Item
1. Financial Statements
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
December 31, 2017
|
|
|
June 30,
2017
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
145,417,158
|
|
|
$
|
123,050,548
|
|
Accounts receivable, net
|
|
|
120,551,994
|
|
|
|
140,252,335
|
|
Inventories
|
|
|
105,613,585
|
|
|
|
78,013,891
|
|
Prepaid expenses and other current assets
|
|
|
3,709,791
|
|
|
|
4,201,782
|
|
Amount due from related parties
|
|
|
1,565,196
|
|
|
|
1,412,844
|
|
Advances to suppliers, net
|
|
|
20,821,812
|
|
|
|
24,023,062
|
|
Total Current Assets
|
|
|
397,679,536
|
|
|
|
370,954,462
|
|
|
|
|
|
|
|
|
|
|
Plant, Property and Equipment, Net
|
|
|
33,227,748
|
|
|
|
34,191,332
|
|
Deferred Asset, Net
|
|
|
0
|
|
|
|
864,070
|
|
Other Assets
|
|
|
296,256
|
|
|
|
279,031
|
|
Other Non-current Assets
|
|
|
17,201,354
|
|
|
|
17,829,621
|
|
Intangible Assets, Net
|
|
|
21,527,536
|
|
|
|
22,911,876
|
|
Goodwill
|
|
|
8,290,857
|
|
|
|
8,651,238
|
|
Total Assets
|
|
$
|
478,223,287
|
|
|
$
|
455,681,630
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
22,783,659
|
|
|
$
|
19,643,897
|
|
Customer deposits
|
|
|
6,935,326
|
|
|
|
7,046,570
|
|
Accrued expenses and other payables
|
|
|
10,140,609
|
|
|
|
9,135,312
|
|
Amount due to related parties
|
|
|
3,288,189
|
|
|
|
3,071,102
|
|
Taxes payable
|
|
|
2,180,995
|
|
|
|
2,690,407
|
|
Short term loans
|
|
|
6,285,300
|
|
|
|
7,678,111
|
|
Interest payable
|
|
|
324,230
|
|
|
|
256,904
|
|
Derivative liability
|
|
|
70,184
|
|
|
|
195,812
|
|
Total Current Liabilities
|
|
|
52,008,492
|
|
|
|
49,718,116
|
|
|
|
|
|
|
|
|
|
|
Long-term Liabilities
|
|
|
|
|
|
|
|
|
Long-term loan
|
|
|
0
|
|
|
|
3,549
|
|
Convertible notes payable
|
|
|
7,268,851
|
|
|
|
8,431,912
|
|
Total Liabilities
|
|
$
|
59,277,343
|
|
|
$
|
58,153,577
|
|
|
|
|
|
|
|
|
|
|
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,
38,551,265 shares issued and outstanding as of December 31, 2017 and June 30, 2017, respectively
|
|
|
38,551
|
|
|
|
38,551
|
|
Additional paid-in capital
|
|
|
128,915,651
|
|
|
|
128,915,651
|
|
Statutory reserve
|
|
|
30,104,103
|
|
|
|
28,962,302
|
|
Retained earnings
|
|
|
256,518,126
|
|
|
|
244,738,993
|
|
Accumulated other comprehensive income
|
|
|
3,369,512
|
|
|
|
(5,127,444
|
)
|
Total Stockholders' Equity
|
|
|
418,945,944
|
|
|
|
397,528,052
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
478,223,287
|
|
|
$
|
455,681,629
|
|
The accompanying notes are an integral
part of these unaudited consolidated financial statements.
CHINA GREEN AGRICULTURE INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinong
|
|
$
|
26,211,280
|
|
|
$
|
26,825,674
|
|
|
$
|
52,985,040
|
|
|
$
|
58,253,394
|
|
Gufeng
|
|
|
24,447,721
|
|
|
|
21,066,559
|
|
|
|
42,669,787
|
|
|
|
36,876,073
|
|
Yuxing
|
|
|
1,953,748
|
|
|
|
2,454,314
|
|
|
|
3,746,391
|
|
|
|
3,809,725
|
|
VIEs - others
|
|
|
11,350,893
|
|
|
|
8,398,466
|
|
|
|
27,330,927
|
|
|
|
21,690,443
|
|
Net sales
|
|
|
63,963,642
|
|
|
|
58,745,013
|
|
|
|
126,732,145
|
|
|
|
120,629,635
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinong
|
|
|
13,265,827
|
|
|
|
12,332,360
|
|
|
|
26,378,583
|
|
|
|
25,601,590
|
|
Gufeng
|
|
|
21,160,024
|
|
|
|
18,138,659
|
|
|
|
37,146,453
|
|
|
|
31,523,736
|
|
Yuxing
|
|
|
1,536,238
|
|
|
|
1,934,046
|
|
|
|
2,928,791
|
|
|
|
2,979,654
|
|
VIEs - others
|
|
|
9,452,987
|
|
|
|
7,159,707
|
|
|
|
22,661,751
|
|
|
|
17,913,386
|
|
Cost of goods sold
|
|
|
45,415,076
|
|
|
|
39,564,772
|
|
|
|
89,115,578
|
|
|
|
78,018,366
|
|
Gross profit
|
|
|
18,548,566
|
|
|
|
19,180,241
|
|
|
|
37,616,567
|
|
|
|
42,611,269
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
7,682,008
|
|
|
|
3,965,382
|
|
|
|
12,861,012
|
|
|
|
8,977,450
|
|
Selling expenses - amortization of deferred asset
|
|
|
0
|
|
|
|
3,475,438
|
|
|
|
|
|
|
|
9,584,220
|
|
General and administrative expenses
|
|
|
937,359
|
|
|
|
4,633,905
|
|
|
|
7,909,981
|
|
|
|
7,865,392
|
|
Total operating expenses
|
|
|
8,619,367
|
|
|
|
12,074,725
|
|
|
|
20,770,993
|
|
|
|
26,427,062
|
|
Income from operations
|
|
|
9,929,199
|
|
|
|
7,105,516
|
|
|
|
16,845,574
|
|
|
|
16,184,207
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
(276,850
|
)
|
|
|
(114,115
|
)
|
|
|
(284,081
|
)
|
|
|
(155,172
|
)
|
Discontinued VIE operation - Zhenbai
|
|
|
(330,966
|
)
|
|
|
0
|
|
|
|
(330,966
|
)
|
|
|
0
|
|
Interest income
|
|
|
130,248
|
|
|
|
76,494
|
|
|
|
218,162
|
|
|
|
153,116
|
|
Interest expense
|
|
|
(94,587
|
)
|
|
|
(93,246
|
)
|
|
|
(274,162
|
)
|
|
|
(231,791
|
)
|
Total other income (expense)
|
|
|
(572,155
|
)
|
|
|
(130,867
|
)
|
|
|
(671,047
|
)
|
|
|
(233,847
|
)
|
Income before income taxes
|
|
|
9,357,045
|
|
|
|
6,974,649
|
|
|
|
16,174,528
|
|
|
|
15,950,360
|
|
Provision for income taxes
|
|
|
1,530,938
|
|
|
|
1,468,638
|
|
|
|
3,253,593
|
|
|
|
3,092,769
|
|
Net income
|
|
|
7,826,107
|
|
|
|
5,506,011
|
|
|
|
12,920,935
|
|
|
|
12,857,591
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
8,256,738
|
|
|
|
(1,205,884
|
)
|
|
|
8,496,956
|
|
|
|
(16,447,063
|
)
|
Comprehensive income (loss)
|
|
$
|
16,082,845
|
|
|
$
|
4,300,127
|
|
|
$
|
21,417,891
|
|
|
$
|
(3,589,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
38,551,264
|
|
|
|
37,658,062
|
|
|
|
38,551,264
|
|
|
|
37,653,333
|
|
Basic net earnings per share
|
|
$
|
0.20
|
|
|
$
|
0.15
|
|
|
$
|
0.34
|
|
|
$
|
0.34
|
|
Diluted weighted average shares outstanding
|
|
|
38,551,264
|
|
|
|
37,658,062
|
|
|
|
38,551,264
|
|
|
|
37,653,333
|
|
Diluted net earnings per share
|
|
|
0.20
|
|
|
|
0.15
|
|
|
|
0.34
|
|
|
|
0.34
|
|
The accompanying notes are an integral
part of these unaudited consolidated financial statements.
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Six Months Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
|
$
|
12,920,935
|
|
|
$
|
12,857,591
|
|
Adjustments to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
Issuance of common stock and stock options for compensation
|
|
|
-
|
|
|
|
1,282,949
|
|
Depreciation and amortization
|
|
|
3,434,389
|
|
|
|
12,115,909
|
|
Gain (Loss) on disposal of property, plant and equipment
|
|
|
15,318
|
|
|
|
109,304
|
|
Amortization of debt discount
|
|
|
377,450
|
|
|
|
155,335
|
|
Change in fair value of derivative liability
|
|
|
(114,233
|
)
|
|
|
(75,918
|
)
|
Changes in operating assets
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
19,546,354
|
|
|
|
(13,023,491
|
)
|
Amount due from related parties
|
|
|
1,436,875
|
|
|
|
(395,616
|
)
|
Other current assets
|
|
|
1,019,062
|
|
|
|
(467,184
|
)
|
Inventories
|
|
|
(25,678,033
|
)
|
|
|
19,962,979
|
|
Advances to suppliers
|
|
|
3,625,303
|
|
|
|
(3,091,976
|
)
|
Other assets
|
|
|
974,189
|
|
|
|
121,719
|
|
Changes in operating liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
2,694,536
|
|
|
|
564,376
|
|
Customer deposits
|
|
|
(226,314
|
)
|
|
|
(2,875,222
|
)
|
Tax payables
|
|
|
(554,210
|
)
|
|
|
(2,146,115
|
)
|
Accrued expenses and other payables
|
|
|
921,456
|
|
|
|
(7,029,002
|
)
|
Interest payable
|
|
|
142,283
|
|
|
|
113,352
|
|
Net cash provided by operating activities
|
|
|
20,535,360
|
|
|
|
18,178,990
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of plant, property, and equipment
|
|
|
(11,758
|
)
|
|
|
(74,353
|
)
|
Change in construction in process
|
|
|
(11,328
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(23,086
|
)
|
|
|
(74,353
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from loans
|
|
|
153,300
|
|
|
|
-
|
|
Repayment of loans
|
|
|
(1,678,603
|
)
|
|
|
-
|
|
Advance from related party
|
|
|
195,013
|
|
|
|
300,000
|
|
Net cash provided by financing activities
|
|
|
(1,330,290
|
)
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate change on cash and cash equivalents
|
|
|
3,184,627
|
|
|
|
(4,726,271
|
)
|
Net increase in cash and cash equivalents
|
|
|
22,366,611
|
|
|
|
13,678,366
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning balance
|
|
|
123,050,548
|
|
|
|
102,896,486
|
|
Cash and cash equivalents, ending balance
|
|
$
|
145,417,158
|
|
|
$
|
116,574,852
|
|
|
|
|
|
|
|
|
|
|
Supplement disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Interest expense paid
|
|
$
|
206,368
|
|
|
$
|
231,791
|
|
Income taxes paid
|
|
$
|
3,807,803
|
|
|
$
|
7,047,713
|
|
The accompanying notes are an integral
part of these unaudited 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 December 31, 2017 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 by one natural person, who is not affiliated with 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 People’s 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 December 31, 2017 and June 30, 2017
were $145,417,158 and $123,050,548, respectively. The Company had $145,409,838 and $122,907,629 in cash in banks in China, and
also had $7,320 and $142,919 in cash in two banks in the United States as of December 31, 2017 and June 30, 2017, 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 December 31, 2017, and June 30, 2017, the Company had accounts receivable of
$122,117,190 and $141,665,179, net of allowance for doubtful accounts of $13,949,452 and $9,457,423, 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.
