10-Q 1 v377250_10q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2014

 

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

 

For the transition period from ____________ to ____________

 

Commission File Number 001-34260

 

CHINA GREEN AGRICULTURE, INC.

(Exact name of registrant as specified in its charter)

 

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

 

300 Walnut Street Suite 245

Des Moines, IA 50309

(Address of principal executive offices) (Zip Code)

 

(515) 897-2421

(Issuer's telephone number, including area code)

 

 

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

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

 

Large accelerated filer     o Accelerated filer             x

Non-accelerated filer o

( Do not check if a smaller reporting company )

 Smaller reporting company     o

 

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

 

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 31,829,369 shares of common stock, $.001 par value, as of May 7, 2014.

 

 
 

 

TABLE OF CONTENTS

 

PART I   FINANCIAL INFORMATION   Page
         
Item 1.   Financial Statements   3
         
    Consolidated Condensed Balance Sheets   3
    As of March 31, 2014 and June 30, 2013 (Unaudited)    
         
    Consolidated Condensed Statements of Income and Comprehensive Income   4
    For the Three and Nine Months Ended March 31, 2014 and 2013 (Unaudited)    
         
    Consolidated Condensed Statements of Cash Flows   5
    For the Nine Months Ended March 31, 2014 and 2013 (Unaudited)    
         
    Notes to Consolidated Condensed Financial Statements   6
    As of March 31, 2014 (Unaudited)    
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   21
         
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   35
         
Item 4.   Controls and Procedures   36
         
PART II   OTHER INFORMATION    
         
Item 1.   Legal Proceedings   37
         
Item 6.   Exhibits   37
         
Signatures   38
     
Exhibits/Certifications    

 

2
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

CHINA GREEN AGRICULTURE INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(UNAUDITED)

 

   March 31, 2014   June 30, 2013 
         
ASSETS          
Current Assets          
Cash and cash equivalents  $23,887,359   $75,031,489 
Accounts receivable, net   87,361,396    85,323,442 
Inventories   72,315,948    34,511,167 
Prepaid expenses and other current assets   391,160    397,897 
Advances to suppliers   21,338,781    20,224,206 
Assets held for sale   10,060,219    11,676,736 
Total Current Assets   215,354,863    227,164,937 
           
Plant, Property and Equipment, Net   74,246,649    89,604,787 
           
Construction In Progress   48,853    68,414 
           
Deferred asset, Net   59,314,664    - 
           
Other Assets   70,366    97,432 
           
Intangible Assets, Net   25,611,475    26,608,013 
           
Goodwill   5,200,781    5,184,759 
           
Total Assets  $379,847,651   $348,728,342 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current Liabilities          
Accounts payable  $3,036,980   $3,375,333 
Unearned revenue   6,371,128    1,433,661 
Accrued expenses and other payables   4,206,784    3,934,184 
Amount due to related parties   1,557,616    1,304,013 
Taxes payable   9,669,371    25,728,759 
Short term loans   28,856,940    16,099,100 
Total Current Liabilities   53,698,819    51,875,050 
           
Commitment and Contingencies          
           
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,  31,820,177 and 29,943,236 shares issued and outstanding as of December 31, 2013 and June 30, 2013, respectively   31,829    29,943 
Additional paid-in capital   113,189,804    105,962,909 
Statutory reserve   22,245,129    20,121,905 
Retained earnings   168,065,226    148,925,125 
Accumulated other comprehensive income   22,616,844    21,813,410 
Total Stockholders' Equity   326,148,832    296,853,292 
           
Total Liabilities and Stockholders' Equity  $379,847,651   $348,728,342 

 

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

 

3
 

 

CHINA GREEN AGRICULTURE INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

 

   Three Months ended March 31,   Nine Months ended March 31, 
   2014   2013   2014   2013 
 Sales                    
 Jinong  $30,210,579   $27,051,929   $88,261,203   $77,857,756 
 Gufeng   39,080,111    37,690,762    70,318,209    66,612,586 
 Yuxing   1,005,291    1,129,842    2,654,517    2,645,923 
 Net sales   70,295,981    65,872,533    161,233,929    147,116,265 
 Cost of goods sold                    
 Jinong   12,174,848    12,502,786    37,013,941    35,994,694 
 Gufeng   31,258,885    30,844,656    54,759,629    54,339,165 
 Yuxing   701,533    779,386    1,978,441    1,909,795 
 Cost of goods sold   44,135,266    44,126,828    93,752,011    92,243,654 
 Gross profit   26,160,715    21,745,705    67,481,918    54,872,611 
 Operating expenses                    
 Selling expenses   11,120,692    3,872,492    25,723,977    10,044,863 
 General and administrative expenses   3,463,127    1,348,802    11,368,835    7,381,015 
 Impairment of assets   1,659,729    -    1,659,729    - 
 Total operating expenses   16,243,548    5,221,294    38,752,541    17,425,878 
 Income from operations   9,917,167    16,524,411    28,729,377    37,446,733 
 Other income (expense)                     
 Other income (expense)   65,563    212,344    (120,877)   609,724 
 Interest income   37,587    73,879    114,675    235,028 
 Interest expense   (472,104)   (268,455)   (1,009,528)   (1,020,694)
 Total other income (expense)   (368,954)   17,768    (1,015,730)   (175,942)
 Income before income taxes   9,548,213    16,542,179    27,713,647    37,270,791 
 Provision for income taxes   2,339,082    3,131,520    6,450,322    6,757,404 
 Net income   7,209,131    13,410,659    21,263,325    30,513,387 
 Other comprehensive income                    
 Foreign currency translation gain (loss)   (2,838,362)   1,541,434    803,434    1,696,220 
 Comprehensive income  $4,370,769   $14,952,093   $22,066,759   $32,209,607 
                     
Basic weighted average shares outstanding   31,825,562    27,939,780    31,201,076    27,682,345 
Basic net earnings per share  $0.23   $0.48   $0.68   $1.10 
Diluted weighted average shares outstanding   31,825,562    27,939,780    31,201,076    27,682,345 
Diluted net earnings per share   0.23    0.48    0.68    1.10 

 

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

 

4
 

 

CHINA GREEN AGRICULTURE INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   Nine Months Ended March 31, 
   2014   2013 
Cash flows from operating activities          
Net income  $21,263,325   $30,513,387 
Adjustments to reconcile net income to net cash provided by  operating activities          
 Issuance of common stock and stock options for compensation   6,703,781    2,704,328 
Depreciation   16,849,788    8,850,655 
Amortization   6,477,776    1,179,780 
Impairment of assets   1,659,729    - 
Changes in operating assets          
Accounts receivable   (1,781,938)   (11,516,998)
Other current assets   8,004    (200,578)
Inventories   (37,860,726)   (19,187,321)
Advances to suppliers   (1,056,615)   2,355,354 
Other assets   27,485    63,762 
Changes in operating liabilities          
Accounts payable   (348,288)   (1,644,727)
Unearned revenue   4,954,312    (918,503)
Tax payables   (16,208,503)   4,158,809 
Accrued expenses and other payables   593,844    (202,264)
Amount due to related parties   -    1,110,900 
Net cash provided by operating activities   1,281,974    17,266,584 
           
Cash flows from investing activities          
Purchase of plant, property, and equipment   (1,127,458)   (14,827,612)
Increase in construction in progress   -    (185,325)
Deferred assets   (64,964,848)   - 
Net cash used in investing activities   (66,092,306)   (15,012,937)
           
