
|
|
38,185,277
|
|
Net Income Per Share – Basic
|
|
$
|
0.23
|
|
|
$
|
0.13
|
|
Net Income for Diluted Earnings Per Share
|
|
$
|
9,011,805
|
|
|
$
|
5,094,828
|
|
Diluted Weighted Average Number of Shares
|
|
|
38,896,945
|
|
|
|
38,185,277
|
|
Net Income Per Share – Diluted
|
|
$
|
0.23
|
|
|
$
|
0.13
|
|
Recent accounting pronouncements
Revenue
Recognition:
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,
Revenue from
Contracts with Customers: Topic
606 (ASU 2014-09), to supersede 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 that is expected to be received for those goods or services. ASU 2014-09 defines
a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required
within the revenue recognition process than are required under existing U.S. GAAP, including identifying performance obligations
in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction
price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2018 using either
of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients
as defined within ASU 2014-09 (full retrospective method); or (ii) retrospective with the cumulative effect of initially
applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per
ASU 2014-09 (modified retrospective method). We are currently assessing the impact to our consolidated financial statements and
have not yet selected a transition approach.
Disclosure of
Going Concern Uncertainties
: In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU
2014-15), to provide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s
ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for us in our fourth
quarter of fiscal 2017 with early adoption permitted. We do not believe the impact of our pending adoption of ASU 2014-15 on the
Company’s financial statements will be material.
Financial instrument
:
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The standard addresses certain aspects of recognition,
measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years, and interim periods
within those years, beginning after December 15, 2017, and early adoption is not permitted. Accordingly, the standard is effective
for us on September 1, 2018. We are currently evaluating the impact that the standard will have on our consolidated financial statements.
Leases
:
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-2”), which provides guidance on lease
amendments to the FASB Accounting Standard Codification. This ASU will be effective for us beginning in May 1, 2019. We are currently
in the process of evaluating the impact of the adoption of ASU 2016-2 on our consolidated financial statements.
Stock-based Compensation
: In
March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting (ASU 2016-09). ASU 2016-09 changes how companies account for certain aspects of stock-based awards to employees,
including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in
the statement of cash flows. ASU 2016-09 is effective for us in the first quarter of 2018, and earlier adoption is permitted.
We are still evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.
Financial Instruments
- Credit Losses:
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): The
amendments in this Update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented
at the net amount expected to be collected. The amendments broaden the information that an entity must consider in developing its
expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates
more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements.
ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those
fiscal years. Early adoption is allowed as of the fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. The Company is still evaluating the effect that this guidance will have on the Company’s consolidated
financial statements and related disclosures.
Statement of
Cash Flows:
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): The amendments in this
Update apply to all entities, including both business entities and not-for-profit entities that are required to present a statement
of cash flows under Topic 230. The amendments in this Update provide guidance on the following eight specific cash flow issues.
The amendments are an improvement to GAAP because they provide guidance for each of the eight issues, thereby reducing the current
and potential future diversity in practice described above. ASU 2016-15 is effective for the Company for fiscal years beginning
after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in
an interim period. The Company is still evaluating the effect that this guidance will have on the Company’s consolidated
financial statements and related disclosures.
Statement
of Cash Flows:
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230):
“Restricted Cash” (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the
change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or
restricted cash equivalents. This update is effective in fiscal years, including interim periods, beginning after December
15, 2017 and early adoption is permitted. The adoption of this guidance will result in the inclusion of the restricted cash
balances within the overall cash balance and removal of the changes in restricted cash activity, which are currently
recognized in other financing activities, on the Statements of Consolidated Cash Flows. Furthermore, an additional
reconciliation will be required to reconcile Cash and cash equivalents and restricted cash reported within the Consolidated
Balance Sheets to sum to the total shown in the Statements of Consolidated Cash Flows. The Company anticipates adopting this
new guidance effective July 1, 2018. The Company is currently evaluating this guidance and the impact it will have on the
Consolidated Financial Statements and disclosures.
Business Combination
:
In January 2017, the FASB issued Accounting Standards Update No. 2017-01,
Business Combinations (Topic 805): Clarifying
the Definition of a Business
(ASU 2017-01), which revises the definition of a business and provides new guidance in evaluating
when a set of transferred assets and activities is a business. This guidance will be effective for us in the first quarter of 2018
on a prospective basis, and early adoption is permitted. We do not expect the standard to have a material impact on our consolidated
financial statements.
Stock-based Compensation
:
In
May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock compensation (Topic 718): Scope of modification
accounting” (“ASU 2017-09”). The purpose of the amendment is to clarify which changes to the terms or condition
of a share-based payment award require an entity to apply modification accounting. For all entities that offer share
-based
payment
awards, ASU 2017-09 are effective for interim and annual reporting periods beginning after December 15, 2017. The Company
is currently assessing the impact of ASU 2017-09 on its condensed consolidated financial statements.
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:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
Raw materials
|
|
$
|
30,149,050
|
|
|
$
|
13,154,465
|
|
Supplies and packing materials
|
|
$
|
523,992
|
|
|
$
|
566,254
|
|
Work in progress
|
|
$
|
386,158
|
|
|
$
|
417,130
|
|
Finished goods
|
|
$
|
54,916,355
|
|
|
$
|
39,646,965
|
|
Total
|
|
$
|
85,975,555
|
|
|
$
|
53,784,814
|
|
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
Building and improvements
|
|
$
|
38,877,508
|
|
|
$
|
40,319,393
|
|
Auto
|
|
|
3,387,289
|
|
|
|
3,504,028
|
|
Machinery and equipment
|
|
|
18,097,309
|
|
|
|
18,765,192
|
|
Agriculture assets
|
|
|
741,044
|
|
|
|
768,528
|
|
Total property, plant and equipment
|
|
|
61,103,149
|
|
|
|
63,357,141
|
|
Less: accumulated depreciation
|
|
|
(32,074,369
|
)
|
|
|
(32,462,458
|
)
|
Total
|
|
$
|
29,028,781
|
|
|
$
|
30,894,683
|
|
NOTE 5 – INTANGIBLE ASSETS
Intangible assets consisted of the following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
Land use rights, net
|
|
$
|
9,516,800
|
|
|
$
|
9,930,420
|
|
Technology patent, net
|
|
|
3,334
|
|
|
|
3,570
|
|
Customer relationships, net
|
|
|
3,131,697
|
|
|
|
3,578,724
|
|
Non-compete agreement
|
|
|
586,096
|
|
|
|
659,500
|
|
Trademarks
|
|
|
5,925,920
|
|
|
|
6,145,700
|
|
Total
|
|
$
|
19,163,847
|
|
|
$
|
20,317,914
|
|
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 $10,655,721). 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 $152,290). 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 $1,060,710). The intangible asset is being amortized over the grant period of 50 years.
The Land Use Rights consisted of the following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
Land use rights
|
|
$
|
11,868,721
|
|
|
|
12,308,907
|
|
Less: accumulated amortization
|
|
|
(2,351,921
|
)
|
|
|
(2,378,488
|
)
|
Total land use rights, net
|
|
$
|
9,516,800
|
|
|
|
9,930,419
|
|
TECHNOLOGY PATENT
On August 16, 2001, Jinong was issued a
technology patent related to a proprietary formula used in the production of humic acid. The fair value of the related intangible
asset was determined to be the respective cost of RMB 5,875,068 (or $855,410) 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 of the acquired technology patent was estimated to be RMB9,200,000 (or
$1,339,520) and is amortized over the remaining useful life of six years using the straight-line method. As of June 30, 2018, this
technology patent is fully amortized.
The technology know-how consisted of the following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
Technology know-how
|
|
$
|
2,199,715
|
|
|
$
|
2,276,335
|
|
Less: accumulated amortization
|
|
|
(2,199,715
|
))
|
|
|
(2,276,335
|
)
|
Total technology know-how, net
|
|
$
|
-
|
|
|
$
|
-
|
|
CUSTOMER RELATIONSHIPS
On July 2, 2010, the Company acquired Gufeng
and its wholly-owned subsidiary Tianjuyuan. The fair value of the acquired customer relationships was estimated to be RMB65,000,000
(or $9,464,000) and is amortized over the remaining useful life of ten years. On June 30, 2016 and January 1, 2017, the Company
acquired the sales VIE Companies. The fair value of the acquired customer relationships was estimated to be RMB16,472,179 (or $2,398,349)
and is amortized over the remaining useful life of seven to ten years.