Deferred
assets
Deferred
assets represent amounts that the distributors owed to the Company in their marketing efforts and developing standard stores
to expand the Company’s products’ competitiveness and market shares. The amount owed to the Company to assist its
distributors will be expensed over three years, which is the term as stated in the cooperation agreement, as long as the
distributors are actively selling the Company’s products. For the six months ended December 31, 2017 and 2016, the
Company amortized $864,070 and $9,894,637 respectively, of the deferred assets. If a distributor breaches, defaults, or
terminates the agreement with the Company within the three-year period, the outstanding unamortized portion of the amount
owed will become payable to the Company immediately.
The
deferred assets consist of items inside the distributors’ stores such as furniture, racks, cabinets, and display units,
and items outside or attached to the distributors’ stores such as signage and billboards. These types of assets would be
capitalized as fixed assets if the Company actually owned the stores or utilized the assets for its own operations. These assets
would also be capitalized as leasehold improvements if the Company leased these stores from the distributors. Therefore, the Company
believes that under U.S. generally accepted accounting principles, these types of asset purchases are properly capitalized. In
addition, the Company believes that these assets are properly classified as deferred assets because if a distributor breaches,
defaults, or terminates the agreement with the Company within a three-year period, a proportionate amount expended by the Company
is to be repaid by the distributor.
The
assets inside the distributors’ stores are custom made to fit the layout of each individual store and the signage and billboards
are also custom designed to fit the specific location. The assets were purchased by the Company directly from the manufacturers
and installed in the distributors’ stores. The Company wants to maintain control over the quality of the items being purchased
as well as making them uniform among all the distributor locations.
Intangible
Assets
The
Company records intangible assets acquired individually or as part of a group at fair value. Intangible assets with definitive
lives are amortized over the useful life of the intangible asset, which is the period over which the asset is expected to contribute
directly or indirectly to the entity’s future cash flows. The Company evaluates intangible assets for impairment at least
annually and more often whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Whenever
any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair
value.
Customer
deposits
Payments
received before all of the relevant criteria for revenue recognition are satisfied are recorded as customer deposits. When all
revenue recognition criteria are met, the customer deposits are recognized as revenue. As of December 31, 2017, and June 30, 2017,
the Company had customer deposits of $6,935,326 and $7,046,570, 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
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net Income for Basic Earnings Per Share
|
|
$
|
7,826,107
|
|
|
$
|
5,506,011
|
|
Basic Weighted Average Number of Shares
|
|
|
38,551,264
|
|
|
|
37,658,062
|
|
Net Income Per Share – Basic
|
|
$
|
0.20
|
|
|
$
|
0.15
|
|
Net Income for Diluted Earnings Per Share
|
|
$
|
7,826,107
|
|
|
$
|
5,506,011
|
|
Diluted Weighted Average Number of Shares
|
|
|
38,551,264
|
|
|
|
37,658,062
|
|
Net Income Per Share – Diluted
|
|
$
|
0.20
|
|
|
$
|
0.15
|
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net Income for Basic Earnings Per Share
|
|
$
|
12,920,935
|
|
|
$
|
12,857,591
|
|
Basic Weighted Average Number of Shares
|
|
|
38,551,264
|
|
|
|
37,653,333
|
|
Net Income Per Share – Basic
|
|
$
|
0.34
|
|
|
$
|
0.34
|
|
Net Income for Diluted Earnings Per Share
|
|
$
|
12,920,935
|
|
|
$
|
12,857,591
|
|
Diluted Weighted Average Number of Shares
|
|
|
38,551,264
|
|
|
|
37,653,333
|
|
Net Income Per Share – Diluted
|
|
$
|
0.34
|
|
|
$
|
0.34
|
|
Recent
accounting pronouncements
In
November 2015, the FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes
. The new guidance requires
that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance
sheet. This update is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods.
The Company does not anticipate the adoption of this ASU will have a significant impact on its consolidated financial position,
results of operations, or cash flows.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. The guidance in ASU No. 2016-02 supersedes the lease
recognition requirements in ASC Topic 840,
Leases (FAS 13)
. ASU 2016-02 requires an entity to recognize assets and liabilities
arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures.
ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently
evaluating the effect this standard will have on its consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share Based Payment Accounting
, to simplify several aspects
of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either
equity or liabilities, and classification on the statement of cash flows. The guidance will be effective for annual periods beginning
after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted, including adoption in an
interim period. The Company is currently evaluating the impact of the adoption of this newly issued guidance to its consolidated
financial statements.
In
April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations
and Licensing” (“ASU 2016-10”), which clarifies the following two aspects of Topic 606: (a) identifying performance
obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in
Topic 606. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within
those annual periods, which will be our interim period beginning January 1, 2018. Early adoption is permitted only as of annual
reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company
is currently evaluating the impact of adopting this standard on its consolidated financial statements.
In
May 2016, the FASB issued ASU 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission
of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-06 Pursuant to Staff Announcements at the March 3, 2016
EITF Meeting” (“ASU 2016-11”), which clarifies revenue and expense recognition for freight costs, accounting
for shipping and handling fees and costs, and accounting for consideration given by a vendor to a customer. The new guidance is
effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, which will
be our interim period beginning January 1, 2018. Early adoption is permitted only as of annual reporting periods beginning after
December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact
of adopting this standard on its consolidated financial statements.
In
May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients” (“ASU 2016-12”), which amends the guidance in the new revenue standard on collectability,
noncash consideration, presentation of sales tax, and transition. The amendments are intended to address implementation issues
and provide additional practical expedients to reduce the cost and complexity of applying the new revenue standard. The new guidance
is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, which
will be our interim period beginning January 1, 2018. Early adoption is permitted only as of annual reporting periods beginning
after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating
the impact of adopting this standard on its consolidated financial statements.
In
August 2016, the FASB issued ASU 2016-15, regarding ASC Topic 230 “Statement of Cash Flows.” This update addresses
eight specific cash flow issues with the objective of reducing the existing diversity in practice. The new guidance is effective
for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early
adoption is permitted. The Company does not expect the adoption of this standard to have a significant effect on our consolidated
financial statements.
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 is 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 January 1, 2018. The Company is currently evaluating this guidance and the impact
it will have on the Consolidated Financial Statements and disclosures.
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.
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 is 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 was not believed by management to have a material impact
on the Company’s present or future financial statements.
NOTE
3 - INVENTORIES
Inventories
consisted of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
Raw materials
|
|
$
|
29,590,560
|
|
|
$
|
39,397,711
|
|
Supplies and packing materials
|
|
$
|
733,214
|
|
|
$
|
540,151
|
|
Work in progress
|
|
$
|
436,445
|
|
|
$
|
421,496
|
|
Finished goods
|
|
$
|
74,853,366
|
|
|
$
|
37,655,533
|
|
Total
|
|
$
|
105,613,585
|
|
|
$
|
78,013,891
|
|
NOTE
4 - PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consisted of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
Building and improvements
|
|
$
|
41,038,672
|
|
|
$
|
40,113,868
|
|
Auto
|
|
|
3,528,765
|
|
|
|
3,473,352
|
|
Machinery and equipment
|
|
|
19,045,164
|
|
|
|
18,760,880
|
|
Agriculture assets
|
|
|
780,234
|
|
|
|
764,660
|
|
Total property, plant and equipment
|
|
|
64,392,835
|
|
|
|
63,111,079
|
|
Less: accumulated depreciation
|
|
|
(31,165,087
|
)
|
|
|
(28,919,747
|
)
|
Total
|
|
$
|
33,227,748
|
|
|
$
|
34,191,332
|
|
NOTE
5 - INTANGIBLE ASSETS
Intangible
assets consisted of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
Land use rights, net
|
|
$
|
10,200,036
|
|
|
$
|
10,121,591
|
|
Technology patent, net
|
|
|
0
|
|
|
|
-
|
|
Customer relationships, net
|
|
|
4,311,416
|
|
|
|
5,578,641
|
|
Non-compete agreement
|
|
|
772,229
|
|
|
|
1,092,584
|
|
Trademarks
|
|
|
6,243,855
|
|
|
|
6,119,059
|
|
Total
|
|
$
|
21,527,536
|
|
|
$
|
22,911,876
|
|
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 $11,219,244). 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 $160,344).
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 $1,116,806). The intangible asset is being amortized over
the grant period of 50 years.
The
Land Use Rights consisted of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
Land use rights
|
|
$
|
12,496,394
|
|
|
|
12,246,630
|
|
Less: accumulated amortization
|
|
|
(2,296,358
|
)
|
|
|
(2,125,039
|
)
|
Total land use rights, net
|
|
$
|
10,200,036
|
|
|
|
10,121,591
|
|
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 $900,648) 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 $1,410,360) and is amortized over the remaining useful life of six years using the
straight-line method. As of June 30, 2016, this technology patent is fully amortized.