Cash flows from financing activities          
Proceeds from loans   28,633,885    2,943,885 
Repayment of loans   (15,870,985)   - 
Advance from related party   450,000    - 
Net cash provided by (used in) financing activities   13,212,900    2,943,885 
           
Effect of exchange rate change on cash and cash equivalents   453,302    476,483 
Net increase (decrease) in cash and cash equivalents   (51,144,130)   5,674,015 
           
Cash and cash equivalents, beginning balance   75,031,489    71,978,630 
Cash and cash equivalents, ending balance  $23,887,359   $77,652,645 
           
Supplement disclosure of cash flow information          
Interest expense paid  $1,009,506   $267,506 
Income taxes paid  $22,658,825   $2,598,595 
           
Supplemental Disclosure of Non-Cash Financing Activities:          
Issuance of 118,778 and 151,515 shares of common stock for repayment of amount due to related party  $525,000   $300,000 

  

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

 

5
 

 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO 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 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 Jintai Agriculture Technology Development Company (“Jintai”), wholly-owned subsidiary of Jinong in the PRC, (iv) Xi’an Hu County Yuxing Agriculture Technology Development Co., Ltd. (“Yuxing”), a Variable Interest Entity (“VIE”) in the PRC controlled by Jinong through contractual agreements; (v) Beijing Gufeng Chemical Products Co., Ltd., a wholly-owned subsidiary of Jinong in the PRC (“Gufeng”), and (vi) Beijing Tianjuyuan Fertilizer Co., Ltd., Gufeng’s wholly-owned subsidiary in the PRC (“Tianjuyuan”).

 

The Company’s corporate structure as of March 31, 2014 is set forth in the diagram below:

 

 

6
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The unaudited consolidated financial statements were prepared by Company pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”).   The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) were omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K.   The results for the nine months ended March 31, 2014, are not necessarily indicative of the results to be expected for the year ending June 30, 2014.

 

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 VIE Yuxing. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

Effective June 16, 2013, Yuxing was converted from being a wholly-owned foreign enterprise 100% owned by Jinong to a domestic enterprise 100% owned one natural person, who is not affiliated to the Company (“Yuxing’s Owner”). Effective the same day, Yuxing’s Owner entered into a series of contractual agreements with Jinong pursuant to which Yuxing became the VIE of Jinong.

 

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.

 

Deferred asset

 

Deferred asset represents 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 as long as the distributors are actively selling the Company’s products. For the nine months ended March 31, 2014, the Company amortized $5,371,194 of the deferred asset.   If a distributor breach, defaults, or terminates the agreement with the Company within the three year period, the outstanding unamortized portion of the amount owed will become payable to the Company immediately. The Company’s Chairman, Mr. Li, guaranteed to the Company of amounts remaining unpaid due from distributors. This deferred asset is subject to annual impairment testing. The estimated amortization expense of the deferred asset for the twelve months ending March 31, 2015, 2016, and 2017 is $21,561,953, $ 21,561,953 and $16,190,758, respectively.

 

Assets held for sale

 

Assets held for sale represent certain equipment from the Company’s Jintai facility that has been relocated. The Company’s Board of Directors (the “Board”) has authorized a special team to be formed to sell these assets. The Company currently has a letter of intent to sell these assets to an outside third party with an expected closing of the sales transaction during the Company’s fourth fiscal quarter of 2014. During the quarter ended March 31, 2014, the Company determined that the fair value of the assets less disposal costs was less than the carrying amounts and took an impairment charge of $1,659,729. The carrying value of the assets held for sale at March 31, 2014 was reduced to $10,060,219 which is fair value less disposal costs.

 

7
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Recent accounting pronouncements

 

FASB Accounting Standards Update No. 2013-02

 

In February 2013, the FASB issued ASU No. 2013-02, which amends the authoritative accounting guidance under ASC Topic 220 “Comprehensive Income.” The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under US GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under US GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under US GAAP that provide additional detail about those amounts. The amendments in this update are effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. Adoption of this update did not have a material effect on the Company’s consolidated results of operations or financial condition.

 

FASB Accounting Standards Update No. 2013-04

 

The FASB has issued ASU No. 2013-04, Liabilities (Topic 405), “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.” ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Adoption of this update did not have a material effect on the Company’s consolidated results of operations or financial condition.

 

FASB Accounting Standards Update No. 2013-11

 

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carryforward Exists (A Consensus the FASB Emerging Issues Task Force). ASU 2013-11 provides guidance on financial statement presentation of unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The FASB’s objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. This ASU applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforward in the same tax jurisdiction as of the reporting date. This amendment is effective for public entities for fiscal years beginning after December 15, 2013 and interim periods within those years. Adoption of this update did not have a material effect on the Company’s consolidated results of operations or financial condition.

  

FASB Accounting Standards Update No. 2014-08

 

In April 2014, the FASB issued ASU 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360)."  ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations.  Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company's operations and financial results should be presented as discontinued operations.  This new accounting guidance is effective for annual periods beginning after December 15, 2014.  The Company is currently evaluating the impact of adopting ASU 2014-08 on the Company's results of operations or financial condition.

 

NOTE 3 - EARNINGS PER SHARE

 

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

 

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

 

   For the Three Months Ended March 31,   For the Nine Months Ended March 31, 
   2014   2013   2014   2013 
Net Income for Basic Earnings Per Share  $7,209,131   $13,410,659   $21,263,325   $30,513,387 
Basic Weighted Average Number of Shares   31,825,562    27,939,780    31,201,076    27,682,345 
Net Income per Share – Basic  $0.23   $0.48   $0.68   $1.10 
Net Income for Diluted Earnings Per Share  $7,209,131   $13,410,659   $21,263,325   $30,513,387 
Diluted Weighted Average Number of Shares   31,825,562    27,939,780    31,201,076    27,682,345 
Net Income per Share – Diluted  $0.23   $0.48   $0.68   $1.10 

 

8
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4 – INVENTORIES

 

Inventories consist of the following:

 

   March 31,   June 30, 
   2014   2013 
Raw materials  $14,191,674   $2,784,760 
Supplies and packing materials   441,005    473,477 
Work in progress   406,829    171,550 
Finished goods   57,276,440    31,081,380 
Total  $72,315,948   $34,511,167 

 

NOTE 5 - PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consist of the following:

 

   March 31,   June 30, 
   2014   2013 
Building and improvements  $29,919,746   $29,836,072 
Auto   732,233    729,978 
Machinery and equipment   87,149,667    88,901,647 
Agriculture assets   826,040    - 
Total property, plant and equipment   118,627,686    119,467,697 
Less: accumulated depreciation   (44,381,037)   (29,862,910)
Total  $74,246,649   $89,604,787 

 

NOTE 6 – CONSTRUCTION IN PROGRESS

 

As of March 31, 2014, construction in progress representing construction for Yuxing’s supporting facilities amounted to $48,853, and the total cost is not expected to exceed RMB 2 million (approximately $325,000).

 

9
 

 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7 - INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

   March 31,   June 30, 
   2014   2013 
Land use rights, net  $11,781,957   $11,940,658 
Technology patent, net   559,936    744,280 
Customer relationships, net   6,610,413    7,378,823 
Non-compete agreement   53,559    85,430 
Trademarks   6,605,610    6,458,822 
Total  $25,611,475   $26,608,013 

 

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 $11,877,908). 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 $169,758). 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 Yanling 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 $1,182,372). The intangible asset is being amortized over the grant period of 50 years.