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
Customer relationships
|
|
$
|
11,608,629
|
|
|
$
|
12,039,169
|
|
Less: accumulated amortization
|
|
|
(8,476,932
|
))
|
|
|
(8,460,445
|
))
|
Total customer relationships, net
|
|
$
|
3,131,697
|
|
|
$
|
3,578,724
|
|
NON-COMPETE AGREEMENT
On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The fair value
of the acquired non-compete agreement was estimated to be RMB1,320,000 (or $192,192) and is amortized over the remaining useful
life of five years using the straight-line method. On June 30, 2016 and January 1, 2017, the Company acquired the sales VIE Companies.
The fair value of the acquired non-compete agreements was estimated to be RMB6,150,683 (or $895,539) and is amortized over the
remaining useful life of five years using the straight-line method.
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
Non-compete agreement
|
|
$
|
1,188,597
|
|
|
$
|
1,232,680
|
|
Less: accumulated amortization
|
|
|
(602,501
|
)
|
|
|
(573,180
|
)
|
Total non-compete agreement, net
|
|
$
|
586,096
|
|
|
$
|
659,500
|
|
TRADEMARKS
On July 2, 2010, the Company acquired Gufeng
and its wholly-owned subsidiary Tianjuyuan. The preliminary fair value of the acquired trademarks was estimated to be RMB40,700,000
(or $5,925,920) and is subject to an annual impairment test.
AMORTIZATION EXPENSE
Estimated amortization expenses of intangible
assets for the next five twelve months periods ended September 30, are as follows:
Twelve Months Ended on September 30,
|
|
Expense ($)
|
|
2019
|
|
|
1,841,368
|
|
2020
|
|
|
1,563,540
|
|
2021
|
|
|
774,915
|
|
2022
|
|
|
583,475
|
|
2023
|
|
|
530,802
|
|
NOTE 6 – OTHER NON-CURRENT ASSETS
Other non-current assets mainly include
advance payments related to leasing land for use by the Company. As of September 30, 2018, the balance of other non-current assets
was $16,776,611, which was the lease fee advances for agriculture lands that the Company engaged in Shiquan County from 2018 to
2027.
In March 2017, Jinong entered into a lease agreement for approximately 3,400 mu, and 2600-hectare agriculture
lands in Shiquan County, Shaanxi Province. The lease was from April 2017 and was renewable for every ten-year period up to 2066.
The aggregate leasing fee was approximately RMB 13 million per annum, The Company had made 10-year advances of leasing fee per
lease terms. The Company has amortized $.5 million as expenses for the three months ended September 30, 2018.
Estimated amortization expenses of the
lease advance payments for the next four twelve-month periods ended September 30 and thereafter are as follows:
Twelve months ending September 30,
|
|
|
|
2019
|
|
$
|
1,954,680
|
|
2020
|
|
$
|
1,954,680
|
|
2021
|
|
$
|
1,954,680
|
|
2022
|
|
$
|
1,954,680
|
|
2023 and thereafter
|
|
$
|
8,957,891
|
|
NOTE 7 - ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payables consisted of the following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
Payroll payable
|
|
$
|
12,932
|
|
|
$
|
13,788
|
|
Welfare payable
|
|
|
149,479
|
|
|
|
155,023
|
|
Accrued expenses
|
|
|
6,373,325
|
|
|
|
5,368,348
|
|
Other payables
|
|
|
4,371,728
|
|
|
|
4,543,261
|
|
Other levy payable
|
|
|
122,109
|
|
|
|
126,638
|
|
Total
|
|
$
|
11,029,573
|
|
|
$
|
10,207,058
|
|
NOTE 8 - RELATED PARTIES TRANSACTIONS
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 $3,712,800). For the three months ended September 30, 2018 and 2017, Yuxing has sold approximately
$71,962 and $133,690 products to 900LH.com.
The amount due from 900LH.com to Yuxing
was $249,087 and $235,551 as of September 30, 2018 and June 30, 2018, respectively.
As
of September 30, 2018, and June 30, 2018, the amount due to related parties was $3,232,715 and $3,271,619, respectively. As
of September 30, 2018, and June 30, 2018, $1,019,200 and $1,057,000, respectively were amounts that Gufeng borrowed from a related
party, Xi’an Techteam Science & Technology Industry (Group) Co. Ltd., a company controlled by Mr. Zhuoyu 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.
As
of September 30, 2018, and June 30, 2018, the Company’s subsidiary, Jinong, owed 900LH.com $431,907 and $393,565, respectively.
On June 29, 2016,
Jinong signed an office lease with Kingtone Information Technology Co., Ltd. (“Kingtone Information”),
of which Mr. Tao Li, former Chairman and CEO of the Company, serves as Chairman of its board of directors. Pursuant to the lease,
Jinong rented 612 square meters (approximately 6,588 square feet) of office space from Kingtone Information. The lease provides
for a two-year term effective as of July 1, 2016 with monthly rent of RMB24,480 (approximately $3,564)
NOTE
9- LOAN PAYABLES
As
of September 30, 2018, the short-term loan payables consisted of two loans which mature on dates ranging from May 21, 2019 through
June 18, 2019 with interest rates ranging from 5.22% to 6.31%. Both loans are collateralized by Tianjuyuan’s land use right
and building ownership right. .
No.
|
|
Payee
|
|
Loan period per agreement
|
|
Interest Rate
|
|
|
September 30,
2018
|
|
1
|
|
Bank of Beijing - Pinggu Branch
|
|
May 22, 2018-May 21, 2019
|
|
|
5.22
|
%
|
|
|
1,456,000
|
|
2
|
|
Postal Saving Bank of China - Pinggu Branch
|
|
June 19, 2018-June 18, 2019
|
|
|
6.31
|
%
|
|
|
2,912,000
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
4,368,000
|
|
The
interest expense from short-term loans was $93,122 and $179,575 for the period ended September 30, 2018 and 2017 respectively.
NOTE
10 – CONVERTIBLE NOTES PAYABLE
Relating
to the acquisition of the VIE Companies, the Company subsidiary, Jinong, issued to the VIE Companies shareholders convertible
notes payable twice, in the aggregate notional amount of RMB 51,000,000 ($7,425,600) with a term of three years and an annual
interest rate of 3%.
No.
|
|
Related
Acquisitions of Sales VIEs
|
|
Issuance
Date
|
|
Maturity
Date
|
|
Notional
Interest Rate
|
|
|
Conversion
Price
|
|
|
Notional
Amount
(in RMB)
|
|
1
|
|
Wangtian,
Lishijie, Xindeguo, Xinyulei, Jinyangguang
|
|
June
30, 2016
|
|
June
30, 2019
|
|
3
|
%
|
|
$
|
5.00
|
|
|
|
39,000,000
|
|
2
|
|
Fengnong,
Xiangrong
|
|
January 1, 2017
|
|
December 31, 2019
|
|
3
|
%
|
|
$
|
5.00
|
|
|
|
12,000,000
|
|
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. Due to the discontinuation
of VIE agreements with Zhenbai’s shareholders, certain convertible notes issued on June 30, 2016 with a face amount of RMB
12,000,000 ($1,747,200) were tendered back to the Company. All outstanding balance of unpaid principal and accrued interest in
the tendered convertible notes were forfeited.
The
Company determined that the fair value of the convertible notes payable was RMB 49,522,859 ($7,210,528) and RMB 48,820,525 ($7,108,268)
as of September 30, 2018 and June 30, 2018, respectively. Aside from the forfeiture of the convertible notes previously issued
to Zhenbai’s shareholders, the difference between the fair value of the notes and the face amount of the notes is being
amortized to accretion implied interest expense over the three-year life of the notes. As of September 30, 2018, the accumulated
amortization of this discount into accretion expenses was $1,025,268.
NOTE
11 – 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, because of the expiration
of its tax exemption on December 31, 2007. Accordingly, it made provision for income taxes for the three-month period ended September
30, 2018 and 2017 of $1,041,180 and $1,013,134, 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 $395,255 and $511,796 for the three months ended September
30, 2018 and 2017, respectively.
Value-Added
Tax
Certain
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.