The
technology know-how consisted of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
Technology know-how
|
|
$
|
2,311,008
|
|
|
$
|
2,264,818
|
|
Less: accumulated amortization
|
|
|
(2,311,008
|
)
|
|
|
(2,264,818
|
)
|
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 $9,964,500) 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 $ 2,525,185) and is amortized over the remaining useful life of seven to ten years.
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
Customer relationships
|
|
$
|
12,222,549
|
|
|
$
|
12,757,628
|
|
Less: accumulated amortization
|
|
|
(7,911,133
|
)
|
|
|
(7,178,987
|
)
|
Total customer relationships, net
|
|
$
|
4,311,416
|
|
|
$
|
5,578,641
|
|
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 $202,356) 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 $ 942,900) and is amortized over the remaining useful life
of five years using the straight-line method.
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
Non-compete agreement
|
|
$
|
1,251,454
|
|
|
$
|
1,515,218
|
|
Less: accumulated amortization
|
|
|
(479,225
|
)
|
|
|
(422,634
|
)
|
Total non-compete agreement, net
|
|
$
|
772,229
|
|
|
$
|
1,092,584
|
|
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 $6,239,310) and is subject to an annual impairment test.
AMORTIZATION
EXPENSE
Estimated
amortization expenses of intangible assets for the next five twelve months periods ended December 31, are as follows:
Twelve Months Ended on December 31,
|
|
Expense ($)
|
|
2018
|
|
|
1,932,908
|
|
2019
|
|
|
1,932,908
|
|
2020
|
|
|
1,371,461
|
|
2021
|
|
|
628,535
|
|
2022
|
|
|
588,448
|
|
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 December 31, 2017, the
balance of other non-current assets was $17,201,354, consisting of 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 December 31, 2017.
Estimated
amortization expenses of the lease advance payments for the next four twelve-month periods ended December 31 and thereafter are
as follows:
Twelve months ending December 31,
|
|
|
|
2018
|
|
$
|
2,058,053
|
|
2019
|
|
$
|
2,058,053
|
|
2020
|
|
$
|
2,058,053
|
|
2021
|
|
$
|
2,058,053
|
|
2022 and thereafter
|
|
$
|
11,174,456
|
|
NOTE
7 - ACCRUED EXPENSES AND OTHER PAYABLES
Accrued
expenses and other payables consisted of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
Payroll payable
|
|
$
|
101,302
|
|
|
$
|
103,412
|
|
Welfare payable
|
|
|
157,384
|
|
|
|
154,239
|
|
Accrued expenses
|
|
|
5,101,131
|
|
|
|
4,863,988
|
|
Other payables
|
|
|
4,652,225
|
|
|
|
3,887,676
|
|
Other levy payable
|
|
|
128,567
|
|
|
|
125,998
|
|
Total
|
|
$
|
10,140,609
|
|
|
$
|
9,135,313
|
|
NOTE
8 - RELATED PARTIES TRANSACTIONS
As
of December 31, 2017, and June 30, 2017, the amount due to related parties was $3,288,189 and $3,071,102, respectively. As
of December 31, 2017, and June 30, 2017, $1,073,100 and $1,051,652, 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.
On June 29, 2016,
Jinong signed an office lease with Kingtone Information Technology Co., Ltd. (“Kingtone
Information”), of which Mr. Zhuoyu Li, 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 $3,686)
NOTE
9- LOAN PAYABLES
As of December 31, 2017,
the short-term loan payables consisted of four loans which mature on dates ranging from October 25, 2017 through July 30, 2018
with interest rates ranging from 5.22% to 6.31%. Loan No.4 in the table below is guaranteed with parent company’s credit
from Jinong: Loans No. 1, 2 and 3 below are collateralized by Tianjuyuan’s land use right and building ownership right.
No.
|
|
Payee
|
|
Loan
period per agreement
|
|
Interest
Rate
|
|
|
December
31,
2017
|
|
1
|
|
Postal
Saving Bank of China - Pinggu Branch
|
|
March
24, 2017-March 5, 2018
|
|
|
6.31
|
%
|
|
$
|
4,599,000
|
|
2
|
|
Bank
of Beijing - Pinggu Branch
|
|
June
9, 2017-June 8, 2018
|
|
|
5.22
|
%
|
|
|
1,456,350
|
|
3
|
|
Bank
of Beijing-Pinggu Branch
|
|
June
9, 2017-June 8, 2018
|
|
|
5.22
|
%
|
|
|
76,650
|
|
4
|
|
Beijing
Agriculture Investment -small loan
|
|
August
1, 2017-July 30, 2018
|
|
|
5.50
|
%
|
|
|
153,300
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
6,285,300
|
|
As of June 30, 2017, the short-term loan
payables consisted of four loans which mature on dates ranging from July 28, 2017 through June 8, 2018 with interest rates ranging
from 5.22% to 6.31%. Loans No. 2 to 3 in the table below are guaranteed with parent company’s credit from Jinong; Loans
No. 1 and 2 below are collateralized by Tianjuyan’s land use right and building ownership right.
No.
|
|
Payee
|
|
Loan
period per agreement
|
|
Interest
Rate
|
|
|
June
30,
2017
|
|
1
|
|
Postal
Saving Bank of China - Pinggu Branch
|
|
March
24, 2017-March 5, 2018
|
|
|
6.31
|
%
|
|
|
4,507,080
|
|
2
|
|
Bank
of Beijing - Pinggu Branch
|
|
June
9, 2017-June 8, 2018
|
|
|
5.22
|
%
|
|
|
1,502,360
|
|
3
|
|
Bank
of Beijing - Pinggu Branch
|
|
June
28, 2016-July 28, 2017
|
|
|
5.22
|
%
|
|
$
|
1,502,360
|
|
4
|
|
Bank
of China-Anhui
|
|
November
25, 2016-October 25, 2017
|
|
|
LPR
|
*
|
|
$
|
166,311
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
7,678,111
|
|
*LPR
stands for Loan Prime Rate. The LPR rate is a 1-year lending rate used by commercial banks to their top grade borrowers whose
credit are comparable to the interbank borrowing creditworthiness in China. The LPR rate is a variable rate and is published along
with Shanghai Interbank Offer Rates daily.
The
interest expense from short-term loans was $274,162 and $231,791 for the six months ended December 31, 2017 and 2016, respectively.
NOTE
10 - CONVERTIBLE NOTES PAYABLE
Relating
to the acquisition of the sales VIE Companies, the Company subsidiary, Jinong, issued convertible notes payable to the shareholders
of sales VIE Companies twice, in the aggregate notional amount of RMB 63,000,000 ($9,462,600) 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, Shenqiu, Xindeguo, Xinyulei, Jinyangguang
|
|
June
30, 2016
|
|
June
30, 2019
|
|
|
3
|
%
|
|
$
|
5.00
|
|
|
|
51,000,000
|
|
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 stock Jinong issues in the future in terms of interest 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 maturity 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 ($1,839,600) 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 outstanding was RMB 47,415,859 (or $7,268,851) and RMB
56,124,446 ($8,431,912) as of December 31, 2017 and June 30, 2017, 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 December 31,
2017, the accumulated amortization of this discount into accretion expenses was $480,774.
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, as a result of the
expiration of its tax exemption on December 31, 2007. Accordingly, it made provision for income taxes for the six months ended
December 31, 2017 and 2016 of $1,845,926 and $1,879,465, 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 $1,106,590 and $792,503 for the six months ended
December 31, 2017 and 2016, respectively.
Value-Added
Tax
All
of the Company’s fertilizer products that are produced and sold in the PRC were subject to a Chinese Value-Added Tax (VAT)
of 13% of the gross sales price. On April 29, 2008, the PRC State of Administration of Taxation (SAT) released Notice #56, “
Exemption
of VAT for Organic Fertilizer Products
”, which allows certain fertilizer products to be exempt from VAT beginning June
1, 2008. The Company submitted the application for exemption in May 2009, which was granted effective September 1, 2009, continuing
through December 31, 2015. On August 10, 2015 and August 28, 2015, the SAT released Notice #90. “
Reinstatement of VAT
for Fertilizer Products
”, and Notice #97, “
Supplementary Reinstatement of VAT for Fertilizer Products
”,
which restore the VAT of 13% of the gross sales price on certain fertilizer products includes non-organic fertilizer products
starting from September 1, 2015, but granted taxpayers a reduced rate of 3% from September 1, 2015 through June 30, 2016.