 

The Land Use Rights consist of the following:

 

   March 31,   June 30, 
   2014   2013 
Land use rights  $13,230,038   $13,189,280 
Less: accumulated amortization   (1,448,081)   (1,248,622)
Total land use rights, net  $11,781,957   $11,940,658 

 

TECHNOLOGY PATENT

 

On August 16, 2001, Jinong was issued a technology patent related to a proprietary formula used in the production of humid acid. The fair value of the related intangible asset was determined to be the respective cost of RMB 5,875,068 (or $953,524) 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 preliminary fair value on the acquired technology patent was estimated to be RMB 9,200,000 (or $1,493,160) and is amortized over the remaining useful life of six years using the straight line method.

 

The technology know-how consisted of the following:

 

   March 31,   June 30, 
   2014   2013 
Technology know-how  $2,446,684   $2,439,146 
Less: accumulated amortization   (1,886,748)   (1,694,866)
Total technology know-how, net  $559,936   $744,280 

 

10
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

CUSTOMER RELATIONSHIP

 

On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The preliminary fair value on the acquired customer relationships was estimated to be RMB65,000,000 (or $10,549,500) and is amortized over the remaining useful life of ten years.

 

   March 31,   June 30, 
   2014   2013 
Customer relationships  $10,549,500   $10,517,000 
 Less: accumulated amortization   (3,939,087)   (3,138,177)
Total customer relationships, net  $6,610,413   $7,378,823 

 

NON-COMPETE AGREEMENT

 

On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The preliminary fair value on the acquired non-compete agreement was estimated to be RMB 1,320,000 (or $214,236) and is amortized over the remaining useful life of five years using the straight line method.  

 

   March 31,   June 30, 
   2014   2013 
Non-compete agreement  $214,236   $213,576 
 Less: accumulated amortization   (160,677)   (128,146)
Total non-compete agreement, net  $53,559   $85,430 

 

TRADEMARKS

 

On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The preliminary fair value on the acquired trademarks was estimated to be RMB40,700,000 (or $6,605,610) and is subject to an annual impairment test.

 

AMORTIZATION EXPENSE

 

Estimated amortization expenses of intangible assets for the next five twelve months periods ended March 31, 2014, are as follows:

 

Year Ends  Expense ($) 
March 31, 2015   1,587,156 
March 31, 2016   1,432,105 
March 31, 2017   1,335,105 
March 31, 2018   1,319,551 
March 31, 2019   1,319,551 

 

11
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8 - ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables consist of the following:

 

   March 31,   June 30, 
   2014   2013 
Payroll payable  $8,630   $20,191 
Welfare payable   166,624    166,111 
Accrued expenses   2,901,370    2,700,468 
Other payables   1,004,222    921,864 
Other levy payable   125,938    125,550 
Total  $4,206,784   $3,934,184 

 

NOTE 9 - AMOUNT DUE TO RELATED PARTIES

 

As of March 31, 2014 and June 30, 2013, the amount due to related parties was $1,557,616 and $1,304,013, respectively.  At March 31, 2014 and June 30, 2013, $1,136,100 and $1,304,013, respectively were amounts that Gufeng borrowed from a related party, Xi’an Techteam Science & Technology Industry (Group) Co. Ltd., a company controlled by Mr. Tao Li, Chairman and CEO of the Company, represent unsecured, non-interest bearing loans that are due on demand.  These loans are not subject to written agreements. On November 1, 2013, Yuxing entered into an agreement with Xi'an Techteam Investment Holding Group (“Techteam Investment”), a holding company owned and controlled by Mr. Tao Li, Chairman and CEO of the Company, to delegate Techteam Investment to procure certain inventories from the market from November 1, 2013 to June 30, 2014 (the “Agreement Period”). During the Agreement Period, Techteam Investment advances procurement payment to vendors, and Yuxing repays the outstanding procurement amount to Techteam Investment periodically. Techteam Investment receives no commission or compensation in this process.

 

On August 10, 2010, Yuxing, a VIE of the Company, entered into an agreement with Xi’an Kingtone Information Technology Co., Ltd. (“Kingtone Information”), the contractually-controlled operating subsidiary of Kingtone Wirelessinfo Solution Holding Ltd (“Kingtone”), whose Chairman is Mr. Tao Li, the Company’s Chairman and CEO. Pursuant to the agreement, Kingtone Information was responsible for developing certain electronic control systems for Yuxing. The total contracted value of this agreement, including value-added taxes and other taxes, is RMB3,030,000, or approximately US$492,000. The project is currently ongoing, and RMB1,212,000 or $197,000 had been paid by Yuxing to Kingtone as of March 31, 2014.

 

On June 29, 2012, 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, 2012 with monthly rent of RMB 24,480 (approximately $4,000).

 

NOTE 10 - LOAN PAYABLES

 

As of March 31, 2014, the short-term loan payables consisted of twelve loans which mature on dates ranging from April 25, 2013 through March 23, 2015 with interest rates ranging from 5.60% to 7.80%. The loans No.1, 9 and 12 below are collateralized by Tianjuyan’s land use right and building ownership right. The loans No. 2,3 ,8,10 and 11 below are guaranteed by Jinong’s credit. The loans No. 5, 6 and 7 are guaranteed by a bonding company in Zhongguancun Beijing, and counter guaranteed by Jinong’s credit. The loan No. 4 is guaranteed by Jinong’s credit and Tianjuyuan’s credit.

 

No.  Payee  Loan period per agreement  Interest
Rate		   March 31,
2014		 
1  Agriculture Bank of China-Pinggu Branch  April 25, 2013 - April 24, 2014   6.60%  $1,639,230 
2  Industrial and Commercial Bank of China  December 20, 2013 - June 19, 2014   5.60%   4,869,000 
3  China Merchants Bank  Feb 25, 2014 - August 14, 2014   6.90%   2,028,750 
4  Bank of Beijing- Pinggu Branch  August 16,2013-August 15, 2014   7.20%   1,623,000 
5  Beijing International Trust Co., Ltd  Sep 25,2013-Sep 24, 2014   7.80%   1,623,000 
6  Beijing International Trust Co., Ltd  Oct 30, 2013-Oct 29, 2014   7.80%   1,623,000 
7  Beijing International Trust Co., Ltd  Dec 12, 2013-Dec 11, 2014   7.80%   1,623,000 
8  Bank of Tianjin- Beijing Branch  Jan 08, 2014 - Jan 07,2015   6.60%   5,680,500 
9  Agriculture Bank of China-Pinggu Branch  Jan 15, 2014-Jan 14, 2015   6.60%   1,363,320 
10  Bank of Tianjin- Beijing Branch  Jan 23, 2014- Jan 22, 2015   6.00%   3,051,240 
11  China Merchants Bank  Feb,19 2014- Feb 18, 2015   7.20%   2,434,500 
12  Agriculture Bank of China-Pinggu Branch  March 24,2014- March 23, 2015   6.60%   1,298,400 
   Total          $28,856,940 

 

12
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2013, the short-term loan payables consisted of nine loans which mature on dates ranging from August 29, 2013 through April 22, 2014 with interest rates ranging from 6.30% to 8.20%. The loans No.1, 2 and 3 below are collateralized by Tianjuyan’s land use right and building ownership right. The loans No. 4 and 5 below are collateralized by the inventory of Gufeng. The loans No. 6, 7 and 8 are guaranteed by Jinong’s credit. The loan No. 9 is collateralized by the land use rights of Jinong’s and the share ownership owned by Jinong.