Income
Taxes and Related Payables
|
|
Sept 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
VAT provision
|
|
$
|
(444,722
|
)
|
|
$
|
(449,140
|
)
|
Income tax payable
|
|
|
77,307
|
|
|
|
554,065
|
|
Other levies
|
|
|
821,723
|
|
|
|
836,747
|
|
Total
|
|
$
|
454,308
|
|
|
$
|
941,672
|
|
The
provision for income taxes consists of the following
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Current tax - foreign
|
|
$
|
1,654,416
|
|
|
$
|
1,722,655
|
|
Deferred tax
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
1,654,416
|
|
|
$
|
1,722,655
|
|
Our
effective tax rates were approximately 15.5% and 25.3% for the three months ended September 30, 2018 and 2017, respectively. Substantially
all 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 three months ended September 30, 2018 and 2017 for the following
reasons:
September
30, 2018
Tax
Rate Reconciliation
September
30, 2018
|
|
China
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
15% - 25%
|
|
|
|
|
|
21%
|
|
|
|
|
|
Total
|
|
|
|
|
Pretax income (loss)
|
|
$
|
11,287,985
|
|
|
|
|
|
|
|
(621,765
|
)
|
|
|
|
|
|
$
|
10,666,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax expense (benefit)
|
|
|
2,821,996
|
|
|
|
25.0
|
%
|
|
|
(130,571
|
)
|
|
|
21.0
|
%
|
|
|
2,691,426
|
|
|
|
|
|
High-tech income benefits on Jinong
|
|
|
(1,041,180
|
)
|
|
|
(9.5
|
)%
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,041,180
|
)
|
|
|
|
|
Losses from subsidiaries in which no benefit is recognized
|
|
|
(126,400
|
)
|
|
|
(1.1
|
)%
|
|
|
-
|
|
|
|
-
|
|
|
|
(126,400
|
)
|
|
|
|
|
Change in valuation allowance on deferred tax asset from US tax benefit
|
|
|
-
|
|
|
|
|
|
|
|
130,571
|
|
|
|
(21.0
|
)%
|
|
|
130,571
|
|
|
|
|
|
Actual tax expense
|
|
$
|
1,654,416
|
|
|
|
14.7
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
1,654,416
|
|
|
|
15.5
|
%
|
|
|
China
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
15% - 25%
|
|
|
|
|
|
34%
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss)
|
|
$
|
7,015,501
|
|
|
|
|
|
|
$
|
(198,017
|
)
|
|
|
|
|
|
$
|
6,817,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax expense (benefit)
|
|
|
1,753,875
|
|
|
|
0.250
|
|
|
|
(67,326
|
)
|
|
|
34
|
%
|
|
|
1,686,549
|
|
|
|
|
|
High-tech income benefits on Jinong
|
|
|
(675,422
|
)
|
|
|
-0.096
|
|
|
|
|
|
|
|
|
|
|
|
(675,422
|
)
|
|
|
|
|
Losses from subsidiaries in which no benefit is recognized
|
|
|
644,202
|
|
|
|
0.092
|
|
|
|
|
|
|
|
|
|
|
|
644,202
|
|
|
|
|
|
Change in valuation allowance on deferred tax asset from US tax benefit
|
|
|
-
|
|
|
|
|
|
|
|
67,326
|
|
|
|
-34
|
%
|
|
|
67,326
|
|
|
|
|
|
Actual tax expense
|
|
$
|
1,722,655
|
|
|
|
24.6
|
%
|
|
$
|
-
|
|
|
|
0.00
|
%
|
|
$
|
1,722,655
|
|
|
|
25.3
|
%
|
NOTE
12 – STOCKHOLDERS’ EQUITY
Common
Stock
There
were no shares of common stock issued during the quarters ended September 30, 2018 and 2017, respectively.
As
of September 30, 2018, and June 30, 2018, there were 38,896,945 and 38,896,945 shares of common stock issued and outstanding.
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 September 30, 2018, 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
13 –CONCENTRATIONS
Market
Concentration
All
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 four vendors from each of which
the Company purchased more than 10% of its raw materials, with the total of 47.6% of its raw materials for the three months ended
September 30, 2018. Total purchases from these four vendors amounted to $26,676,809 for the three-month period ended September
30, 2018.
There were six vendors from each of which
the Company purchased more than 10% of its raw materials, with the total of 64.6% of its raw materials for the three months ended
September 30, 2017. Total purchases from these six vendors amounted to $52,430,050 for the three-month period ended September 30,
2017.
No
customer accounted for over 10% of the Company’s sales for the three months ended September 30, 2018 and 2017.
NOTE
14 – SEGMENT REPORTING
As
of September 30, 2018, the Company was organized into four main business segments based on location and product: Jinong (fertilizer
production), Gufeng (fertilizer production), Yuxing (agricultural products production) and the sales VIEs. 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 September 30,
|
|
Revenues from unaffiliated customers:
|
|
2018
|
|
|
2017
|
|
Jinong
|
|
$
|
22,496,533
|
|
|
$
|
26,773,760
|
|
Gufeng
|
|
|
17,473,251
|
|
|
|
18,222,066
|
|
Yuxing
|
|
|
2,387,546
|
|
|
|
1,792,643
|
|
Sales VIEs
|
|
|
15,597,474
|
|
|
|
15,340,182
|
|
Consolidated
|
|
$
|
57,954,804
|
|
|
$
|
62,128,651
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
Jinong
|
|
$
|
6,928,090
|
|
|
$
|
6,766,075
|
|
Gufeng
|
|
|
1,609,052
|
|
|
|
2,106,213
|
|
Yuxing
|
|
|
193,177
|
|
|
|
175,473
|
|
Sales VIEs
|
|
|
2,631,299
|
|
|
|
(1,808,652
|
)
|
Reconciling item (1)
|
|
|
-
|
|
|
|
2
|
|
Reconciling item (2)
|
|
|
(621,764
|
)
|
|
|
(198,019
|
)
|
Consolidated
|
|
$
|
10,739,854
|
|
|
$
|
6,791,658
|
|
|
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
Jinong
|
|
$
|
5,900,016
|
|
|
$
|
5,741,090
|
|
Gufeng
|
|
|
1,120,344
|
|
|
|
1,489,067
|
|
Yuxing
|
|
|
193,178
|
|
|
|
175,622
|
|
Sales VIEs
|
|
|
2,420,029
|
|
|
|
(2,070,864
|
|
Reconciling item (1)
|
|
|
2
|
|
|
|
2
|
|
Reconciling item (2)
|
|
|
(621,766
|
)
|
|
|
(198,019
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
9,011,805
|
|
|
$
|
5,052,758
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
Jinong
|
|
$
|
198,258
|
|
|
$
|
853,743
|
|
Gufeng
|
|
|
536,619
|
|
|
|
547,757
|
|
Yuxing
|
|
|
304,818
|
|
|
|
312,519
|
|
Sales VIEs
|
|
|
186,806
|
|
|
|
186,606
|
|
Consolidated
|
|
$
|
1,226,500
|
|
|
$
|
1,900,626
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Jinong
|
|
|
69,442
|
|
|
|
70,836
|
|
Gufeng
|
|
|
93,122
|
|
|
|
104,723
|
|
|
|
|
|
|
|
|
|
|
Sales VIEs
|
|
|
123
|
|
|
|
4,016
|
|
Consolidated
|
|
$
|
162,686
|
|
|
$
|
179,575
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditure:
|
|
|
|
|
|
|
|
|
Jinong
|
|
$
|
3,036
|
|
|
$
|
3,341
|
|
Gufeng
|
|
|
26,988
|
|
|
|
13,868
|
|
Yuxing
|
|
|
1,249
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
31,273
|
|
|
$
|
17,209
|
|
|
|
As
of
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
Identifiable assets:
|
|
|
|
|
|
|
Jinong
|
|
$
|
224,480,929
|
|
|
$
|
226,335,489
|
|
Gufeng
|
|
|
160,920,365
|
|
|
|
168,572,947
|
|
Yuxing
|
|
|
-
|
|
|
|
-
|
|
Sales VIEs
|
|
|
83,654,118
|
|
|
|
87,567,782
|
|
Reconciling item (1)
|
|
|
582,901
|
|
|
|
512,622
|
|
Reconciling item (2)
|
|
|
(2,879
|
)
|
|
|
(2,879
|
)
|
Consolidated
|
|
$
|
469,635,433
|
|
|
$
|
482,985,960
|
|
(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
15 – COMMITMENTS AND CONTINGENCIES
On June
29, 2018, Jinong renewed 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 four-year term effective
as of July 1, 2018 with monthly rent of $3,564 (approximately RMB 24,480).