Income
Taxes and Related Payables
Taxes
payable consisted of the following:
|
|
December 31,
|
|
June 30,
|
|
|
2017
|
|
2017
|
VAT provision
|
|
$
|
(628,399
|
)
|
|
$
|
(575,872
|
)
|
Income tax payable
|
|
|
2,141,669
|
|
|
|
2,229,735
|
|
Other levies
|
|
|
667,724
|
|
|
|
1,036,544
|
|
Total
|
|
$
|
2,180,994
|
|
|
$
|
2,690,407
|
|
The
provision for income taxes consists of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
Current tax
|
|
|
3,253,593
|
|
|
$
|
7,371,967
|
|
Deferred tax
|
|
$
|
0
|
|
|
|
0
|
|
Total
|
|
|
3,253,593
|
|
|
$
|
7,371,967
|
|
Tax
Rate Reconciliation
Our
effective tax rates were approximately 20.1% and 19.4% for six months ended December 31, 2017 and 2016, respectively. Substantially
all of the Company’s income before income taxes and related tax expense are from PRC sources. Actual income tax benefit
reported in the consolidated statements of income and comprehensive income differ from the amounts computed by applying the US
statutory income tax rate of 34% to income before income taxes for the six months ended December 31, 2017 and 2016 for the following
reasons:
Tax
Rate Reconciliation
December
31, 2017
|
|
China
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
15% - 25%
|
|
|
34%
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss)
|
|
$
|
16,805,296
|
|
|
|
|
|
|
$
|
(630,768
|
)
|
|
|
|
|
|
$
|
16,174,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax expense (benefit)
|
|
|
4,201,324
|
|
|
|
0.250
|
|
|
|
(214,461
|
)
|
|
|
34
|
%
|
|
|
3,986,863
|
|
|
|
|
|
High-tech income benefits on Jinong
|
|
|
(1,230,618
|
)
|
|
|
-0.073
|
|
|
|
|
|
|
|
|
|
|
|
(1,230,618
|
)
|
|
|
|
|
Losses from subsidiaries in which no benefit is recognized
|
|
|
282,887
|
|
|
|
0.017
|
|
|
|
|
|
|
|
|
|
|
|
282,887
|
|
|
|
|
|
Change in valuation allowance on deferred tax asset from US tax benefit
|
|
|
0
|
|
|
|
|
|
|
|
214,461
|
|
|
|
-34
|
%
|
|
|
214,461
|
|
|
|
|
|
Actual tax expense
|
|
$
|
3,253,593
|
|
|
|
19.4
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
3,253,593
|
|
|
|
20.1
|
%
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
15% - 25%
|
|
|
34%
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss)
|
|
$
|
17,806,630
|
|
|
|
|
|
|
|
(1,856,270
|
)
|
|
|
|
|
|
$
|
15,950,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax expense (benefit)
|
|
|
4,451,658
|
|
|
|
25.0
|
%
|
|
|
(631,132
|
)
|
|
|
34.0
|
%
|
|
|
3,820,526
|
|
|
|
|
|
High-tech income benefits on Jinong
|
|
|
(1,139,344
|
)
|
|
|
(6
|
)%
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,139,344
|
)
|
|
|
|
|
Losses from subsidiaries in which no benefit is recognized
|
|
|
(219,544
|
)
|
|
|
(1
|
)%
|
|
|
-
|
|
|
|
-
|
|
|
|
(219,544
|
)
|
|
|
|
|
Change in valuation allowance
on deferred tax asset from US tax benefit
|
|
|
-
|
|
|
|
|
|
|
|
631,132
|
|
|
|
(34.0
|
)%
|
|
|
631,132
|
|
|
|
|
|
Actual tax expense
|
|
$
|
3,092,769
|
|
|
|
17
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
3,092,769
|
|
|
|
19.4
|
%
|
NOTE
12 - STOCKHOLDERS’ EQUITY
Common
Stock
On
December 30, 2016, the Company granted an aggregate of 870,000 shares of restricted stock under the 2009 Plan to certain key employees.
The stock grants vest immediately. The value of the restricted stock awards was $1,044,000 and is based on the fair value of the
Company’s common stock on the grant date.
There was no issuance share of common stock during the three and six months ended December 31, 2017.
Preferred
Stock
Under
the Company’s Articles of Incorporation, the Board has the authority, without further action by stockholders, to designate
up to 20,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges, qualifications
and restrictions granted to or imposed upon the preferred stock, including dividend rights, conversion rights, voting rights,
rights and terms of redemption, liquidation preference and sinking fund terms, any or all of which may be greater than the rights
of the common stock. If the Company sells preferred stock under its registration statement on Form S-3, it will fix the rights,
preferences, privileges, qualifications and restrictions of the preferred stock of each series in the certificate of designation
relating to that series and will file the certificate of designation that describes the terms of the series of preferred stock
the Company offers before the issuance of the related series of preferred stock.
As
of December 31, 2017, 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
of the Company's revenue-generating operations are conducted in the PRC. Accordingly, the Company's business, financial condition
and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state
of the PRC's economy.
The
Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies
in North America and Western Europe. These include risks associated with, among other things, the political, economic and legal
environment and foreign currency exchange. The Company’s results may be adversely affected by, among other things, changes
in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation.
Vendor
and Customer Concentration
None
of the vendors accounted over 10% of the Company’s purchase of raw materials and supplies for the six months ended December
31, 2017.
There were two vendors from which the
Company purchased 20.1% and 14.6% of its raw materials for the six months ended December 31, 2016. Total purchase from these two
vendors amounted to $10,100,403 for the six months ended December 31, 2016.
None
of the customers accounted over 10% of the Company’s sales for the six months ended December 31, 2017 and 2016.
NOTE
14 - SEGMENT REPORTING
As
of December 31, 2017, 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
December 31,
|
|
|
Six Months Ended
December 31,
|
|
Revenues from unaffiliated customers:
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Jinong
|
|
$
|
26,211,280
|
|
|
$
|
26,825,674
|
|
|
$
|
52,985,040
|
|
|
$
|
58,253,394
|
|
Gufeng
|
|
|
24,447,721
|
|
|
|
21,066,559
|
|
|
|
42,669,787
|
|
|
|
36,876,073
|
|
Yuxing
|
|
|
1,953,748
|
|
|
|
2,454,314
|
|
|
|
3,746,391
|
|
|
|
3,809,725
|
|
Sales VIEs
|
|
|
11,350,893
|
|
|
|
8,398,466
|
|
|
|
27,330,927
|
|
|
|
21,690,443
|
|
Consolidated
|
|
$
|
63,963,642
|
|
|
$
|
58,745,013
|
|
|
$
|
126,732,145
|
|
|
$
|
120,629,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinong
|
|
$
|
5,577,154
|
|
|
$
|
5,740,784
|
|
|
$
|
12,343,229
|
|
|
$
|
12,120,004
|
|
Gufeng
|
|
|
2,549,525
|
|
|
|
1,906,816
|
|
|
|
4,655,738
|
|
|
|
2,991,899
|
|
Yuxing
|
|
|
222,275
|
|
|
|
330,780
|
|
|
|
397,748
|
|
|
|
487,810
|
|
Sales VIEs
|
|
|
2,012,999
|
|
|
|
637,284
|
|
|
|
79,630
|
|
|
|
2,440,764
|
|
Reconciling item (1)
|
|
|
(2
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Reconciling item (2)
|
|
|
(432,753
|
)
|
|
|
(1,510,148
|
)
|
|
|
(630,772
|
)
|
|
|
(1,856,270
|
)
|
Consolidated
|
|
$
|
9,929,199
|
|
|
$
|
7,105,516
|
|
|
$
|
16,845,574
|
|
|
$
|
16,184,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinong
|
|
$
|
4,719,159
|
|
|
$
|
4,849,485
|
|
|
$
|
10,460,249
|
|
|
$
|
10,195,773
|
|
Gufeng
|
|
|
1,727,764
|
|
|
|
1,268,439
|
|
|
|
3,216,831
|
|
|
|
1,984,925
|
|
Yuxing
|
|
|
222,869
|
|
|
|
330,509
|
|
|
|
398,491
|
|
|
|
487,589
|
|
Sales VIEs
|
|
|
1,914,125
|
|
|
|
567,726
|
|
|
|
(198,809
|
)
|
|
|
2,045,574
|
|
Reconciling item (1)
|
|
|
2
|
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
Reconciling item (2)
|
|
|
(432,753
|
)
|
|
|
(1,510,148
|
)
|
|
|
(630,772
|
)
|
|
|
(1,856,270
|
)
|
Reconciling item (3)
|
|
|
(325,058
|
)
|
|
|
0
|
|
|
|
(325,058
|
)
|
|
|
|
|
Consolidated
|
|
$
|
7,826,108
|
|
|
$
|
5,506,011
|
|
|
$
|
12,920,936
|
|
|
$
|
12,857,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinong
|
|
$
|
422,383
|
|
|
$
|
3,675,142
|
|
|
$
|
1,276,126
|
|
|
$
|
9,988,231
|
|
Gufeng
|
|
|
552,299
|
|
|
|
631,041
|
|
|
|
1,100,057
|
|
|
|
1,258,350
|
|
Yuxing
|
|
|
315,282
|
|
|
|
306,210
|
|
|
|
627,801
|
|
|
|
620,126
|
|
Sales VIEs
|
|
|
210,482
|
|
|
|
123,070
|
|
|
|
430,405
|
|
|
|
249,202
|
|
Consolidated
|
|
$
|
1,500,446
|
|
|
$
|
4,735,463
|
|
|
$
|
3,434,389
|
|
|
$
|
12,115,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinong
|
|
|
71,447
|
|
|
|
55,979
|
|
|
|
142,283
|
|
|
|
113,352
|
|
Gufeng
|
|
|
101,645
|
|
|
|
58,306
|
|
|
|
206,368
|
|
|
|
118,439
|
|
Yuxing
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Sales VIEs
|
|
|
(78,505
|
)
|
|
|
0
|
|
|
|
(74,489
|
)
|
|
|
0
|
|
Consolidated
|
|
$
|
94,587
|
|
|
$
|
114,285
|
|
|
$
|
274,162
|
|
|
$
|
231,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinong
|
|
$
|
808
|
|
|
$
|
571
|
|
|
$
|
4,149
|
|
|
$
|
1,793
|
|
Gufeng
|
|
|
297
|
|
|
|
556
|
|
|
|
14,165
|
|
|
|
4,999
|
|
Yuxing
|
|
|
4,773
|
|
|
|
0
|
|
|
|
4,773
|
|
|
|
548
|
|
Sales VIEs
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consolidated
|
|
$
|
5,878
|
|
|
$
|
1,127
|
|
|
$
|
23,086
|
|
|
$
|
7,340
|
|
|
|
As of
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
Identifiable assets:
|
|
|
|
|
|
|
Jinong
|
|
$
|
230,059,040
|
|
|
$
|
213,355,900
|
|
Gufeng
|
|
|
162,568,545
|
|
|
|
156,648,924
|
|
Yuxing
|
|
|
41,487,750
|
|
|
|
40,965,345
|
|
Sales VIEs
|
|
|
43,643,613
|
|
|
|
44,571,422
|
|
Reconciling item (1)
|
|
|
467,218
|
|
|
|
142,918
|
|
Reconciling item (2)
|
|
|
(2,879
|
)
|
|
|
(2,879
|
)
|
Consolidated
|
|
$
|
478,223,287
|
|
|
$
|
455,681,630
|
|
|
(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.
|
|
(3)
|
Reconciling
amounts refer to the expenses of discontinuation of VIE agreement with Zhenbai.
|
NOTE
15 - COMMITMENTS AND CONTINGENCIES
On
June 29, 2016, Jinong signed an office lease with Kingtone Information. Pursuant to the lease, Jinong rented 612 square meters
(approximately 6,588 square feet) of office space from Kingtone Information. The lease provided for a two-year term effective
as of July 1, 2016 with monthly rent of $3,525 (RMB 24,480).