No.  Payee  Loan period per agreement  Interest
Rate		   June 30, 2013 
1  Agriculture Bank of China-Beijing Branch  January 24, 2013 - January 13, 2014   6.60%  $1,359,120 
2  Agriculture Bank of China-Beijing Branch  March 23, 2013 - March 22, 2014    6.60%   1,294,400 
3  Agriculture Bank of China-Beijing Branch  April 25, 2013 - April 24, 2014    6.60%   1,634,180 
4  Bank of Tianjin   June 28, 2013 - August 2, 2013    6.72%   1,132,600 
5  Bank of Tianjin   June 20, 2013 - August 2, 2013    6.72%   970,800 
6  China Merchant Bank   August 30, 2012 - August 29, 2013   6.30%   4,045,000 
7  Industrial and Commercial Bank of China  October 25, 2012 - October 24,2013   8.00%   1,618,000 
8  Industrial and Commercial Bank of China  September 25, 2012-September 24, 2013   8.00%   1,618,000 
9  China Minsheng Bank   January 5, 2013 - January 4, 2014    7.20%   2,427,000 
      Total        $16,099,100 

  

The interest expense from short-term loans was $472,104 and $268,455 for the three months ended March 31, 2014 and 2013, respectively, and $1,009,528 and $1,020,694 for the nine months ended March 31, 2014 and 2013, respectively.

 

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 nine months ended March 31, 2014, and 2013 of $3,698,296 and $4,746,988, 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 $2,752,026 and $2,010,416 for the nine months ended March 31, 2014 and 2013.

 

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. The VAT exemption applies to all agricultural products sold by Jintai, and all but a nominal amount of agricultural products sold by Jinong.

 

13
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Income Taxes and Related Payables

 

Taxes payable consist of the following:

   March 31,   June 30, 
   2014   2013 
VAT provision  $21,377   $36,573 
Income tax payable   9,290,397    25,348,794 
Other levies   357,597    343,392 
Total  $9,669,371   $25,728,759 

 

Tax Rate Reconciliation

 

Our effective tax rates were approximately 23.3% and 18.1% for the nine months ended March 31, 2014 and 2013, 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 nine months ended March 31, 2014 and 2013 for the following reasons:

 

March 31, 2014                        
   China   United States         
   15% - 25%   34%   Total 
                         
Pretax income (loss)  $35,186,323        $(7,472,676)       $27,713,647      
                               
Expected income tax expense (benefit)   8,796,581    25.0%   (2,540,710)   34.0%   6,255,871      
High-tech income benefits on Jinong   (2,305,732)   (6.6)%   -    -    (2,305,732)     
Losses from subsidiaries in which no benefit is recognized   (40,527)   (0.1)%   -    -    (40,527)     
Change in valuation allowance on deferred tax asset from US tax benefit   -         2,540,710    (34.0)%   2,540,710      
Actual tax expense  $6,450,322    18.3%  $-    -%  $6,450,322    23.3%

 

March 31, 2013  China   United States         
   15% - 25%   34%   Total 
                         
Pretax income (loss)  $40,324,031        $(3,053,240)       $37,270,791      
                               
Expected income tax expense (benefit)   10,081,008    25.0%   (1,038,102)   34.0%   9,042,906      
High-tech income benefits on Jinong   (1,976,456)   (4.9)%   -    -    (1,976,456)     
Losses from subsidiaries in which no benefit is recognized   (1,347,148)   (3.3)%   -    -    (1,347,148)     
Change in valuation allowance on deferred tax asset from US tax benefit   -         1,038,102    (34.0)%   1,038,102      
Actual tax expense  $6,757,404    16.8%  $-    -%  $6,757,404    18.1%

 

14
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 12 – STOCKHOLDERS’ EQUITY

 

Common Stock

 

On June 14, 2012, the Company granted a total of 1,000,000 shares of restricted common stock of the Company to certain directors, executive officers and key employees under its 2009 Equity Incentive Plan (the “2009 Plan”). Pursuant to the terms of the grant, the stock grants vest in three installments on June 30, 2012, September 30, 2012 and December 31, 2012. The Company issued 445,000 shares of common stock related to these grants on June 14, 2012 with 555,000 issued on June 1, 2013 to a group of employees.  

 

On September 12, 2012, the Company issued 35,041 shares of Common Stock valued at $130,000 of consulting services to a consultant of the Company.

 

On September 26, 2012, the Company agreed to issue 151,515 shares of Common Stock at the market price of $3.30 per share to Mr. Tao Li, the Company’s Chairman and Chief Executive Officer in the first offering of the Company’s Employee Stock Purchase Plan (“ESPP”) adopted by the Board on August 9, 2012. Mr. Li had previously advanced the Company $300,000 and has unpaid compensation accrued in the balance sheet for the fiscal year ended December 31, 2012. The 151,515 shares were not issued until after September 30, 2012 and accordingly the due to officer of $300,000 and accrued compensation of $ 200,000 were deducted during the quarter ended December 31, 2012.

 

On September 28, 2012, the Company approved the grant of (i) 200,000 shares of restricted stock to Mr. Ken Ren, the Company’s Chief Financial Officer (the “CFO”), and (ii) 40,000 shares of restricted stock to Mr. Yizhao Zhang, 30,000 shares of restricted stock to Ms. Yiru Shi, and 20,000 shares of restricted stock to Mr. Lianfu Liu, each an independent director of the Company (the “Stock Grants”). The Stock Grants all vest in three installments on December 31, 2012, March 31, 2013, and June 30, 2013, with 100,000 shares vesting first and 50,000 shares vesting on each of the other two vesting dates to the CFO; and 10,000 shares vesting first and half of the their respective remaining shares vesting on each of the other two vesting dates to the three independent directors. These shares were issued during the quarter ended December 31, 2012 and vested. The expenses associated with the issuance of these shares were recorded over the vesting period of the shares.

 

On June 1, 2013, the Company granted an aggregate of 1,025,000 shares of restricted stock under the 2009 Plan to certain employees. On July 24, 2013, the Company granted an aggregate of 970,000 shares of restricted stock under the 2009 Plan to certain employees. The shares vest on the following dates: on June 30, 2013, September 30, 2013, December 31, 2013, March 31, 2014, June 30, 2014, September 30, 2014, and December 31, 2014.

 

On September 26, 2013, the Company issued 118,778 shares of Common Stock at the market price of $4.42 per share to Mr. Tao Li as repayment for $ 200,000 previously advanced the Company by Mr. Li and $325,000 for unpaid compensation.

 

On September 28, 2013, the Company granted an aggregate of 1,750,000 shares of restricted stock under the 2009 Plan to certain executive officers, directors and employees. among which (i) 480,000 shares of restricted stock to Mr. Tao Li, the CEO; (ii) 200,000 shares of restricted stock to Mr. Ken Ren, the CFO, (iii) 40,000 shares of restricted stock to Mr. Yizhao Zhang, 30,000 shares of restricted stock to Ms. Yiru Shi, and 20,000 shares of restricted stock to Mr. Lianfu Liu, each an independent director of the Company; and (iv) 980,000 shares of restricted stock to 220 employees.   The stock grants are subject to time-based vesting schedules, vesting in various installments until March 31, 2014 for the CFO and the three independent directors, until March 31, 2015 for the CEO and until December 31, 2015 for the employees.

 

During the nine months ended March 31, 2014, the Company issued 17,356 shares of common stock for consulting services valued at $65,535. The share were valued at the market price on the date of issuance.

 

15
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 March 31, 2014, 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 – STOCK OPTIONS

 

There were no issuances of stock options during the three months ended March 31, 2014.