Accordingly,
the Company recorded an aggregate of $11,985 and $14,716 as rent expenses from these committed property leases for the three-month
periods ended September 30, 2018 and 2017, respectively. The contingent rent expenses herein for the next five twelve-month periods
ended September 30, are as follows:
Years ending September 30,
|
|
|
|
2019
|
|
$
|
47,940
|
|
2020
|
|
|
47,940
|
|
2021
|
|
|
47,940
|
|
2022
|
|
|
47,940
|
|
2023
|
|
|
47,940
|
|
NOTE
16 – VARIABLE INTEREST ENTITIES
In
accordance with accounting standards regarding consolidation of variable interest entities, VIEs are generally entities that lack
enough 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 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 and January 1, 2017, the
Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition agreements and a series of contractual
agreements to qualify as VIEs with the shareholders of the sales VIE Companies.
Jinong,
the sales VIE Companies, and the shareholders of the sales VIE Companies also entered into a series of contractual agreements
for the sales VIE Companies to qualify as VIEs (the “VIE Agreements”).
On
November 30, 2017, the Company, through its wholly-owned subsidiary Jinong, exited the VIE agreements with the shareholders of
Zhenbai.
As
a result of these contractual arrangements, with Yuxing and the sales VIE Companies the Company is entitled to substantially all
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 September 30, 2018 and June 30, 2018:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,347,720
|
|
|
$
|
982,312
|
|
Accounts receivable, net
|
|
|
35,129,065
|
|
|
|
38,295,505
|
|
Inventories
|
|
|
20,889,337
|
|
|
|
21,133,970
|
|
Other current assets
|
|
|
950,471
|
|
|
|
988,051
|
|
Related party receivable
|
|
|
249,087
|
|
|
|
(359,005
|
)
|
Advances to suppliers
|
|
|
814,358
|
|
|
|
848,458
|
|
Total Current Assets
|
|
|
59,380,038
|
|
|
|
61,889,291
|
|
|
|
|
|
|
|
|
|
|
Plant, Property and Equipment, Net
|
|
|
10,548,189
|
|
|
|
11,206,667
|
|
Other assets
|
|
|
218,549
|
|
|
|
226,654
|
|
Intangible Assets, Net
|
|
|
10,724,735
|
|
|
|
11,348,180
|
|
Goodwill
|
|
|
3,181,816
|
|
|
|
3,319,732
|
|
Total Assets
|
|
$
|
84,053,327
|
|
|
$
|
87,990,524
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short-term loan
|
|
$
|
-
|
|
|
$
|
-
|
|
Accounts payable
|
|
|
20,951,481
|
|
|
|
25,584,614
|
|
Customer deposits
|
|
|
242,728
|
|
|
|
841,694
|
|
Accrued expenses and other payables
|
|
|
4,109,982
|
|
|
|
3,896,340
|
|
Amount due to related parties
|
|
|
41,903,021
|
|
|
|
43,339,286
|
|
Total Current Liabilities
|
|
$
|
67,207,212
|
|
|
$
|
73,661,934
|
|
Long-term Loan
|
|
|
-
|
|
|
|
-
|
|
Total Liabilities
|
|
$
|
67,207,212
|
|
|
$
|
73,661,934
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
16,846,115
|
|
|
|
14,328,590
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
|
84,053,327
|
|
|
$
|
87,990,524
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
$
|
17,985,020
|
|
|
$
|
17,132,823
|
|
Expenses
|
|
|
15,371,814
|
|
|
|
19,112,207
|
|
Net income
|
|
$
|
2,613,206
|
|
|
$
|
(1,979,384
|
)
|
NOTE
17 – 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 Shaanxi Lishijie Agrochemical Co., Ltd., Songyuan
Jinyangguang Sannong Service Co., Ltd., Shenqiu County Zhenbai Agriculture Co., Ltd., Weinan City Linwei District Wangtian Agricultural
Materials Co., Ltd., Aksu Xindeguo Agricultural Materials Co., Ltd., and Xinjiang Xinyulei Eco-agriculture Science and Technology
Co., Ltd.
Subsequently,
on January 1, 2017, Jinong entered into similar strategic acquisition agreements and a series of contractual agreements to qualify
as VIEs with the shareholders of Sunwu County Xiangrong Agricultural Materials Co., Ltd., and Anhui Fengnong Seed Co., Ltd.
On
November 30, 2017, the Company, through its wholly-owned subsidiary Jinong, discontinued the strategic acquisition agreements
and the series of contractual agreements with the shareholders of Zhenbai.
The
VIE Agreements are as follows:
Entrusted
Management Agreements
Pursuant
to the terms of certain Entrusted Management Agreements dated June 30, 2016 and January 1, 2017, between Jinong and the shareholders
of the sales VIE Companies (the “Entrusted Management Agreements”), the sales 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 sales VIE Companies’ operations, assets and personnel, has the right
to control all the sales VIE Companies’ cash flows through an entrusted bank account, is entitled to the sales VIE Companies’
net profits as a management fee, is obligated to pay all the sales VIE Companies’ payables and loan payments, and bears
all losses of the sales 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 sales VIE Companies; or (iii) Jinong acquires all the assets or
equity of the sales 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 and January 1, 2017, between Jinong and the
sales VIE companies (the “Exclusive Technology Supply Agreements”), Jinong is the exclusive technology provider to
the sales VIE companies. The sales 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 sales VIE companies; or (iii) Jinong acquires
the sales 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 and January 1, 2017, among Jinong and
the shareholders of the sales VIE companies (the “Shareholder’s Voting Proxy Agreements”), the shareholders
of the sales 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 sales VIE companies, including the appointment
and election of directors of the sales 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 the assets or equity of the sales VIE companies.
Exclusive
Option Agreements
Pursuant
to the terms of certain Exclusive Option Agreements dated June 30, 2016 and January 1, 2017, among Jinong, the sales VIE companies,
and the shareholders of the sales VIE companies (the “Exclusive Option Agreements”), the shareholders of the sales
VIE companies granted Jinong an irrevocable and exclusive purchase option (the “Option”) to acquire the sales 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 sales 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 sales 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.
Equity
Pledge Agreements
Pursuant
to the terms of certain Equity Pledge Agreements dated June 30, 2016 and January 1, 2017, among Jinong and the shareholders of
the sales VIE companies (the “Pledge Agreements”), the shareholders of the sales VIE companies pledged all of their
equity interests in the sales 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 and January 1, 2017, among Jinong and the shareholders of the
sales VIE companies (the “Non-Compete Agreements”), the shareholders of the sales 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. If the shareholders
of the sales VIE companies breach the non-compete obligations contained therein, Jinong is entitled to all loss and damages; if
the damages are difficult to determine, remedies bore the shareholders of the sales 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:
For
acquisitions made on June 30, 2016:
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
|
|
Goodwill
|
|
|
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 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 made on June 30, 2016 was paid in July and August 2016.
For
acquisitions made on January 1, 2017:
Working Capital
|
|
$
|
941,192
|
|
Machinery and equipment
|
|
|
222,875
|
|
Intangible assets
|
|
|
1440
|
|
Goodwill
|
|
|
684,400
|
|
Customer Relationship
|
|
|
522,028
|
|
Non-compete Agreement
|
|
|
392,852
|
|
Purchase price
|
|
$
|
2,764,787
|
|
A
summary of the purchase consideration paid is below:
Cash
|
|
$
|
1,201,888
|
|
Convertible notes
|
|
|
1,559,350
|
|
Derivative liability
|
|
|
3,549
|
|
|
|
$
|
2,764,787
|
|
The
cash component of the purchase price for these acquisitions made on January 1, 2017 was paid during March 2017.
On
November 30, 2017, the Company, through its wholly-owned subsidiary Jinong, discontinued the strategic acquisition agreements
and the series of contractual agreements with the shareholders of Zhenbai. In return, the shareholders of Zhenbai agreed to tender
the whole payment consideration in the SAA back to the Company with early termination penalties. The convertible notes paid to
Zhenbai’s shareholders and the accrued interest has been forfeited.