In
January 2008, Jintai signed a ten-year land lease with Xi’an Jinong Hi-tech Agriculture Demonstration Zone for a monthly
rent of $749 (RMB 5,200).
In
February 2004, Tianjuyuan signed a fifty-year lease with the village committee of Dong Gao Village and Zhen Nan Zhang Dai Village
in the Beijing Ping Gu District, at a monthly rent of $426 (RMB 2,958).
Accordingly,
the Company recorded an aggregate of $30,020 and $28,198 as rent expenses for the six months ended December 31, 2017 and 2016,
respectively. Rent expenses for the next five years ended December 31, are as follows:
Years ending December 31,
|
|
|
|
2018
|
|
$
|
27,958
|
|
2019
|
|
|
5,442
|
|
2020
|
|
|
5,442
|
|
2021
|
|
|
5,442
|
|
2022
|
|
|
5,442
|
|
NOTE
16 - VARIABLE INTEREST ENTITIES
In
accordance with accounting standards regarding consolidation of variable interest entities, VIEs are generally entities that lack
sufficient equity to finance their activities without additional financial support from other parties or whose equity holders
lack adequate decision making ability. All VIEs with which a company is involved must be evaluated to determine the primary beneficiary
of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.
Green
Nevada through one of its subsidiaries, Jinong, entered into a series of agreements (the “VIE Agreements”) with Yuxing
for it to qualify as a VIE, effective June 16, 2013.
The
Company has concluded, based on the contractual arrangements, that Yuxing is a VIE and that the Company’s wholly-owned subsidiary,
Jinong, absorbs a majority of the risk of loss from the activities of Yuxing, thereby enabling the Company, through Jinong, to
receive a majority of Yuxing expected residual returns.
On
June 30, 2016 and January 1, 2017, the Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition
agreements and also into a series of contractual agreements to qualify as VIEs with the shareholders of the 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
of the economic benefits of Yuxing and the VIE Companies. The following financial statement amounts and balances of the VIEs were
included in the accompanying consolidated financial statements as of December 31, 2017 and June 30, 2016:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,347,719
|
|
|
$
|
374,587
|
|
Accounts receivable, net
|
|
|
31,545,752
|
|
|
|
30,687,859
|
|
Inventories
|
|
|
22,272,408
|
|
|
|
21,314,940
|
|
Other current assets
|
|
|
1,101,385
|
|
|
|
2,195,156
|
|
Advances to suppliers
|
|
|
1,624,932
|
|
|
|
2,380,812
|
|
Total Current Assets
|
|
|
57,892,196
|
|
|
|
56,953,354
|
|
|
|
|
|
|
|
|
|
|
Plant, Property and Equipment, Net
|
|
|
12,122,345
|
|
|
|
12,418,906
|
|
Other assets
|
|
|
230,107
|
|
|
|
225,508
|
|
Intangible Assets, Net
|
|
|
11,925,590
|
|
|
|
13,002,818
|
|
Goodwill
|
|
|
3,378,474
|
|
|
|
3,837,038
|
|
Total Assets
|
|
$
|
85,548,712
|
|
|
$
|
86,437,624
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short-term loan
|
|
$
|
-
|
|
|
$
|
166,311
|
|
Accounts payable
|
|
|
20,454,287
|
|
|
|
18,355,921
|
|
Customer deposits
|
|
|
694,119
|
|
|
|
1,375,785
|
|
Accrued expenses and other payables
|
|
|
3,328,483
|
|
|
|
3,833,868
|
|
Amount due to related parties
|
|
|
43,107,165
|
|
|
|
42,741,043
|
|
Total Current Liabilities
|
|
$
|
67,584,054
|
|
|
$
|
66,472,928
|
|
Long-term Loan
|
|
|
0
|
|
|
|
3,549
|
|
Total Liabilities
|
|
$
|
67,584,054
|
|
|
$
|
66,476,477
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
17,964,658
|
|
|
|
19,961,147
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
|
85,548,712
|
|
|
$
|
86,437,624
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
$
|
13,304,643
|
|
|
$
|
10,852,779
|
|
|
$
|
31,077,318
|
|
|
$
|
25,500,167
|
|
Expenses
|
|
|
10,989,225
|
|
|
|
9,954,543
|
|
|
|
25,590,542
|
|
|
|
22,967,005
|
|
Net income (loss)
|
|
$
|
2,136,994
|
|
|
$
|
898,236
|
|
|
$
|
199,680
|
|
|
$
|
2,533,162
|
|
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
|
|
$
|
1,175,696
|
|
Intangible assets
|
|
|
893,780
|
|
Customer Relationship
|
|
|
682,604
|
|
Non-compete Agreement
|
|
|
211,176
|
|
Goodwill
|
|
|
536,819
|
|
Total Asset
|
|
$
|
2,606,296
|
|
In
return, the purchase consideration returned to the Company from Zhenbai’s shareholders is summarized below:
Cash
|
|
$
|
459,900
|
|
Interest Payable
|
|
|
82,782
|
|
Convertible notes
|
|
|
1,719,336
|
|
Derivative liability
|
|
|
13,312
|
|
Total Payback
|
|
$
|
2,275,330
|
|
Net Loss
|
|
|
-330,966
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
consolidated financial statements and the notes to those financial statements appearing elsewhere in this report. This discussion
and analysis contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors,
such as the slow-down of the global financial markets 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, Gufeng (including Gufeng’s subsidiary Tianjuyuan), Yuxing and our
VIE. 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 75.5% and 78.9% of our total revenues for the six months
ended December 31, 2017 and 2016, respectively. The sales VIEs generated 21.6% and 18.0% of our revenues for the six months ended
December 31, 2017 and 2016, respectively. Yuxing serves as a research and development base for our fertilizer products.
Fertilizer
Products
As
of December 31, 2017, we had developed and produced a total of 720 different fertilizer products in use, of which 136 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
|
|
|
Change
|
|
|
|
December 31,
|
|
|
2016 to 2017
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
%
|
|
|
|
(metric tons)
|
|
|
|
|
|
|
|
Jinong
|
|
|
13,165
|
|
|
|
8,955
|
|
|
|
4,210
|
|
|
|
47.0
|
%
|
Gufeng
|
|
|
66,237
|
|
|
|
63,167
|
|
|
|
3,070
|
|
|
|
4.9
|
%
|
|
|
|
79,402
|
|
|
|
72,122
|
|
|
|
13,922
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(revenue per tons)
|
|
Jinong
|
|
$
|
2,107
|
|
|
$
|
2,996
|
|
Gufeng
|
|
|
364
|
|
|
|
334
|
|
|
|
Six Months Ended
|
|
|
Change
|
|
|
|
December 31,
|
|
|
2016 to 2017
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
%
|
|
|
|
(metric tons)
|
|
|
|
|
|
|
|
Jinong
|
|
|
27,690
|
|
|
|
18,635
|
|
|
|
9,055
|
|
|
|
48.6
|
%
|
Gufeng
|
|
|
129,404
|
|
|
|
108,698
|
|
|
|
20,706
|
|
|
|
19.0
|
%
|
|
|
|
157,094
|
|
|
|
127,333
|
|
|
|
29,761
|
|
|
|
|
|
|
|
Six Months Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(revenue per tons)
|
|
Jinong
|
|
$
|
2,045
|
|
|
$
|
3,126
|
|
Gufeng
|
|
|
352
|
|
|
|
339
|
|
For
the three months ended December 31, 2017, we sold approximately 79,042 metric tons of fertilizer products, as compared to 72,122
metric tons for the three months ended December 31, 2016. For the three months ended December 31, 2017, Jinong sold approximately
13,165 metric tons of fertilizer products, as compared to 8,955 metric tons for the three months ended December 31, 2016. For
the three months ended December 31, 2017, Gufeng sold approximately 66,237 metric tons of fertilizer products, as compared to
63,167 metric tons for the three months ended December 31, 2016.
For
the six months ended December 31, 2017, we sold approximately 157,094 metric tons of fertilizer products, as compared to 127,333
metric tons for the six months ended December 31, 2016. For the six months ended December 31, 2017, Jinong sold approximately
27,690 metric tons of fertilizer products, an increase of 9,055 metric tons, or 48.6%, as compared to 18,635 metric tons for the
six months ended December 31, 2016. For the six months ended December 31, 2017, Gufeng sold approximately 129,404 metric tons
of fertilizer products, an increase of 20,706 metric tons, or 19.0% as compared to 108,698 metric tons for the six months ended
December 31, 2016.
Our
sales of fertilizer products to customers in five provinces within China accounted for approximately 55.5% of our fertilizer revenue
for the three months ended December 31, 2017. Specifically, the provinces and their respective percentage contributing to our
fertilizer revenues were: Hebei (23.4%), Heilongjiang (9.0%), Inner Mongolia (7.8%), Liaoning (7.7%), and Shaanxi (7.5%).
As
of December 31, 2017, we had a total of 1,939 distributors covering 22 provinces, 4 autonomous regions and 4 central government-controlled
municipalities in China. Jinong had 1,127 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 2.03% of its fertilizer revenues for the three
months ended December 31, 2017. Gufeng had 314 distributors, including some large state-owned enterprises. Gufeng’s top
five distributors accounted for 74.6% of its revenues for the three months ended December 31, 2017.
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 80.9% of our agricultural products
revenue for the three months ended December 31, 2017 were Shaanxi (60.1%), Sichuan (10.4%), and Zhejiang (7.5%).
Recent
Developments
New
Products and distributors
During
the three months ended December 31, 2017, Jinong did not launch any new fertilizer product. However, Jinong added 6 new distributors
during this period. Gufeng did not launch any new fertilizer products, but added two new distributors during the three months
ended December 31, 2017
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.