 

Options outstanding and related weighted average price and intrinsic value are as follows:

 

       Weighted     
       Average     
   Number   Exercise   Aggregate 
   of Shares   Price   Intrinsic Value 
Outstanding, June 30, 2013   115,099    14.66    - 
Granted   -           
Forfeited/Canceled   -           
Exercised   -           
Outstanding, March 31, 2014   115,099    14.66    - 

 

NOTE 14 –CONCENTRATIONS AND LITIGIATION

 

Market Concentration

 

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

 

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

 

Vendor and Customer Concentration

 

There were two vendors from which the Company purchased 21.9% and 17.2% of its raw materials for the nine months ended March 31, 2014. Total purchase from these two venders amounted to $21,559,360 as of March 31, 2014. There were no vendors from which the Company purchased more than 10% of its raw materials for the fertilizer products for the nine months ended March 31, 2013.

 

There was no customer that accounted over 10% of the total sales of fertilizer products as of nine months ended March 31, 2014 and there was one customer that accounted over 10% of the total sales of fertilizer products as of nine months ended March 31, 2013.

 

16
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Litigation

 

On October 15, 2010, a class action lawsuit was filed against the Company and certain of its current and former officers in the United States District Court for the District of Nevada (the "Nevada Federal Court") on behalf of purchasers of the Company’s common stock between November 12, 2009 and September 1, 2010.  The current version of the complaint alleges that the Company and certain of its current and former officers and directors violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended, by making material misstatements and omissions in the Company’s financial statements, securities offering documents, and related disclosures during the class period.  On October 7, 2011, the defendants moved to dismiss the amended complaint and to strike portions of it. On November 2, 2012, the Nevada Federal Court issued an order dismissing the claims for violation of sections 11, 12(a)(2) and 15 of the Securities Act of 1933 as to all defendants and dismissing certain individual defendants from the complaint and allowing the claims for violations of section 10(b) and 20(a) of the Securities Exchange Act of 1934 to continue with respect to the Company and certain of the individual defendants.  The Nevada Federal Court also denied the defendants’ motion to strike.   The parties to the securities class action held mediation on March 7, 2013, which led to an agreement in principle to settle the case for a payment of $ 2.5 million by the Company’s insurers in exchange for a release of all claims against all defendants. Plaintiffs filed an upopposed motion for preliminary approval of the proposed settlement on March 19, 2014, and the court granted the motion on March 20, 2014. The court will hold a final approval hearing on the proposed settlement on July 22, 2014.

 

NOTE 15 – SEGMENT REPORTING

 

As of March 31, 2014, the Company was organized into three main business segments based on location and product: Jinong (fertilizer production), Gufeng (fertilizer production), and Yuxing (agricultural products production). Each of the three 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. Jintai’s business is in the migrating process into Yuxing’s.

 

   Three months ended March 31,   Nine months ended March 31, 
Revenues from unaffiliated customers:  2014   2013   2014   2013 
Jinong  $30,210,579   $27,051,929   $88,261,203   $77,857,756 
Gufeng   39,080,111    37,690,762    70,318,209    66,612,586 
Yuxing   1,005,291    1,129,842    2,654,517    2,645,923 
Consolidated  $70,295,981   $65,872,533   $161,233,929   $147,116,265 
                     
Operating income :                    
Jinong  $5,487,505   $11,406,985   $23,924,484   $31,418,916 
Gufeng   6,355,545    5,642,544    12,059,529    8,821,041 
Yuxing   111,507    171,500    218,049    260,155 
Reconciling item (1)   0    0    0    0 
Reconciling item (2)   (203,393)   (256,110)   (834,439)   (738,343)
Reconciling item (2)—stock compensation   (1,833,997)   (440,508)   (6,638,246)   (2,315,036)
Consolidated  $9,917,167   $16,524,411   $28,729,377   $37,446,733 
                     
Net income:                    
Jinong  $4,658,433   $9,756,153   $20,317,816   $26,893,836 
Gufeng   4,419,560    4,178,836    8,142,956    5,848,880 
Yuxing   168,523    172,275    275,229    823,911 
Reconciling item (1)   5    13    9    139 
Reconciling item (2)   (2,037,390)   (696,618)   (7,472,685)   (3,053,379)
Consolidated  $7,209,131   $13,410,659   $21,263,325   $30,513,387 
                     
Depreciation and Amortization:                    
Jinong  $6,333,478   $1,990,178   $19,808,803   $6,449,763 
Gufeng   924,689    1,709,328    2,521,225    2,634,409 
Yuxing   336,211    316,700    997,536    946,263 
Consolidated  $7,594,378   $4,016,206   $23,327,564   $10,030,435 
                     
Interest expense:                    
Gufeng   472,104    298,455    1,009,528    1,050,694 
Consolidated  $472,104   $298,455   $1,009,528   $1,050,694 
                     
Capital Expenditure:                    
Jinong  $24,306   $6,275,253   $63,830   $15,601,870 
Gufeng   70,257    31,271    81,036    (876,682)
Yuxing   10,974    (134,467)   982,591    102,424 
Consolidated  $105,538   $6,172,057   $1,127,458   $14,827,612 

 

17
 

  

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

   As of   As of 
   March 31,   June 30, 
   2014   2013 
Identifiable assets:          
Jinong  $200,472,838   $197,232,555 
Gufeng   135,622,233    108,409,694 
Yuxing   43,680,405    43,021,886 
Reconciling item (1)   76,081    68,113 
Reconciling item (2)   (3,906)   (3,906)
Consolidated  $379,847,651   $348,728,342 

 

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

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

 

NOTE 16 - COMMITMENTS AND CONTINGENCIES

 

On June 29, 2012, 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, 2012 with monthly rent of $3,973 (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 $844 (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 $480 (RMB 2,958).

 

Accordingly, the Company recorded an aggregate of $35,758 and $46,822 as rent expenses for the nine months ended March 31, 2014 and 2012, respectively. Rent expenses for the next five years months ended December 31, are as follows:

 

18
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Years ending March 31,     
2015  $27,808 
2016   15,889 
2017   15,889 
2018   13,357 
2019   5,761 

 

NOTE 17 VARIABLE INTEREST ENTITIES

 

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 VIE Agreements are as follows:

 

Entrusted Management Agreement

 

Pursuant to the terms of a certain Entrusted Management Agreement dated June 16, 2013 among Yuxing, Jinong and the shareholder of Yuxing (the “Entrusted Management Agreement”), Yuxing and its shareholder 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 Yuxing’s operations, assets and personnel, has the right to control all of Yuxing's cash flows through an entrusted bank account, is entitled to Yuxing's net profits as a management fee, is obligated to pay all of Yuxing’s payables and loan payments, and bears all losses of Yuxing. The Entrusted Management Agreement will remain in effect until (i) the parties mutually agree to terminate the agreement; (ii) the dissolution of Yuxing or (iii) Jinong acquires all of the assets or equity of Yuxing (as more fully described below under “Exclusive Option Agreement”).

 

Exclusive Product Supply Agreement

 

Pursuant to the terms of a certain Exclusive Product Supply Agreement dated June 16, 2013 between Yuxing and Jinong (“the Exclusive Product Supply Agreement”), Jinong is the exclusive product provider to Yuxing. Yuxing agreed to pay Jinong all fees payable for products supply prior to making any payments under the Entrusted Management Agreement. Any payment from Yuxing to Jinong must comply with applicable Chinese laws. The Exclusive Product Supply Agreement shall remain in effect until (i) the parties mutually agree to terminate the agreement; (ii) the dissolution of Yuxing or (iii) Jinong acquires Yuxing (as more fully described below under “Exclusive Option Agreement”).