For
the discontinuation of Zhenbai made on November 30, 2017, the Company gave up the control of the following assets in Zhenbai:
Working Capital
|
|
$
|
1,179,352
|
|
Intangible assets
|
|
|
896,559
|
|
Customer Relationship
|
|
|
684,727
|
|
Non-compete Agreement
|
|
|
211,833
|
|
Goodwill
|
|
|
538,488
|
|
Total Asset
|
|
$
|
2,614,401
|
|
In
return, the purchase consideration returned to the Company from Zhenbai’s shareholders is summarized below:
Cash
|
|
$
|
461,330
|
|
Interest Payable
|
|
|
83,039
|
|
Convertible notes
|
|
|
1,724,683
|
|
Derivative liability
|
|
|
13,353
|
|
Total Payback
|
|
$
|
2,282,406
|
|
Net Loss
|
|
|
(331,995
|
)
|
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 contain 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 TechTeam Jinong Humic 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 in the PRC (“VIE”)
controlled by Jinong through contractual agreements; (iv) Shaanxi Lishijie Agrochemical Co., Ltd. (“Lishijie”), a
VIE controlled by Jinong through contractual agreements; (v) Songyuan Jinyangguang Sannong Service Co., Ltd. (“Jinyangguang”),
a VIE in the PRC controlled by Jinong through contractual agreements; (vi) Weinan City Linwei District Wangtian Agricultural Materials
Co., Ltd. (“Wangtian”), a VIE controlled by Jinong through contractual agreements; (vii) Aksu Xindeguo Agricultural
Materials Co., Ltd. (“Xindeguo”), a VIE controlled by Jinong through contractual agreements; (vii) Xinjiang Xinyulei
Eco-agriculture Science and Technology Co., Ltd (“Xinyulei”), a VIE controlled by Jinong through contractual agreements;
(ix) Sunwu County Xiangrong Agricultural Materials Co., Ltd. (“Xiangrong”), a VIE controlled by Jinong through contractual
agreements; (x) Anhui Fengnong Seed Co., Ltd. (“Fengnong”), a VIE controlled by Jinong through contractual agreements;
(xi) Beijing Gufeng Chemical Products Co., Ltd., a wholly-owned subsidiary of Jinong in the PRC (“Gufeng”); and (xii)
Beijing Tianjuyuan Fertilizer Co., Ltd., Gufeng’s wholly-owned subsidiary in the PRC (“Tianjuyuan”). Yuxing,
Lishijie, Jinyangguang, Wangtian, Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred to as the “the
VIE Companies”; Lishijie, Jinyangguang, Wangtian, Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred
to as “the sales VIEs” or “the sales 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 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,
Yuxing. 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. For financial reporting purposes,
our operations are organized into three business segments: fertilizer products (Jinong), fertilizer products (Gufeng) and agricultural
products production (Yuxing).
The
fertilizer business conducted by Jinong and Gufeng generated approximately 69.0% and 71.7% of our total revenues for the three
months ended September 30, 2018 and 2017, respectively. The sales VIEs generated 26.9% and 25.5% of our revenues for the three
months ended September 30, 2018 and 2017, respectively. Yuxing serves as a research and development base for our fertilizer products.
Fertilizer
Products
As
of September 30, 2018, we had developed and produced a total of 726 different fertilizer products in use, of which 142 were developed
and produced by Jinong, 333 by Gufeng, and 251 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
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Change 2017 to 2018
|
|
|
|
2018
|
|
|
2017
|
|
|
Amount
|
|
|
%
|
|
|
|
(metric tons)
|
|
|
|
|
|
|
|
Jinong
|
|
|
18,605
|
|
|
|
14,525
|
|
|
|
4,080
|
|
|
|
28.1
|
%
|
Gufeng
|
|
|
49,247
|
|
|
|
54,608
|
|
|
|
(5,361
|
)
|
|
|
-9.8
|
%
|
|
|
|
67,851
|
|
|
|
69,133
|
|
|
|
(1,282
|
)
|
|
|
-1.9
|
%
|
|
|
Three Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(revenue per tons)
|
|
Jinong
|
|
$
|
1,294
|
|
|
$
|
1,980
|
|
Gufeng
|
|
|
348
|
|
|
|
374
|
|
For
the three months ended September 30, 2018, we sold approximately 67,851 metric tons of fertilizer products, as compared to 69,133
metric tons for the three months ended September 30, 2017. For the three months ended September 30, 2018, Jinong sold approximately
18,605 metric tons of fertilizer products, as compared to 14,525 metric tons for the three months ended September 30, 2017. For
the three months ended September 30, 2018, Gufeng sold approximately 49,247 metric tons of fertilizer products, as compared to
54,608 metric tons for the three months ended September 30, 2017.
Our
sales of fertilizer products to customers in five provinces within China accounted for approximately 37.5% of our fertilizer revenue
for the three months ended September 30, 2018. Specifically, the provinces and their respective percentage contributing to our
fertilizer revenues were: Shaanxi (12.5%), Heilongjiang (8.8%), Liaoning (6.5%), Inner Mongolia (5.7%) and Anhui (4.0%).
As
of September 30, 2018, we had a total of 1,978 distributors covering 22 provinces, 4 autonomous regions and 4 central government-controlled
municipalities in China. Jinong had 1,162 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 2.88% of its fertilizer revenues for the three
months ended September 30, 2018. Gufeng had 318 distributors, including some large state-owned enterprises. Gufeng’s top
five distributors accounted for 63.6% of its revenues for the three months ended September 30, 2018.
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 and municipalities that accounted for 85.2% of our agricultural products
revenue for the three months ended September 30, 2018 were Shaanxi (65.3%), Hebei (15.1%) and Sichuan (4.7%).
Recent
Developments
New
Products
During
the three months ended September 30, 2018, Jinong did not launch any new fertilizer products but added 17 new distributors. During
the three months ended September 30, 2018, Gufeng did not launch any new fertilizer products but added 2 new distributors.
Strategic
Acquisitions
On
June 30, 2016 and January 1, 2017, through 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 identified below
(the “Targets”).
June
30, 2016:
|
|
|
|
Cash
|
|
|
Principal of
|
|
|
|
|
|
Payment for
|
|
|
Notes for
|
|
|
|
|
|
Acquisition
|
|
|
Acquisition
|
|
Company Name
|
|
Business Scope
|
|
(RMB
[1]
)
|
|
|
(RMB)
|
|
Shaanxi Lishijie Agrochemical Co., Ltd.
|
|
Sales of pesticides, agricultural chemicals, chemical fertilizers, agricultural materials; Manufacture and sales of mulches.
|
|
|
10,000,000
|
|
|
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Songyuan Jinyangguang Sannong Service Co., Ltd.
|
|
Promotion and consulting services regarding agricultural technologies; Retail sales of chemical fertilizers (including compound fertilizers and organic fertilizers); Wholesale and retail sales of pesticides, agricultural machinery and accessories; Collection of agricultural information; Development of saline-alkali soil; Promotion and development of high-efficiency agriculture and related information technology solutions for agriculture, agricultural and biological engineering high technologies; E-commerce; Cultivation of freshwater fish, poultry, fruits, flowers, vegetables, and seeds; Recycling and complex utilization of straw and stalk; Technology transfer and training; Recycling of agricultural materials ; Ecological industry planning.
|
|
|
8,000,000
|
|
|
|
12,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenqiu County Zhenbai Agriculture Co., Ltd.
|
|
Cultivation of crops; Storage, sales, preliminary processing and logistics distribution of agricultural by-products; Promotion and application of agricultural technologies; Purchase and sales of agricultural materials; Electronic commerce.
|
|
|
3,000,000
|
|
|
|
12,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Weinan City Linwei District Wangtian Agricultural Materials Co., Ltd.
|
|
Promotion and application of new agricultural technologies; Professional prevention of plant diseases and insect pests; Sales of plant protection products, plastic mulches, material, chemical fertilizers, pesticides, agricultural medicines, micronutrient fertilizers, hormones, agricultural machinery and medicines, and gardening tools.
|
|
|
6,000,000
|
|
|
|
12,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Aksu Xindeguo Agricultural Materials Co., Ltd.
|
|
Wholesale and retail sales of pesticides; Sales of chemical fertilizers, packaged seeds, agricultural mulches, micronutrient fertilizers, compound fertilizers, plant growth regulators, agricultural machineries, and water economizers; Consulting services for agricultural technologies; Purchase and sales of agricultural by- products.
|
|
|
10,000,000
|
|
|
|
12,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Xinjiang Xinyulei Eco-agriculture Science and Technology Co., Ltd
|
|
Sales of chemical fertilizers, packaged seeds, agricultural mulches, micronutrient fertilizers, organic fertilizers, plant growth regulators, agricultural machineries, and water economizers; Purchase and sales of agricultural by-products; Cultivation of fruits and vegetables; Consulting services and training for agricultural technologies; Storage services; Sales of articles of daily use, food and oil; On-line sales of the above-mentioned products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
37,000,000
|
|
|
|
51,000,000
|
|
(1)
|
The
exchange rate between RMB and U.S. dollars on June 30, 2016 is RMB1=US$0.1508, according to the exchange rate published by
Bank of China.
|
|
|
(2)
|
On
November 30, 2017, the Company, through its wholly-owned subsidiary Jinong, discontinued the strategic acquisition agreements
and the series of contractual agreements with the shareholders of Zhenbai. In return, the shareholders of Zhenbai agreed to
tender the whole payment consideration in the SAA back to the Company with early termination penalties. The convertible notes
paid to Zhenbai’s shareholders and the accrued interest has been forfeited.
|
January
1, 2017:
|
|
|
|
Cash
|
|
|
Principal of
|
|
|
|
|
|
Payment for
|
|
|
Notes for
|
|
|
|
|
|
Acquisition
|
|
|
Acquisition
|
|
Company Name
|
|
Business Scope
|
|
(RMB
[1]
)
|
|
|
(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)
|
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 retaining possession of the equity interests and continuing 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 aggregate
amount of RMB45,000,000 (approximately $6,731,600) to be paid by Jinong within three days following the execution of the SAA,
ACN and the VIE Agreements, and convertible notes with an aggregate face value of RMB 63,000,000 (approximately $9,418,800) with
an annual fixed compound interest rate of 3% and term of three years.