[2]
|
|
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
|
|
(2) 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 ca 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 December 31, 2017 Compared to the Three Months ended December 31, 2016.
|
|
2017
|
|
|
2016
|
|
|
Change $
|
|
|
Change %
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinong
|
|
|
26,211,280
|
|
|
|
26,825,674
|
|
|
|
(614,394
|
)
|
|
|
-2.3
|
%
|
Gufeng
|
|
|
24,447,721
|
|
|
|
21,066,559
|
|
|
|
3,381,162
|
|
|
|
16.0
|
%
|
Yuxing
|
|
|
1,953,748
|
|
|
|
2,454,314
|
|
|
|
(500,566
|
)
|
|
|
-20.4
|
%
|
Sales VIEs
|
|
|
11,350,893
|
|
|
|
8,398,466
|
|
|
|
2,952,427
|
|
|
|
35.2
|
%
|
Net sales
|
|
|
63,963,642
|
|
|
|
58,745,013
|
|
|
|
5,218,629
|
|
|
|
8.9
|
%
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinong
|
|
|
13,265,827
|
|
|
|
12,332,360
|
|
|
|
933,467
|
|
|
|
7.6
|
%
|
Gufeng
|
|
|
21,160,024
|
|
|
|
18,138,659
|
|
|
|
3,021,365
|
|
|
|
16.7
|
%
|
Yuxing
|
|
|
1,536,238
|
|
|
|
1,934,046
|
|
|
|
(397,808
|
)
|
|
|
-20.6
|
%
|
Sales VIEs
|
|
|
9,452,987
|
|
|
|
7,159,707
|
|
|
|
2,293,280
|
|
|
|
32.0
|
%
|
Cost of goods sold
|
|
|
45,415,076
|
|
|
|
39,564,772
|
|
|
|
5,850,304
|
|
|
|
14.8
|
%
|
Gross profit
|
|
|
18,548,566
|
|
|
|
19,180,241
|
|
|
|
(631,675
|
)
|
|
|
-3.3
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
7,682,008
|
|
|
|
3,965,382
|
|
|
|
3,716,626
|
|
|
|
93.7
|
%
|
Selling expenses - amortization of deferred asset
|
|
|
0
|
|
|
|
3,475,438
|
|
|
|
(3,475,438
|
)
|
|
|
-100.0
|
%
|
General and administrative expenses
|
|
|
937,359
|
|
|
|
4,633,905
|
|
|
|
(3,696,546
|
)
|
|
|
-79.8
|
%
|
Total operating expenses
|
|
|
8,619,367
|
|
|
|
12,074,725
|
|
|
|
(3,455,358
|
)
|
|
|
-28.6
|
%
|
Income from operations
|
|
|
9,929,199
|
|
|
|
7,105,516
|
|
|
|
2,823,683
|
|
|
|
39.7
|
%
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
(669,760
|
)
|
|
|
(114,115
|
)
|
|
|
(555,645
|
)
|
|
|
486.9
|
%
|
Interest income
|
|
|
130,248
|
|
|
|
76,494
|
|
|
|
53,754
|
|
|
|
70.3
|
%
|
Interest expense
|
|
|
(94,587
|
)
|
|
|
(93,246
|
)
|
|
|
(1,341
|
)
|
|
|
1.4
|
%
|
Total other income (expense)
|
|
|
(634,099
|
)
|
|
|
(130,867
|
)
|
|
|
(503,232
|
)
|
|
|
384.5
|
%
|
Income before income taxes
|
|
|
9,295,101
|
|
|
|
6,974,649
|
|
|
|
2,320,452
|
|
|
|
33.3
|
%
|
Provision for income taxes
|
|
|
1,521,646
|
|
|
|
1,468,638
|
|
|
|
53,008
|
|
|
|
3.6
|
%
|
Net income
|
|
|
7,773,455
|
|
|
|
5,506,011
|
|
|
|
2,267,444
|
|
|
|
41.2
|
%
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
8,255,781
|
|
|
|
(1,205,884
|
)
|
|
|
9,461,665
|
|
|
|
-784.6
|
%
|
Comprehensive income (loss)
|
|
|
16,029,236
|
|
|
|
4,300,127
|
|
|
|
11,729,109
|
|
|
|
272.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
365,987
|
|
|
|
37,658,062
|
|
|
|
(37,292,075
|
)
|
|
|
-99.0
|
%
|
Basic net earnings per share
|
|
|
0.20
|
|
|
|
0.15
|
|
|
|
(0.07
|
)
|
|
|
37.0
|
%
|
Diluted weighted average shares outstanding
|
|
|
365,987
|
|
|
|
37,658,062
|
|
|
|
(37,292,075
|
)
|
|
|
-99.0
|
%
|
Diluted net earnings per share
|
|
|
0.20
|
|
|
|
0.15
|
|
|
|
(0.07
|
)
|
|
|
37.0
|
%
|
Net
Sales
Total
net sales for the three months ended December 31, 2017 were $63,963,642, an increase of $5,218,629 or 8.9%, from $58,745,013 for
the three months ended December 31, 2016. This increase was primarily due to an increase in sales VIE’s and Gufeng’s
net sales.
For
the three months ended December 31, 2017, Jinong’s net sales decreased $614,394, or 2.3%, to $26,211,280 from $26,825,674
for the three months ended December 31, 2016. This decrease was mainly attributable to the decrease in Jinong’s sales volume
in the last three months.
For
the three months ended December 31, 2017, Gufeng’s net sales were $24,447,721, an increase of $3,381,162, or 16.0% from
$21,066,559 for the three months ended December 31, 2016. This increase was mainly attributable to the increase in market demand
during the last three months.
For
the three months ended December 31, 2017, Yuxing’s net sales were $1,953,748, a decrease of $500,566 or 20.4%, from $2,454,314
for the three months ended December 31, 2016. The decrease was mainly due to the decrease in market demand during the last three
months.
For
the three months ended December 31, 2017, VIEs’ net sales were $11,350,893, an increase of $2,952,427 or 35.2%, from $8,398,466
for the three months ended December 31, 2016. The increase was mainly attributable to the increase in market demand during the
last three months.
Cost
of Goods Sold
Total
cost of goods sold for the three months ended December 31, 2017 was $45,415,076, an increase of $5,850,304, or 14.8%, from $39,564,772
for the three months ended December 31, 2016. The increase was mainly due to the increase in sales VIE’s and Gufeng’s
cost of goods sold which increased 32.0% and 16.7% respectively.
Cost
of goods sold by Jinong for the three months ended December 31, 2017 was $13,265,827, a decrease of $933,467, or 7.6%, from $12,332,360
for the three months ended December 31, 2016. The decrease in cost of goods was primarily attributable to the 2.3% decrease in
net sale during the last three months.
Cost
of goods sold by Gufeng for the three months ended December 31, 2017 was $21,160,024, an increase of $3,021,365, or 16.7%, from
$18,138,659 for the three months ended December 31, 2016. This increase was primarily attributable to the more products sold during
the last three months.
For
three months ended December 31, 2017, cost of goods sold by Yuxing was $1,536,238, a decrease of $397,808 or 20.6%, from $1,934,046
for the three months ended December 31, 2016. The decrease in cost of goods was primarily attributable to the 20.4% decrease in
net sale during the last three months.
Cost
of goods sold by VIEs for the three months ended December 31, 2017 was $9,452,987, an increase of $2,293,280, or 32.0%, from $7,159,707
for the three months ended December 31, 2016. This increase was primarily attributable to the more products sold during the last
three months.
Gross
Profit
Total
gross profit for the three months ended December 31, 2017 decreased by $631,675, or 3.3%, to $18,548,566, as compared to $19,180,241
for the three months ended December 31, 2016. Gross profit margin was 29.0% and 32.6% for the three months ended December 31,
2017 and 2016, respectively.
Gross
profit generated by Jinong decreased by $1,547,861, or 10.7%, to $12,945,453 for the three months ended December 31, 2017 from
$14,493,314 for the three months ended December 31, 2016. Gross profit margin from Jinong’s sales was approximately 49.4%
and 54.0% for the three months ended December 31, 2017 and 2016, respectively. The decrease in gross profit margin was mainly
due to higher raw material cost and higher packaging cost.
For
the three months ended December 31, 2017, gross profit generated by Gufeng was $3,287,697, an increase of $359,797, or 12.3%,
from $2,927,900 for the three months ended December 31, 2016. Gross profit margin from Gufeng’s sales was approximately
13.4% and 13.9% for the three months ended December 31, 2017 and 2016, respectively. The decrease in gross profit percentage was
mainly due to the increase in product costs and the decrease in sales prices.
For
the three months ended December 31, 2017, gross profit generated by Yuxing was $417,510, a decrease of $102,758, or 19.8% from
$520,268 for the three months ended December 31, 2016. The gross profit margin was approximately 21.4% and 21.2% for the three
months ended December 31, 2017 and 2016, respectively, which is slightly increased.
Gross
profit generated by VIEs increased by $659,147, or 53.2%, to $1,897,906 for the three months ended December 31, 2017 from $ 1,234,759
for the three months ended December 31, 2016. Gross profit margin from VIE’s sales was approximately 16.7% and 14.7% for
the three months ended December 31, 2017 and 2016, respectively.
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 $7,682,008, or 12.0%, of net sales for the three months ended December 31, 2017, as
compared to $3,965,382, or 6.8% of net sales for the three months ended December 31, 2016, an increase of $3,716,626, or 93.7%.
The
selling expenses of Jinong for the three months ended December 31, 2017 were $7,172,773 or 27.4% of Jinong’s net sales,
as compared to selling expenses of $3,637,790 or 13.6% of Jinong’s net sales for the three months ended December 31, 2016.
The increase in Jinong’s selling expenses was due to Jinong’s expanded marketing efforts. The selling expenses of
Yuxing were $10,498 or 0.5% of Yuxing’s net sales for the three months ended December 31, 2017, as compared to $11,264 or
0.5% of Yuxing’s net sales for the three months ended December 31, 2016. The selling expenses of Gufeng were $ 189,945 or
0.1% of Gufeng’s net sales for the three months ended December 31, 2017, as compared to $68,080 or 0.3% of Gufeng’s
net sales for the three months ended December 31, 2016. The selling expenses of VIEs were $319,290 or 2.4% of VIEs’ net
sales for the three months ended December 31, 2017, as compared to $248,248, or 3.0% of VIEs’ net sales for the three months
ended December 31, 2016.
Selling
Expenses – amortization of deferred assets
Our
selling expenses - amortization of our deferred assets were 0 for the three months ended December 31, 2017, as compared to $3,475,438,
or 5.9% of net sales for the three months ended December 31, 2016. This decrease was due to the fact that all deferred assets
were fully amortized and therefore no amortization was recorded on the fully amortized assets during the three months ended December
31, 2017.