 

Shareholder’s Voting Proxy Agreement

 

Pursuant to the terms of a certain Shareholder’s Voting Proxy Agreement dated June 16, 2013 among Jinong and the shareholder of Yuxing (the “Shareholder’s Voting Proxy Agreement”), the shareholder of Yuxing irrevocably appointed Jinong as their proxy to exercise on such shareholder’s behalf all of her voting rights as shareholder pursuant to PRC law and the Articles of Association of Yuxing, including the appointment and election of directors of Yuxing. Jinong agreed that it shall maintain a board of directors the composition of which will be the members of the Board of Green Nevada, except those directors that are employed solely for the purpose of satisfying listing or financing requirements of Green Nevada, if any. The Shareholder’s Voting Proxy Agreement will remain in effect until Jinong acquires all of the assets or equity of Yuxing.

 

Exclusive Option Agreement

 

Pursuant to the terms of a certain Exclusive Option Agreement dated June 16, 2013 among Jinong, Yuxing and the shareholder of Yuxing (the “Exclusive Option Agreement”), the shareholder of Yuxing granted Jinong an irrevocable and exclusive purchase option (the “Option”) to acquire Yuxing’s 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 Yuxing 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. To the extent Yuxing shareholder receive any of such consideration, the Option requires them to transfer (and not retain) the same to Yuxing or Jinong. The Exclusive Option Agreement may be terminated by mutual agreement or by 30 days written notice by Jinong.

 

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CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Equity Pledge Agreement

 

Pursuant to the terms of a certain Equity Pledge Agreement dated June 16, 2013 among Jinong and the shareholder of Yuxing (the “Pledge Agreement”), the shareholder of Yuxing pledged all of her equity interests in Yuxing, including the proceeds thereof, to guarantee all of Jinong's rights and benefits under the Entrusted Management Agreement, the Exclusive Product Supply Agreement, the Shareholder’ Voting Proxy Agreement and the Exclusive Option Agreement. Prior to termination of the Pledge Agreement, the pledged equity interests cannot be transferred without Jinong's prior written consent. The Pledge Agreement may be terminated only upon the written agreement of the parties.

 

As a result of these contractual arrangements, Green Nevada is able to exercise control over Yuxing and was entitled to substantially all of the economic benefits of Yuxing through its subsidiary, Jinong. Therefore, Green Nevada consolidates Yuxing in accordance with ASC 810-10 (“Consolidation of Variable Interest Entities”) since the date of the VIE Agreements.

 

The following financial statement amounts and balances of the VIE were included in the accompanying consolidated financial statements as of March 31, 2014 and June 30, 2013 and for the three and nine months respectively ended March 31, 2014 and 2013:

 

   March 31,   June 30, 
   2014   2013 
         
ASSETS          
Current Assets          
Cash and cash equivalents  $177,606   $42,975 
Accounts receivable, net   275,478    209,194 
Inventories   15,777,174    15,478,654 
Other current assets   9,587    7,061 
Advances to suppliers   188,993    101,555 
Total Current Assets   16,428,838    15,839,439 
           
Plant, Property and Equipment, Net   16,413,614    16,180,551 
Construction In Progress   48,853    68,414 
Intangible Assets, Net   10,789,100    10,933,482 
Total Assets  $43,680,405   $43,021,886 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current Liabilities          
Accounts payable  $374,772   $533,773 
Accrued expenses and other payables   4,296    8,673 
Amount due to related parties   43,014,020    42,466,210 
Total Current Liabilities   43,393,088    43,008,656 
           
Stockholders' equity   287,317    13,230 
           
Total Liabilities and Stockholders' Equity  $43,680,405   $43,021,886 

 

   Three Months Ended December 31,   Nine Months Ended March 31, 
   2014   2013   2014   2013 
Revenue  $1,005,291   $1,129,842   $2,654,517   $2,645,923 
Expenses   836,768    957,567    2,379,288    1,822,012 
Net income  $168,523   $172,275   $275,229   $823,911 

 

20
 

 

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 following discussion, “Company,” “we,” “us,” and “our,” refer to (i) China Green Agriculture, Inc. (“Green Nevada”), a corporation incorporated in the State of Nevada; (ii) Green Agriculture Holding Corporation (“Green New Jersey”), a wholly-owned subsidiary of Green Nevada incorporated in the State of New Jersey; (iii) Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd. (“Jinong”), a wholly-owned subsidiary of Green New Jersey organized under the laws of the PRC; (iv) Xi’an Jintai Agriculture Technology Development Company (“Jintai”), a wholly-owned subsidiary of Jinong in the PRC, (v) Xi’an Hu County Yuxing Agriculture Technology Development Co., Ltd. (“Yuxing”), a Variable Interest Entity (“VIE”) controlled by Jinong in the PRC; (vi) Beijing Gufeng Chemical Products Co., Ltd. (“Gufeng”), a wholly-owned subsidiary of Jinong in the PRC, and (vii) Beijing Tianjuyuan Fertilizer Co., Ltd. (“Tianjuyuan”), a wholly-owned subsidiary of Gufeng in the PRC.

 

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

  

Overview

 

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

 

The fertilizer business conducted by Jinong and Gufeng generated approximately 98.6% and 98.3% of our total revenues for the three months ended March 31, 2014 and 2013, respectively. Yuxing serves as a research and development base for our fertilizer products. Previously, Jintai had served in that capacity as well. However, as reported in our previous annual and quarterly reports, as a result of environmental degradation that harmed Jintai’s flora, we started to relocate Jintai’s facilities to Yuxing. As a result, Jintai has not been in operation since the ongoing relocation commenced in March 1, 2012.

 

21
 

  

Fertilizer Products

 

As of March 31, 2014, we had developed and produced a total of 446 different fertilizer products in use, of which 123 were developed and produced by Jinong and 323 by Gufeng.

 

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 March 31,     Change 2013 to 2014  
    2014     2013     Amount     %  
    (metric tons)              
Jinong     14,719       17,437       (2,718 )     -15.6 %
Gufeng     93,687       84,073       9,614       11.4 %
      108,406       101,510       6,896          
                                 
      Three Months Ended March 31,                  
      2014       2013                  
      (revenue per ton)                  
Jinong   $ 2,052     $ 1,551                  
Gufeng     417       367                  
                                 
    Nine Months Ended March 31,     Change 2013 to 2014  
    2014     2013     Amount     %  
    (metric tons)              
Jinong     48,101       51,498       (3,397 )     -6.6 %
Gufeng     161,630       147,520       14,110       9.6 %
      209,731       199,018       10,713          
                                 
    Nine Months Ended March 31,                  
    2014     2013                  
    (revenue per ton)                  
Jinong   $ 1,835     $ 1,512                  
Gufeng     435       452                  

 

For the three months ended March 31, 2014, we sold approximately 108,406 metric tons of fertilizer products, as compared to 101,510 metric tons for the three months ended March 31, 2013. For the three months ended March 31, 2014, Jinong sold approximately 14,719 metric tons of fertilizer products, as compared to 17,437 metric tons for the three months ended March 31, 2013. For the three months ended March 31, 2014, Gufeng sold approximately 93,687 metric tons of fertilizer products, as compared to 84,073 metric tons for the three months ended March 31, 2013. 