Jinong
acquired the Targets using the VIE arrangement based on our need to further develop our business and comply with the regulatory
requirements under the PRC laws.
As
our business focuses on the production of fertilizer, all our business activities intertwine with those in the agriculture industry
in China. Specifically, we deal with compliance, regulation, safety, inspection, and licenses in fertilizer production, farm land
use and transfer, growing and distribution of agriculture goods, agriculture basic supplies, seeds, pesticides, and trades of
grains. It is an industry in which heavy regulations get implemented and strictly enforced. In addition, E-commerce, which is
also under strict government regulation in the PRC, has lately become a sales and distribution channel for agricultural products.
Currently, we are developing an online platform to connect the physical distribution network we either own or lease.
Compared
with the regulatory environment in other jurisdictions, the regulatory environment in the PRC is unique. For example, the “M&A
Rules” purports to require that an offshore special purpose vehicle controlled directly or indirectly by PRC companies or
individuals and formed for purposes of overseas listing through acquisition of PRC domestic interests held by such PRC companies
or individuals obtain the approval of the China Securities Regulatory Commission (the “CSRC”) prior to the listing
and trading of such special purpose vehicle’s securities on an overseas stock exchange. On September 21, 2006, the CSRC
published procedures regarding its approval of overseas listings by special purpose vehicles.
For
both e-commerce and agriculture industries, PRC regulators limit the investment from foreign entities and set particularly rules
for foreign-owned entities to conduct business. We expect these limitations on foreign-owned entities will continue to exist in
e-commerce and agriculture industries. The VIE arrangement, however, provides feasibility for obtaining administrative approval
process and avoiding industry restrictions that can be imposed on an entity that is a wholly-owned subsidiary of a foreign entity.
The VIE agreements reduce uncertainty and the current limitation risk. It is our understanding that the VIE agreements, as well
as the control we obtained through VIE arrangement, are valid and enforceable. Such legal structure does not violate the known,
published, and current PRC laws. While there are substantial uncertainties regarding the interpretation and application of PRC
Laws and future PRC laws and regulations, and there can be no assurance that the PRC authorities will take a view that is not
contrary to or otherwise different from our belief and understanding stated above, we believe the substantial difficulty that
we experienced previously to conduct business in agriculture as a foreign ownership can be greatly reduced by the VIE arrangement.
Further, as an integral part of the VIE arrangement, the underlying equity pledge agreements provide legal protection for the
control we obtained. Pursuant to the equity pledge agreements, we have completed the equity pledge processes with the Targets
to ensure the complete control of the interests in the Targets. The shareholders of the Targets are not entitled to transfer any
shares to a third party under the exclusive option agreements. If necessary, they may transfer shares to our company without consideration.
While
the VIE arrangement provides us with the feasibility to conduct our business in the E-Commerce and agriculture industries, validity
and enforceability of VIE arrangement is subject to (i) any applicable bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or similar laws affecting creditors’ rights generally, (ii) possible judicial or administrative actions or any
PRC Laws affecting creditors’ rights, (iii) certain equitable, legal or statutory principles affecting the validity and
enforceability of contractual rights generally under concepts of public interest, interests of the State, national security, reasonableness,
good faith and fair dealing, and applicable statutes of limitation; (iv) any circumstance in connection with formulation, execution
or implementation of any legal documents that would be deemed materially mistaken, clearly unconscionable, fraudulent, coercive
at the conclusions thereof; and (v) judicial discretion with respect to the availability of indemnifications, remedies or defenses,
the calculation of damages, the entitlement to attorney’s fees and other costs, and the waiver of immunity from jurisdiction
of any court or from legal process. Validity and enforceability of VIE arrangement is also subject to risk derived from the discretion
of any competent PRC legislative, administrative or judicial bodies in exercising their authority in the PRC. As a result, there
can no assurance that any of such PRC Laws will not be changed, amended or replaced in the immediate future or in the longer term
with or without retrospective effect.
Results
of Operations
Three
Months ended September 30, 2018 Compared to the Three Months ended September 30, 2017.
|
|
2018
|
|
|
2017
|
|
|
Change $
|
|
|
Change %
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinong
|
|
|
22,496,533
|
|
|
|
26,773,760
|
|
|
|
(4,277,227
|
)
|
|
|
-16.0
|
%
|
Gufeng
|
|
|
17,473,251
|
|
|
|
18,222,066
|
|
|
|
(748,815
|
)
|
|
|
-4.1
|
%
|
Yuxing
|
|
|
2,387,546
|
|
|
|
1,792,643
|
|
|
|
594,903
|
|
|
|
33.2
|
%
|
Sales VIEs
|
|
|
15,597,476
|
|
|
|
15,340,182
|
|
|
|
257,294
|
|
|
|
1.7
|
%
|
Net sales
|
|
|
57,954,806
|
|
|
|
62,128,651
|
|
|
|
(4,173,845
|
)
|
|
|
-6.7
|
%
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinong
|
|
|
11,203,172
|
|
|
|
13,112,756
|
|
|
|
(1,909,584
|
)
|
|
|
-14.6
|
%
|
Gufeng
|
|
|
15,304,863
|
|
|
|
15,986,429
|
|
|
|
(681,566
|
)
|
|
|
-4.3
|
%
|
Yuxing
|
|
|
2,047,163
|
|
|
|
1,392,553
|
|
|
|
654,610
|
|
|
|
47.0
|
%
|
Sales VIEs
|
|
|
12,929,968
|
|
|
|
12,693,629
|
|
|
|
236,339
|
|
|
|
1.9
|
%
|
Cost of goods sold
|
|
|
41,485,166
|
|
|
|
43,185,367
|
|
|
|
(1,700,201
|
)
|
|
|
-3.9
|
%
|
Gross profit
|
|
|
16,469,640
|
|
|
|
18,943,284
|
|
|
|
(2,473,644
|
)
|
|
|
-13.1
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
3,420,427
|
|
|
|
5,154,197
|
|
|
|
(1,733,770
|
)
|
|
|
-33.6
|
%
|
Selling expenses - amortization of deferred asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
2,309,359
|
|
|
|
6,914,802
|
|
|
|
(4,605,443
|
)
|
|
|
-66.6
|
%
|
Total operating expenses
|
|
|
5,729,786
|
|
|
|
12,068,999
|
|
|
|
(6,339,213
|
)
|
|
|
-52.5
|
%
|
Income from operations
|
|
|
10,739,854
|
|
|
|
6,874,285
|
|
|
|
3,865,569
|
|
|
|
56,2
|
%
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
(38,330
|
)
|
|
|
(7,211
|
)
|
|
|
(31,119
|
)
|
|
|
431,5
|
%
|
Interest income
|
|
|
127,383
|
|
|
|
87,914
|
|
|
|
39,469
|
|
|
|
44.9
|
%
|
Interest expense
|
|
|
(162,686
|
)
|
|
|
(179,575
|
)
|
|
|
16,889
|
|
|
|
-9,4
|
%
|
Total other income (expense)
|
|
|
(73,633
|
)
|
|
|
(98,872
|
)
|
|
|
25,239
|
|
|
|
-25,5
|
%
|
Income before income taxes
|
|
|
10,666,221
|
|
|
|
6,775,413
|
|
|
|
3,890,808
|
|
|
|
57.4
|
%
|
Provision for income taxes
|
|
|
1,654,416
|
|
|
|
1,722,655
|
|
|
|
(68,239
|
)
|
|
|
-4.0
|
%
|
Net income from continuing operations
|
|
|
9,011,805
|
|
|
|
5,052,758
|
|
|
|
3,959,047
|
|
|
|
78
|
%
|
Net income from discontinued operation, net of tax
|
|
|
-
|
|
|
|
42,070
|
|
|
|
(42,070
|
)
|
|
|
-100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
9,011,805
|
|
|
|
5,094,828
|
|
|
|
3,916,977
|
|
|
|
77
|
%
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
(15,987,792
|
)
|
|
|
240,218
|
|
|
|
(16,228,010
|
)
|
|
|
-6755.5
|
%
|
Comprehensive income (loss)
|
|
|
(6,975,987
|
)
|
|
|
5,335,046
|
|
|
|
(12,268,963
|
)
|
|
|
-231.8
|
%
|
Net
Sales
Total
net sales for the three months ended September 30, 2018 were $57,954,806, a decrease of $4173,845 or 6.7%, from $62,128,651 for
the three months ended September 30, 2017. This decrease was primarily due to a decrease in Jinong’s and Gufeng’s
net sales.