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 $937,359, or 1.5% of net sales for the three months
ended December 31, 2017, as compared to $ 4,633,905, or 12.1%, of net sales for the three months ended December 31, 2016, a decrease
of $ 3,696,546, or 79.8%.
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 December 31, 2017 was $572,155, as compared
to $130,867 for the three months ended December 31, 2016, an increase in expense of $441,288, or 337.2%. The increase in total
other expense was largely resulted from the increase for bank charges and accretion expenses offset by the decrease in 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 $1,836,635
for the three months ended December 31, 2017, as compared to $891,953 for the three months ended December 31, 2016, an increase
of $ 944,682, or 105.9%.
Gufeng
is subject to a tax rate of 25%, incurred income tax expenses of $ 1,159,097 for the three months ended December 31, 2017, as
compared to $484,768 for the three months ended December 31, 2016, an increase of $ 674,329, or 139.1%, which was primarily due
to Gufeng’s increased net income.
Yuxing
has no income tax for the three months ended December 31, 2017 and 2016 as a result of being exempted from paying income tax due
to its products falling into the tax exemption list set out in the EIT.
Net
Income
Net
income for the three months ended December 31, 2017 was $7,773,455, an increase of $2,267,444, or 41.2%, compared to $5,506,011
for the three months ended December 31, 2016. Net income as a percentage of total net sales was approximately 12.2% and 9.4% for
the three months ended December 31, 2017 and 2016, respectively.
Six
Months ended December 31, 2017 Compared to the Six Months ended December 31, 2016.
|
|
2017
|
|
|
2016
|
|
|
Change $
|
|
|
Change %
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinong
|
|
|
52,985,040
|
|
|
|
58,253,394
|
|
|
|
(5,268,354
|
)
|
|
|
-9.0
|
%
|
Gufeng
|
|
|
42,669,787
|
|
|
|
36,876,073
|
|
|
|
5,793,714
|
|
|
|
15.7
|
%
|
Yuxing
|
|
|
3,746,391
|
|
|
|
3,809,725
|
|
|
|
(63,334
|
)
|
|
|
-1.7
|
%
|
Sales VIEs
|
|
|
27,330,927
|
|
|
|
21,690,443
|
|
|
|
5,640,484
|
|
|
|
26.0
|
%
|
Net sales
|
|
|
126,732,145
|
|
|
|
120,629,635
|
|
|
|
6,102,510
|
|
|
|
5.1
|
%
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinong
|
|
|
26,378,583
|
|
|
|
25,601,590
|
|
|
|
776,993
|
|
|
|
3.0
|
%
|
Gufeng
|
|
|
37,146,453
|
|
|
|
31,523,736
|
|
|
|
5,622,717
|
|
|
|
17.8
|
%
|
Yuxing
|
|
|
2,928,791
|
|
|
|
2,979,654
|
|
|
|
(50,863
|
)
|
|
|
-1.7
|
%
|
Sales VIEs
|
|
|
22,661,751
|
|
|
|
17,913,386
|
|
|
|
4,748,365
|
|
|
|
26.5
|
%
|
Cost of goods sold
|
|
|
89,115,578
|
|
|
|
78,018,366
|
|
|
|
11,097,212
|
|
|
|
14.2
|
%
|
Gross profit
|
|
|
37,616,567
|
|
|
|
42,611,269
|
|
|
|
(4,994,702
|
)
|
|
|
-11.7
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
12,861,012
|
|
|
|
8,977,450
|
|
|
|
3,883,562
|
|
|
|
43.3
|
%
|
Selling expenses - amortization of deferred asset
|
|
|
|
|
|
|
9,584,220
|
|
|
|
(9,584,220
|
)
|
|
|
-100.0
|
%
|
General and administrative expenses
|
|
|
7,909,981
|
|
|
|
7,865,392
|
|
|
|
44,589
|
|
|
|
0.6
|
%
|
Total operating expenses
|
|
|
20,770,993
|
|
|
|
26,427,062
|
|
|
|
(5,656,069
|
)
|
|
|
-21.4
|
%
|
Income from operations
|
|
|
16,845,574
|
|
|
|
16,184,207
|
|
|
|
661,367
|
|
|
|
4.1
|
%
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
(676,991
|
)
|
|
|
(155,172
|
)
|
|
|
(521,819
|
)
|
|
|
336.3
|
%
|
Interest income
|
|
|
218,162
|
|
|
|
153,116
|
|
|
|
65,046
|
|
|
|
42.5
|
%
|
Interest expense
|
|
|
(274,162
|
)
|
|
|
(231,791
|
)
|
|
|
(42,371
|
)
|
|
|
18.3
|
%
|
Total other income (expense)
|
|
|
(732,991
|
)
|
|
|
(233,847
|
)
|
|
|
(499,144
|
)
|
|
|
213.4
|
%
|
Income before income taxes
|
|
|
16,112,584
|
|
|
|
15,950,360
|
|
|
|
162,224
|
|
|
|
1.0
|
%
|
Provision for income taxes
|
|
|
3,244,301
|
|
|
|
3,092,769
|
|
|
|
151,532
|
|
|
|
4.9
|
%
|
Net income
|
|
|
12,868,283
|
|
|
|
12,857,591
|
|
|
|
10,692
|
|
|
|
0.1
|
%
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
8,495,999
|
|
|
|
(16,447,063
|
)
|
|
|
24,943,062
|
|
|
|
-151.7
|
%
|
Comprehensive income (loss)
|
|
|
21,364,282
|
|
|
|
(3,589,472
|
)
|
|
|
24,953,754
|
|
|
|
-695.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
38,551,264
|
|
|
|
37,653,333
|
|
|
|
897,931
|
|
|
|
2.4
|
%
|
Basic net earnings per share
|
|
|
0.33
|
|
|
|
0.34
|
|
|
|
(0.01
|
)
|
|
|
-2.2
|
%
|
Diluted weighted average shares outstanding
|
|
|
38,551,264
|
|
|
|
37,653,333
|
|
|
|
897,931
|
|
|
|
2.4
|
%
|
Diluted net earnings per share
|
|
|
0.33
|
|
|
|
0.34
|
|
|
|
(0.01
|
)
|
|
|
-2.2
|
%
|
Net
Sales
Total
net sales for the six months ended December 31, 2017 were $126,732,145, an increase of $6,102,510, or 5.1%, from $120,629,635
for the six months ended December 31, 2016.
This
increase was largely due to the increase of VIEs’ net sales during the six months ended December 31, 2017. The VIEs’
net sales for the six months ended December 31, 2017 were $27,330,927, an increase of $5,640,484, or 26.0% from the same period
a year ago.
For
the six months ended December 31, 2017, Jinong’s net sales decreased by $5,268,354, or 9.0%, to $52,985,040 from $58,253,394
for the six months ended December 31, 2016. This decrease was mainly attributable to the decrease in Jinong’s sales volume,
which was result of Jinong’s implementation of its new sales strategy that further focuses on producing high-margin liquid
fertilizer during the last six months.
For
the six months ended December 31, 2017, Gufeng’s net sales were $42,669,787, an increase of $5,793,714 or 15.7% from $36,876,073
for the six months ended December 31, 2016. This increase was mainly attributable to the increase in Gufeng’s sales volume,
which was result of the increase in market demand during the six months ended December 31, 2017.
For
the six months ended December 31, 2017, Yuxing’s net sales were $3,746,391, a slight decrease of $63,334 or 1.7%, from
$3,809,725 during the six months ended December 31, 2016. The decrease was mainly attributable to the decrease in market demand.
For
the six months ended December 31, 2017, VIEs’ net sales were $ 27,330,927, an increase of $ 5,640,484 or 26.0% from $ 21,690,443
for the six months ended December 31, 2016. This increase was mainly attributable to the increase in VIEs’ sales volume,
which was result of the increase in market demand during the six months ended December 31, 2017.
Cost
of Goods Sold
Total
cost of goods sold for the six months ended December 31, 2017 was $89,115,578, an increase of $11,097,212, or 14.2%, from $78,018,366
for the six months ended December 31, 2016. This increase was mainly due to the increase for Jinong and VIE’s cost of goods
sold.
Cost
of goods sold by Jinong for the six months ended December 31, 2017 was $26,378,583, an increase of $776,993, or 3.0%, from $25,601,590
for the six months ended December 31, 2016. The increase was primarily due to the higher labor cost.
Cost
of goods sold by Gufeng for the six months ended December 31, 2017 was $37,146,453 an increase of $5,622,717, or 17.8%, from $31,523,736
for the six months ended December 31, 2016. This increase was primarily attributable to the increase in net sales during the last
six months.
For
the six months ended December 31, 2017, cost of goods sold by Yuxing was $2,928,791, a slight decrease of $50,863, or 1.7%, from
$2,979,654 for the six months ended December 31, 2016. This decrease was mainly due to the decrease in Yuxing’s net sales.
Cost
of goods sold by VIEs for the six months ended December 31, 2017 was $22,661,751 an increase of $4,748,365, or 26.5%, from $ 17,913,386
for the six months ended December 31, 2016. This increase was primarily attributable to the increase in net sales during the last
six months.
Gross
Profit
Total
gross profit for the six months ended December 31, 2017 decreased by $4,994,702 to $37,616,567, as compared to $42,611,269 for
the six months ended December 31, 2016. Gross profit margin was 29.7% and 35.3% for the six months ended December 31, 2017 and
2016, respectively.
Gross
profit generated by Jinong decreased by $ 6,045,347, or 18.5%, to $26,606,457 for the six months ended December 31, 2017 from
$32,651,804 for the six months ended December 31, 2016. Gross profit margin from Jinong’s sales was approximately 50.2%
and 56.1% for the six months ended December 31, 2017 and 2016, respectively. The decrease in gross profit margin was mainly due
to higher raw material cost and higher packaging cost.
For
the six months ended December 31, 2017, gross profit generated by Gufeng was $5,523,334, an increase of $170,997, or 3.2%, from
$5,352,337 for the six months ended December 31, 2016. Gross profit margin from Gufeng’s sales was approximately 12.9% and
14.5% for the six months ended December 31, 2017 and 2016, respectively. The decrease in gross profit percentage was mainly due
to the increased weight for lower-margin products sales in Gufeng’s total sales answering to market demand.