 

For the nine months ended March 31, 2014, we sold approximately 209,731 metric tons of fertilizer products, as compared to 199,018 metric tons for the nine months ended March 31, 2013. For the nine months ended March 31, 2014, Jinong sold approximately 48,101 metric tons of fertilizer products, as compared to 51,498 metric tons for the nine months ended March 31, 2013. For the nine months ended March 31, 2014, Gufeng sold approximately 161,630 metric tons of fertilizer products, as compared to 147,520 metric tons for the nine months ended March 31, 2013. 

 

22
 

  

Our sales of fertilizer products to five provinces accounted for approximately 57.8% of our fertilizer revenue for the nine months ended March 31, 2014.   Specifically, the provinces and their respective percentage contributed to our fertilizer revenues were: Hebei (16.9 %), Shaanxi (12.5%), Jilin (11.9%), Heilongjiang (9.7%), and Mongolia (6.8%).

 

As of March 31, 2014, we had a total of 1,143 distributors covering 27 provinces, four autonomous regions and three central government-controlled municipalities in China. Jinong had 891 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 39.0% of its fertilizer revenues for the three months ended March 31, 2014. Gufeng had 252 distributors, including some large state-owned enterprises. Gufeng’s top five distributors accounted for 41.8% of its revenues for the three months ended March 31, 2014.

 

Agricultural Products

 

Through Yuxing, we develop, produce and sell high-quality flowers, green vegetables and fruits to local market places and various horticulture and planting companies. We also use certain of Yuxing’s greenhouse facilities to conduct research and development activities for our fertilizer products. The three PRC provinces that accounted for 87.6% of our agricultural products revenue for the three months ended March 31, 2014 were Shaanxi (80.5%), Qinghai (4.9%), and Sichuan (4.5%).

     

Recent Developments

 

New Products

 

During the three months ended March 31, 2014, Jinong launched four new fertilizer products. Jinong’s new products generated approximately $454,191, or 1.5% of Jinong’s fertilizer revenue for the three months ended March 31,2014.Jinong added 19 new distributors for the three months ended March 31,2014. Jinong’s new distributors accounted for approximately $556,243, or 1.8% of Jinong’s fertilizer revenue for the three months ended March 31,2014.

 

During the three months ended March 31, 2014, Gufeng added 24 new distributors during the three months ended March 31, 2014, which accounted for approximately $2,141,955, or 5.5%, of Gufeng’s fertilizer revenue.

 

Results of Operations

 

Three months ended March 31, 2014 Compared to the Three months ended March 31, 2013.

 

   For the Three Months Ended March 31, 
   2014   2013   change $   change % 
 Sales                    
Jinong  $30,210,579   $27,051,929   $3,158,650    11.7%
Gufeng   39,080,111    37,690,762    1,389,349    3.7%
Yuxing   1,005,291    1,129,842    (124,551)   -11.0%
 Net sales   70,295,981    65,872,533    4,423,448    6.7%
 Cost of goods sold                    
Jinong   12,174,848    12,502,786    (327,938)   -2.6%
Gufeng   31,258,885    30,844,656    414,229    1.3%
Yuxing   701,533    779,386    (77,853)   -10.0%
 Cost of goods sold   44,135,266    44,126,828    8,438    0.0%
 Gross profit   26,160,715    21,745,705    4,415,010    20.3%
 Operating expenses                    
 Selling expenses   11,120,692    3,872,492    7,248,200    187.2%
 General and administrative expenses   3,463,127    1,348,802    2,114,325    156.8%
 Impairment of assets   1,659,729    0    1,659,729      
 Total operating expenses   16,243,548    5,221,294    11,022,254    211.1%
 Income from operations   9,917,167    16,524,411    (6,607,244)   -40.0%
 Other income (expense)                    
 Other income (expense)   65,563    212,344    (146,781)   -69.1%
 Interest income   37,587    73,879    (36,292)   -49.1%
 Interest expense   (472,104)   (268,455)   (203,649)   75.9%
 Total other income (expense)   (368,954)   17,768    (386,722)   -2176.5%
 Income before income taxes   9,548,213    16,542,179    (6,993,966)   -42.3%
 Provision for income taxes   2,339,082    3,131,520    (792,438)   -25.3%
 Net income   7,209,131    13,410,659    (6,201,528)   -46.2%
 Other comprehensive income                    
 Foreign currency translation gain   (2,838,362)   1,541,434    (4,379,796)   -284.1%
 Comprehensive income  $4,370,769   $14,952,093   $(10,581,324)   -70.8%
                     
Basic weighted average shares outstanding   31,825,562    27,939,780    3,885,782    13.9%
Basic net earnings per share  $0.23   $0.48   $(0.25)   -52.8%
Diluted weighted average shares outstanding   31,825,562    27,939,780    3,885,782    13.9%
Diluted net earnings per share  $0.23   $0.48   $(0.25)   -52.8%

 

23
 

  

Net Sales

 

Total net sales for the three months ended March 31, 2014 were $70,295,981, an increase of $4,423,448, or 6.7%, from $65,872,533 for the three months ended March 31, 2013. This increase was due to an increase in Gufeng’s and Jinong’s net sales.

 

For the three months ended March 31, 2014, Jinong’s net sales increased $3,158,650, or 11.7%, to $30,210,579 from $27,051,929 for the three months ended March 31, 2013. This increase was mainly attributable to the greater sales of humic acid fertilizer products including our liquid and powder fertilizers with a higher unit price during this period as a result of our increased distributors and the aggressive marketing strategy.

 

For the three months ended March 31, 2014, net sales at Gufeng were $39,080,111, an increase of $1,389,349, or 3.7% from $37,690,762 for the three months ended March 31, 2013. The increase was mainly attributable to Gufeng’s expanded marketing promotion strategy during the last three months. 

 

For the three months ended March 31, 2014, Yuxing’s net sales were $1,005,291 a decrease of $124,551 or 11.0%, from $1,129,842 during the three months ended March 31, 2013. The decrease was mainly attributable to reduced procurement demand from the government during the last three months.

 

Cost of Goods Sold

 

Total cost of goods sold for the three months ended March 31, 2014 was $44,135,266, an increase of $8,438, from $44,126,828 for the three months ended March 31, 2013. The increase was not significant.

 

24
 

  

Cost of goods sold by Jinong for the three months ended March 31, 2014 was $12,174,848, a decrease of $327,938, or 2.6%, from $12,502,786 for the three months ended March 31, 2013. The decrease was primarily attributable to slightly lower product costs.

 

Cost of goods sold by Gufeng for the three months ended March 31, 2014 was $31,258,885, an increase of $414,229, or 1.3%, from $30,844,656 for the three months ended March 31, 2013. The increase was proportional to Gufeng’s sales increase for the three months ended March 31, 2014.

 

For three months ended March 31, 2014, cost of goods sold by Yuxing was $701,533, a decrease of $77,853, or 10.0%, from $779,386 for the three months ended March 31, 2013. The decrease was proportional to Yuxing’s decreased sales for the three months ended March 31, 2014.

 

Gross Profit

 

Total gross profit for the three months ended March 31, 2014 increased by $4,415,010 to $26,160,715, as compared to $21,745,705 for the three months ended March 31, 2013. Gross profit margin was approximately 37.2% and 33.0% for the three months ended March 31, 2014 and 2013, respectively.

 

Gross profit generated by Jinong increased by $3,486,588, or 24.0%, to $18,035,731 for the three months ended March 31, 2014 from $14,549,143 for the three months ended March 31, 2013. Gross profit margin from Jinong’s sales was approximately 59.7% and 53.8% for the three months ended March 31, 2014 and 2013, respectively. The increase in gross profit margin was mainly due to the increased weight for higher-margin products sales in Jinong’s total sales.  