For
the three months ended September 30, 2018, Jinong’s net sales decreased $4,277,227, or 16.0%, to $22,496,533 from $26,773,760
for the three months ended September 30, 2017. This decrease was mainly attributable to the decrease in Jinong’s sales price
in the last three months.
For
the three months ended September 30, 2018, Gufeng’s net sales were $17,473,251, a decrease of $748,815, or 4.1% from $18,222,066
for the three months ended September 30, 2017. This decrease was mainly attributable to the decrease in Gufeng’s sales price
in the last three months.
For
the three months ended September 30, 2018, Yuxing’s net sales were $2,387,546, an increase of $594,903 or 33.2%, from $1,792,643
for the three months ended September 30, 2017. The increase was mainly attributable to the increase in market demand and the higher
prices on Yuxing’s top grade flowers during the three months ended September 30, 2018.
Cost
of Goods Sold
Total
cost of goods sold for the three months ended September 30, 2018 was $41,485,166, a decrease of $1,700,201, or 3.9%, from $43185,367
for the three months ended September 30, 2017. The increase was mainly due to the decrease in Jinong’s and Gufeng’s
cost of goods sold which increased 14.6% and 4.3% respectively.
Cost
of goods sold by Jinong for the three months ended September 30, 2018 was $11,203,172, a decrease of $1,909,584, or 14.6%, from
$13,112,756 for the three months ended September 30, 2017. The decrease in cost of goods was primarily attributable to the 16.0%
decrease in net sale during the last three months.
Cost
of goods sold by Gufeng for the three months ended September 30, 2018 was $15,304,863, a decrease of $681,566, or 4.3%, from $15,986,429
for the three months ended September 30, 2017. This decrease was primarily attributable to the4.1% decrease in net sale during
the last three months.
For
three months ended September 30, 2018, cost of goods sold by Yuxing was $2,047,163, an increase of $654,610, or 47.0%, from $1,392,553
for the three months ended September 30, 2017. This increase was mainly due to the increase in Yuxing’s net sales during
the last three months.
Gross
Profit
Total
gross profit for the three months ended September 30, 2018 decreased by $2,473,644, or 13.1%, to $16,469,640, as compared to $18,943,284
for the three months ended September 30, 2017. Gross profit margin was 28.4% and 30.5% for the three months ended September 30,
2018 and 2017, respectively.
Gross
profit generated by Jinong decreased by $2,367,643, or 17.3%, to $11,293,361 for the three months ended September 30, 2018 from
$13,661,004 for the three months ended September 30, 2017. Gross profit margin from Jinong’s sales was approximately 50.2%
and 51.0% for the three months ended September 30, 2018 and 2017, respectively. The decrease in gross profit margin was mainly
due to the lower sales prices.
For
the three months ended September 30, 2018, gross profit generated by Gufeng was $2,168,388, a decrease of $67,249, or 3.0%, from
$2,235,637 for the three months ended September 30, 2017. Gross profit margin from Gufeng’s sales was approximately 12.4%
and 12.3% for the three months ended September 30, 2018 and 2017, respectively. The decrease in gross profit was mainly due to
the increase in product costs and the decrease in sales prices.
For
the three months ended September 30, 2018, gross profit generated by Yuxing was $340,383, a decrease of $59,707, or 14.9% from
$400,090 for the three months ended September 30, 2017. The gross profit margin was approximately 14.3% and 22.3% for the three
months ended September 30, 2018 and 2017, respectively. The decrease in gross profit percentage was mainly due to the increase
in product costs and the decrease in sales prices.
Gross
profit generated by VIEs increased by $20,955, or 0.8%, to $2,667,508 for the three months ended September 30, 2018 from $2,646,553
for the three months ended September 30, 2017. Gross profit margin from VIE’s sales was approximately 17.1% and 17.3% for
the three months ended September 30, 2018 and 2017, respectively, which was slightly decreased.
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 $3,420,427, or 5.9%, of net sales for the three months ended September 30, 2018, as
compared to $5,154,197, or 8.3% of net sales for the three months ended September 30, 2017, a decrease of $1,733,770, or 33.6%.
The
selling expenses of Yuxing were $17,729 or 0.7% of Yuxing’s net sales for the three months ended September 30, 2018, as
compared to $9,646 or 0.5% of Yuxing’s net sales for the three months ended September 30, 2017. The selling expenses of
Gufeng were $76,764 or 0.4% of Gufeng’s net sales for the three months ended September 30, 2018, as compared to $95,776
or 0.5% of Gufeng’s net sales for the three months ended September 30, 2017. The selling expenses of Jinong for the three
months ended September 30, 2018 were $3,071,231 or 13.7% of Jinong’s net sales, as compared to selling expenses of $4,843,178
or 18.1% of Jinong’s net sales for the three months ended September 30, 2017.
Selling
Expenses – amortization of deferred assets
Our selling expenses
- amortization of our deferred assets were 0 for the three months ended September 30, 2018, as compared to $649,496, or 1.0% of
net sales for the three months ended September 30, 2017, a decrease of $649,496, or 100%. This decrease was due to that all deferred
assets were fully amortized and therefore no amortization was recorded on the fully amortized assets for the fiscal year ended
September 30, 2018.
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 litigation. General and administrative expenses were $2,309,359, or 4.0% of net sales for the three months
ended September 30, 2018, as compared to $6,914,802, or 11.1% of net sales for the three months ended September 30, 2017, a decrease
of $4,605,443, or 66.6%.
Total
Other Expenses
Total
other expenses consisted of income from subsidies received from the PRC government, interest income, interest expenses and bank
charges. Total other expense for the three months ended September 30, 2018 was $73,633, as compared to $98,872 for the three months
ended September 30, 2017, a decrease in expense of $25,239, or 25,5%. The decrease in total other expense was resulted from the
decrease in net interest expenses.
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 $1,046,844
for the three months ended September 30, 2018, as compared to $1,013,134 for the three months ended September 30, 2017, an increase
of $33,710, or 3.3%.
Gufeng
is subject to a tax rate of 25%, incurred income tax expenses of $395,255 for the three months ended September 30, 2018, as compared
to $534,686 for the three months ended September 30, 2017, a decrease of $139,431, or 26.1%, which was primarily due to Gufeng’s
decreased net income.
Yuxing
has no income tax for the three months ended September 30, 2018 and 2017 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 three months ended September 30, 2018 was $9,011,805, an increase of $3,959,047, or 78.4%, compared to $5,052,758
for the three months ended September 30, 2017. Net income as a percentage of total net sales was approximately 15.5% and 8.1%
for the three months ended September 30, 2018 and 2017, respectively.
Discussion
of Segment Profitability Measures
As
of September 30, 2018, we were engaged in the following businesses: the production and sale of fertilizers through Jinong and
Gufeng, the production and sale of high-quality agricultural products by Yuxing, and the sales of agriculture materials by the
sales VIEs. For financial reporting purpose, our operations were organized into four main business segments based on locations
and products: Jinong (fertilizer production), Gufeng (fertilizer production) and Yuxing (agricultural products production) and
the sales VIEs. Each of the segments has its own annual budget about 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 $191,028, or 3.3% to $5,932,118 for three months ended September 30, 2018, from $5,741,090
for the three months ended September 30, 2017. The increase was principally due to decreased in operating expense.
For
Gufeng, the net income decreased by $483,713 or 30.2% to $1,120,344 for three months ended September 30, 2018 from $1,604,057
for three months ended September 30, 2017. The decrease was principally due to the decrease in net sales.
For
Yuxing, the net income increased $17,788 or 10.1% to $193,178 for three months ended September 30, 2018 from $175,390 for three
months ended September 30, 2017. The increase was mainly due to the increase in net sales.