For
the six months ended December 31, 2017, gross profit generated by Yuxing was $817,600, a slight decrease of $12,471, or 1.5% from
$830,071 for the six months ended December 31, 2016. The gross profit margin was approximately 21.8% and 21.8% for the six
months ended December 31, 2017 and 2016, respectively.
For
the six months ended December 31, 2017, gross profits generated by VIEs were $4,669,176, an increase of $892,119, or 23.6%, from
$3,777,057 for the six months ended December 31, 2016. Gross profit margin from VIEs’ sales was approximately 17.1% and
17.4% for the six months ended December 31, 2017 and 2016, respectively. The slight decrease in gross profit percentage was mainly
due to higher raw material cost.
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 $12,861,012, or 10.1%, of net sales for the six months ended December 31, 2017, as
compared to $8,977,450or 7.4% of net sales for the six months ended December 31, 2016, an increase of $3,883,562, or 43.3%. This
increase was primarily due to Jinong. The selling expenses of Jinong for the six months ended December 31, 2017 were $12,015,951
or 22.7% of Jinong’s net sales, as compared to selling expenses of $8,142,911 or 14.0% of Jinong’s net sales for the
six months ended December 31, 2016. The increase in Jinong’s selling expenses was due to Jinong’s expanded marketing
efforts and the increase in shipping costs. The selling expenses of Yuxing were $20,144 or 0.5% of Yuxing’s net sales for
the six months ended December 31, 2017, as compared to $18,975, or 0.5% of Yuxing’s net sales for the six months ended December
31, 2016. The selling expenses of Gufeng were $285,721 or 0.7% of Gufeng’s net sales for the six months ended December 31,
2017, as compared to $213,408 or 0.6% of Gufeng’s net sales for the six months ended December 31, 2016. The selling expenses
of VIEs were $559,341, or 1.8%, of VIEs’ net sales or the six months ended December 31, 2017, as compared to $602,156, or
2.8% of VIEs’ net sales for the six months ended December 31, 2016.
Selling
Expenses – amortization of deferred assets
Our
selling expenses - amortization of deferred assets were 0 for the six months ended December 31, 2017, as compared to $9,584,220,
or 7.9% of net sales, for the six months ended December 31, 2016. This decrease was due to the fact that all deferred assets were
fully amortized and therefore no amortization was recorded on the fully amortized assets during the six months ended December
31, 2017.
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 $7,909,981, or 6.2% of net sales for the six months
ended December 31, 2017, as compared to $7,865,392, or 6.5%, of net sales for the six months ended December 31, 2016, an increase
of $44,589, or 0.6%.
Total
Other Income and Expenses
Total other income and expenses consisted of income from subsidies
received
from the PRC government, interest income, interest expenses and bank charges. The total other expense for the six months
ended December 31, 2017 was $732,991, as compared to $ 233,847 for the six months ended December 31, 2016, an increase of
$499,144, or 213.4%. The increase in total other expense mainly resulted from the increase for bank charges and accretion
expenses. The bank charges increased by $128,854 or 1207.4%, to $139,626 during the six months ended December 31, 2017 as
compared to $10,672 during the six months ended December 31, 2016. Accretion expenses increased by $174,274 or 112.2%, to
$329,609 during the six months ended December 31, 2017 as compared to $155,335 during the six months ended December 31,
2016.
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 $ 1,845,926
for the six months ended December 31, 2017, as compared to $1,879,465 for the six months ended December 31, 2016, a decrease of
$33,539, or 1.8%.
Gufeng,
subject to a tax rate of 25%, incurred income tax expenses of $ 1,159,097 for the six months ended December 31, 2017, as compared
to $792,503 for the six months ended December 31, 2016, an increase of $366,594, or 46.3%. The increase is mainly due to the increase
in net sales for Gufeng for the six months ended December 31, 2017 comparing to the same period of last year.
Yuxing
had no income tax for the six months ended December 31, 2017 as a result of being exempted from paying income tax due to its products
falling into the tax exemption list set out in the EIT.
Net
Income
Net
income for the six months ended December 31, 2017 was $12,868,283, a slight increase of $10,692, or 0.1%, compared to $12,857,591
for the six months ended December 31, 2016. Net income as a percentage of total net sales was approximately 10.2% and 10.7 % for
the six months ended December 31, 2017 and 2016, respectively.
Discussion
of Segment Profitability Measures
As
of December 31, 2017, 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 decreased by $ 264,477, or 2.6% to $ 10,460,249 for six months ended December 31, 2017, from $10,195,772
for the six months ended December 31, 2016. The decrease was principally due to higher selling expenses.
For
Gufeng, the net income increased by $ 1,492,367 or 75.2% to $ 3,477,292.48 for six months ended December 31, 2017 from $ 1,984,925
for six months ended December 31, 2017. The increase was principally due to the increase in net sales.
For
Yuxing, the net income decreased $89,368 or 18.3% to $ 398,491 for six months ended December 31, 2017 from $ 487,859 for six months
ended December 31, 2017. The decrease was mainly due to the decrease in net sales.
For
the VIEs, the net income was $ 199,680 for year ended December 31, 2017, decreased by $ 1,845,894 or 90.2%, from $2,045,574 for
six months ended December 31, 2016. The decrease was mainly due to the increase 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 December 31, 2017, cash and cash equivalents were $145,417,158, an increase of $22,366,610, or 18.2%,
from $123,050,548 as of June 30, 2017.
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:
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net cash provided by operating activities
|
|
$
|
20,535,360
|
|
|
$
|
18,178,990
|
|
Net cash used in investing activities
|
|
|
(23,086
|
)
|
|
|
(74,353
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(1,330,290
|
)
|
|
|
300,000
|
|
Effect of exchange rate change on cash and cash equivalents
|
|
|
3,184,627
|
|
|
|
(4,726,271
|
)
|
Net increase in cash and cash equivalents
|
|
|
22,366,611
|
|
|
|
13,678,366
|
|
Cash and cash equivalents, beginning balance
|
|
|
123,050,548
|
|
|
|
102,896,486
|
|
Cash and cash equivalents, ending balance
|
|
$
|
145,417,159
|
|
|
$
|
116,574,852
|
|
Operating
Activities
Net
cash provided by operating activities was $20,535,360 for the six months ended December 31, 2017, an increase of $2,356,370, or
13.0%, from cash provided by operating activities of $18,178,990 for the six months ended December 31, 2016. The increase was
mainly attributable to an increase in accounts payable and decrease in advances to suppliers during the six months ended December
31, 2017 as compared to the same period in 2016.
Investing
Activities
Net
cash used in investing activities for the six months ended December 31, 2017 was $23,086, an increase of $51,267, or 69.0%, compared
to cash used in investing activities of $74,353 for the six months ended December 31, 2016. The difference was due to the fact
that the Company purchased less plant, property and equipment during the last six months compared to the same period last year.
Financing
Activities
Net
cash used by financing activities for the six months ended December 31, 2017 was $1,330,290 compared to $300,000 net cash provided
in financing activities for the six months ended December 31, 2016, which was largely due to $1,678,603 in repayment of loans
for the six months ended December 31, 2017, compared to zero repayment of loans in the same period last year.
As
of December 31, 2017 and June 30, 2017, our loans payable were as follows:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
Short term loans payable:
|
|
$
|
6,285,300
|
|
|
$
|
7,678,111
|
|
Total
|
|
$
|
6,285,300
|
|
|
$
|
7,678,111
|
|
Accounts
Receivable
We
had accounts receivable of $136,066,642 as of December 31, 2017, as compared to $141,665,179 as of June 30, 2017, a decrease of
$5,598,537 or 4.0 %. The decrease was primarily attributable to Gufeng’s accounts receivable. As of December 31, 2017, Gufeng’s
accounts receivable was $46,610,891, a decrease of $18,552,537 or 28.5% compared to $65,163,428 as of June 30, 2017.
Allowance
for doubtful accounts in accounts receivable for the six months ended December 31, 2017 was $13,949,452, from $9,457,423 as of
June 30, 2017,and the allowance for doubtful accounts as a percentage of accounts receivable was 10.3% as of December 31, 2017
and 6.3% as of June 30, 2017.
Deferred
assets
We
had no deferred assets as of December 31, 2017, as compared to $864,070 as of June 30, 2017. During the six 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 December 31, 2017.
Inventories
We
had inventories of $105,613,585 as of December 31, 2017, as compared to $78,013,891 as of June 30, 2017, an increase of $27,599,694,
or 35.4%. The increase was primarily attributable to Jinong’s inventory. As of December 31, 2017, Jinong’s inventory
was $ 1,309,529, compared to $980,159 as of June 30, 2017.
Advances
to Suppliers
We
had advances to suppliers of $20,821,812 as of December 31, 2017 as compared to $24,023,062 as of June 30, 2017, representing
a decrease of $3,201,250 or 13.3%. 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 $22,783,659 as of December 31, 2017 as compared to $19,643,897 as of June 30, 2017, representing an increase
of $3,139,762, or 16.0%. The increase was primarily due to the increase of accounts payable for VIEs. They have accounts payable
of $20,454,287 as of December 31, 2017 as compared to $18,355,921 as of June 30, 2017, representing an increase of $2,098,366,
or 11.4%.
Unearned
Revenue (Customer Deposits)
We
had customer deposits of $6,935,326 as of December 31, 2017 as compared to $7,046,570 as of June 30, 2017, representing a decrease
of $111,244, or 1.6%. The decrease was mainly attributable to VIE’s $ 718,647 unearned revenue as of December 31, 2017,
compared to $1,375,785 unearned revenue as of June 30, 2017, 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 of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
Our
revenue consists of invoiced value of goods, net of a value-added tax (VAT). No product return or sales discount allowance is
made as products delivered and accepted by customers are normally not returnable and sales discounts are normally not granted
after products are delivered.
Cash
and cash equivalents
For
statement of cash flows purposes, we consider all cash on hand and in banks, certificates of deposit and other highly-liquid investments
with maturities of three months or less, when purchased, to be cash and cash equivalents.
Accounts
receivable
Our
policy is to maintain reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts
receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and
changes in customer payment patterns to evaluate the adequacy of these reserves. Any accounts receivable of Jinong and Gufeng
that 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 December 31, 2017.
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 December 31, 2017, we were organized into eleven 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.