For
the sales VIEs, the net income was $2,379,635 for period ended September 30, 2018, increased by $4,534,641 or 210.4%, from $(2,155,006)
for three months ended September 30, 2017. The increase was mainly due to the decrease in general and administrative expenses
for the sales VIEs.
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 September 30, 2018, cash and cash equivalents were $153,154,657, an increase of $2,349,018, or 1.6%, from $150,805,639 as of
June 30, 2018.
We
intend to use some of the remaining net proceeds from the Public Offerings, as well as other working capital if required, 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. Yuxing purchased a set of agricultural products
testing equipment for the year of 2016. 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.
The
following table sets forth a summary of our cash flows for the periods indicated:
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Net cash provided by continued operating activities
|
|
$
|
8518,839
|
|
|
$
|
12,106,155
|
|
Net cash provided by (used in) discontinued operation
|
|
|
-
|
|
|
|
(10,782
|
)
|
Net cash provided by operating activities
|
|
|
8,518,839
|
|
|
|
12,095,373
|
|
Net cash used in investing activities
|
|
|
(31,273
|
)
|
|
|
(17,209
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(191,056
|
)
|
|
|
(1,353,800
|
|
Effect of exchange rate change on cash and cash equivalents
|
|
|
(5,947,491
|
)
|
|
|
134,551
|
|
Net increase in cash and cash equivalents
|
|
|
2,349,019
|
|
|
|
10,858,915
|
|
Cash and cash equivalents, beginning balance
|
|
|
150,805,639
|
|
|
|
123,050,548
|
|
Cash and cash equivalents, ending balance
|
|
$
|
153,154,657
|
|
|
$
|
133,909,463
|
|
Operating
Activities
Net
cash provided in operating activities was $8,518,839 for the three months ended September 30, 2018, a decrease of $3,587,316,
or 29.6% from cash provided by operating activities of $12,106,155 for the three months ended September 30, 2017. The increase
was mainly attributable to a decrease in accounts receivable, decrease in advances to suppliers and increase in retained earnings
during the three months ended September 30, 2018 as compared to the same period in 2017.
Investing
Activities
Net
cash used in investing activities for the three months ended September 30, 2018 was $31,273, compared to cash used in investing
activities of $17,209 for the three months ended September 30, 2017. The different was due to Company purchased more plant, property
and equipment during the last three months compared to the same period last year.
Financing
Activities
Net
cash used by financing activities for the three months ended September 30, 2018 was $191,056, compared to $1,353,800 net cash
provided in financing activities for the three months ended September 30, 2017, which was largely due to $191,056 in repayment
of loans for the three months ended September 30, 2018, compared to $3,156,300 in the same period last year.
As of September 30, 2018,
and June 30, 2018, our loans payables were as follows:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
Short term loans payable:
|
|
$
|
4,368,000
|
|
|
$
|
4,726,300
|
|
Total
|
|
$
|
4,368,000
|
|
|
$
|
4,726,300
|
|
Accounts
Receivable
We
had accounts receivable of $136,794,689 as of September 30, 2018, as compared to $174,460,937 as of June 30, 2018, a decrease
of $37,666,248 or 21.6%. The decrease was primarily attributable to Gufeng’s accounts receivable. As of September 30, 2018,
Gufeng’s accounts receivable was $70,837,363, a decrease of $31,275,953 or 30.6% compared to $102,113,316 as of June 30,
2018.
Allowance
for doubtful accounts in accounts receivable for the three months ended September 30, 2018 was $24,387,808, from $24,551,796 as
of June 30, 2018. And the allowance for doubtful accounts as a percentage of accounts receivable was 15.1% as of September 30,
2018 and 12.3% as of June 30, 2018.
Deferred
assets
We
had no deferred assets as of September 30, 2018, as compared to $213,289 as of June 30, 2018. During the three months, we assisted
the distributors in certain marketing efforts and developing standard stores 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 if the distributors are actively selling our products. If a distributor defaults, breaches, or terminates
the agreement with us earlier than the contractual terms, the unamortized portion of the amount owed by the distributor is payable
to us immediately. The deferred assets had been fully amortized as of September 30, 2018.
Inventories
We
had inventories of $85,975,555 as of September 30, 2018, as compared to $53,784,814 as of June 30, 2018, an increase of $32,190,741,
or 59.9%. The increase was primarily attributable to Gufeng’s inventory. As of September 30, 2018, Gufeng’s inventory
was $64,037,393, compared to $31,617,519 as of June 30, 2018, an increase of $32,419,874, or 102.5%.
Advances
to Suppliers
We
had advances to suppliers of $18,497,101 as of September 30, 2018 as compared to $25,194,463 as of June 30, 2018, representing
a decrease of $6,697,362 or 26.6%. Our inventory level may fluctuate from time to time, depending how quickly the raw material
is consumed and replenished during the production process, and how soon the finished goods are sold. The replenishment of raw
material relies on management’s estimate of numerous factors, including but not limited to, the raw materials future
price, and spot price along with its 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 times of slow sales and insufficient inventories in peak times.
Accounts
Payable
We
had accounts payable of $22,463,673 as of September 30, 2018 as compared to $27,128,921 as of June 30, 2018, representing a decrease
of $4,665,248, or 17.2%. The decrease was primarily due to the decrease of accounts payable for VIEs. They have accounts payable
of $20,756,643 as of September 30, 2018 as compared to $25,398,118 as of June 30, 2018, representing a decrease of $4,641,475,
or 18.3%.
Unearned
Revenue (Customer Deposits)
We
had customer deposits of $5,785,249 as of September 30, 2018 as compared to $7,251,967 as of June 30, 2018, representing a decrease
of $1,466,718, or 20.2%. The decrease was mainly attributable to Gufeng’s $4,535,050 unearned revenue as of September 30,
2018, compared to $5,149,905 unearned revenue as of June 30, 2018, decreased 614,855 or 11.9%, caused by the advance deposits
made by clients. This decrease was due to seasonal fluctuation and we expect to deliver products to our customers during the next
three months at which time we will recognize the revenue.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements.
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 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 are outstanding for more than 180 days will be accounted as allowance for bad debts, and any accounts receivable of Yuxing
that are 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 if the distributors are actively selling our products. If a distributor
defaults, breaches, or terminates the agreement with us earlier than the realization of the contractual terms, the unamortized
portion of the amount owed by the distributor is to be refunded to us immediately. The deferred assets had been fully amortized
as of September 30, 2018.
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 way management
disaggregates a company.
As
of September 30, 2018, we were organized into ten main business units: Jinong (fertilizer production), Gufeng (fertilizer
production), Yuxing (agricultural products production), Lishijie (agriculture sales), Jinyangguang (agriculture sales), Wangtian
(agriculture sales), Xindeguo (agriculture sales), Xinyulei (agriculture sales), Fengnong (agriculture sales) and Xiangrong (agriculture
sales). For financial reporting purpose, our operations were organized into four main business segments based on locations and
products: Jinong (fertilizer production), Gufeng (fertilizer production) and Yuxing (agricultural products production) and the
sales VIEs. Each of the segments has its own annual budget regarding development, production and sales.
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 the 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 the 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 the U.S. dollars and RMB. If RMB depreciates
against the 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 September 30, 2018, our accumulated other comprehensive loss was $6.9 million.
We have not entered into any hedging transactions in efforts to reduce our exposure to foreign exchange risk. The value of the
RMB against the U.S. dollar and other currencies is affected by, among other things, changes in PRC’s political and economic
conditions. Between July 1, 2018 and September 30, 2018, China’s currency dropped by a cumulative 3.6% against the U.S.
dollar, making Chinese exports cheaper and imports into China more expensive by that percentage. The effect on trade can be substantial.
Moreover, it is possible that in the future, the PRC authorities may lift restrictions on fluctuations in the 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
our outstanding debt instruments carry fixed rates of interest. The amount of short-term debt outstanding as of September 30,
2018 and June 30, 2018 was $4.4 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 was no material change in interest rates for short-term bank loans
renewed during the three months ended September 30, 2018. The original loan term on average is one year, and the remaining average
life of the short term-loans is approximately nine 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 efforts 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.
Item
4. Controls and Procedures
(a)
Evaluation of disclosure controls and procedures
Pursuant
to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), at the conclusion of the period ended
September 30, 2018 we carried out an evaluation, under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, 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 Chief Executive Officer and Chief Financial Officer concluded that as of the end
of the period covered by this 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 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 Chief Executive Officer and Chief Financial Officer, 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 September 30, 2018 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
PART
II – OTHER INFORMATION