  

For the three months ended March 31, 2014, gross profit generated by Gufeng was $7,821,226, an increase of $975,120, or 14.2%, from $6,846,106 for the three months ended March 31, 2013. Gross profit margin from Gufeng’s sales was approximately 20.0% and 18.2% for the three months ended March 31, 2014 and 2013, respectively. The increase in gross profit margin was mainly due to the decrease in raw material and the increased in weight for higher-margin products sales in Gufeng’s total sales.

 

For the three months ended March 31, 2014, gross profit generated by Yuxing was $303,758, a decrease of $46,698, or 13.3% from $350,456 for the three months ended March 31, 2013.  The gross profit margin was approximately 30.2% and 31.0% for the three months ended March 31, 2014 and 2013, respectively. The decrease in gross profit percentage was not significant.

 

Selling Expenses

 

Our selling expenses consisted primarily of salaries of amortization of our deferred assets, sales personnel, advertising and promotion expenses, freight-out costs and related compensation. Selling expenses were $11,120,692, or 15.8%, of net sales for the three months ended March 31, 2014, as compared to $3,872,492 or 5.9% of net sales for the three months ended March 31, 2013, an increase of $7,248,200, or 187.2%. The selling expenses of Gufeng were $518,401 or 1.3% of Gufeng’s net sales for the three months ended March 31, 2014, as compared to $503,932, or 1.3% of Gufeng’s net sales for the three months ended March 31, 2013. The selling expenses of Jinong for the three months ended March 31, 2014 were $10,589,460, or 35.1% of Jinong’s net sales, as compared to selling expenses of $3,353,575, or 12.4% of Jinong’s net sales for the three months ended March 31, 2013. Most of this increase in Jinong’s selling expenses was due to the amortization of $1,528,996 of the deferred assets related to assisting the distributors in certain marketing efforts and developing standard stores to expand our competitive advantage and market shares.

 

General and Administrative Expenses

 

General and administrative expenses consisted primarily of related salaries, rental expenses, business development, depreciation and travel expenses incurred by our general and administrative departments and legal and professional expenses including expenses incurred and accrued for certain litigations. General and administrative expenses were $3,463,127, or 4.9% of net sales for the three months ended March 31, 2014, as compared to $1,348,802, or 2.0%, of net sales for the three months ended March 31, 2013, an increase of $2,114,325, or 156.8%.  The increase in general and administrative expenses was mainly due to the related expense in the stock compensation awarded to the employees for fiscal year 2013.

 

25
 

  

Impairment of assets

 

During the quarter ended March 31, 2014, we determined that the fair value of the Jintai’s assets held for sale less disposal costs was less than the carrying amounts of the assets and took an impairment charge of $1,659,729. The carrying value of the assets held for sale at March 31, 2014 was reduced to $10,060,219 which is fair value less disposal costs. There was no such impairment charge during the three months ended March 31, 2013.

 

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 March 31, 2014 was $368,954, as compared to total other income of $17,768 for the three months ended March 31, 2013, an increase in expense of $386,722, or 2176.5%. The increase in total other expense was mainly resulted from a decrease by $146,781 in other income, to $65,563 during the three months ended March 31, 2014, as compared to $212,344 during the three month ended March 31, 2013 and an increase in interest expenses by $203,649 or 75.9% to $472,104 during the three months ended March 31, 2014, as compared to $268,455 during the three months ended March 31, 2013.

 

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 $849,003 for the three months ended March 31, 2014, as compared to $1,754,200for the three months ended March 31, 2013, a decrease of $905,197, or 51.6%.

   

Gufeng, subject to a tax rate of 25%, incurred income tax expenses of $1,490,079 for the three months ended March 31, 2014, as compared to $1,409,419 for the three months ended March 31, 2013, an increase of $80,660, or 5.7%, which was primarily due to Gufeng’s increased net income.

 

Yuxing has no income tax for the three months ended March 31, 2014 as a result of being exempted from paying income tax due to its products fall into the tax exemption list set out in the EIT.

 

Net Income

 

Net income for the three months ended March 31, 2014 was $7,209,131, a decrease of $6,201,528, or 46.2%, compared to $13,410,659 for the three months ended March 31, 2013. The decrease was attributable to the increase in selling expenses and the impairment charge related to the write down of assets held for sale. Net income as a percentage of total net sales was approximately 10.3% and 20.4 % for the three months ended March 31, 2014 and 2013, respectively.

 

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Nine months ended March 31, 2014 Compared to the Nine months ended March 31, 2013

 

   For the Nine Months Ended March 31, 
   2014   2013   change $   change % 
 Sales                    
Jinong  $88,261,203   $77,857,756   $10,403,447    13.4%
Gufeng   70,318,209    66,612,586    3,705,623    5.6%
Yuxing   2,654,517    2,645,923    8,594    0.3%
 Net sales   161,233,929    147,116,265    14,117,664    9.6%
 Cost of goods sold                    
Jinong   37,013,941    35,994,694    1,019,247    2.8%
Gufeng   54,759,629    54,339,165    420,464    0.77%
Yuxing   1,978,441    1,909,795    68,646    3.6%
 Cost of goods sold   93,752,011    92,243,654    1,508,357    1.6%
 Gross profit   67,481,918    54,872,611    12,609,307    23.0%
 Operating expenses                    
 Selling expenses   25,723,977    10,044,863    15,679,114    156.1%
 General and administrative expenses   11,368,835    7,381,015    3,987,820    54.0%
Impairment of assets   1,659,729    0    1,659,729      
 Total operating expenses   38,752,541    17,425,878    21,326,663    122.4%
 Income from operations   28,729,377    37,446,733    (8,717,356)   -23.3%
 Other income (expense)                    
 Other income (expense)   (120,877)   609,724    (730,601)   -119.8%
 Interest income   114,675    235,028    (120,353)   -51.2%
 Interest expense   (1,009,528)   (1,020,694)   11,166    -1.1%
 Total other income (expense)   (1,015,730)   (175,942)   (839,788)   477.3%
 Income before income taxes   27,713,647    37,270,791    (9,557,144)   -25.6%
 Provision for income taxes   6,450,322    6,757,404    (307,082)   -4.5%
 Net income   21,263,325    30,513,387    (9,250,062)   -30.3%
 Other comprehensive income                    
 Foreign currency translation gain   803,434    1,696,220    (892,786)   -52.6%
 Comprehensive income  $22,066,759   $32,209,607   $(10,142,848)   -31.5%
                     
Basic weighted average shares outstanding   31,201,076    27,682,345    3,518,731    12.7%
Basic net earnings per share  $0.68   $1.10   $(0.42)   -38.2%
Diluted weighted average shares outstanding   31,201,076    27,682,345    3,518,731    12.7%
Diluted net earnings per share  $0.68   $1.10   $(0.42)   -38.2%

 

Net Sales

 

Total net sales for the nine months ended March 31, 2014 were $161,233,929, an increase of $14,117,664 or 9.6%, from $147,116,265 for the nine months ended March 31, 2013. This increase was largely due to the increase in Jinong’s and Gufeng’s net sales.

 

For the nine months ended March 31, 2014, Jinong’s net sales increased $10,403,447, or 13.4%, to $88,261,203 from $77,857,756 for the nine months ended March 31, 2013. This increase was mainly attributable to the greater sales of humic acid fertilizer products including our liquid and powder fertilizers during this period as a result of our increased distributors and certain marketing efforts.

 

For the nine months ended March 31, 2014, net sales at Gufeng were $70,318,209, an increase of $3,705,623, or 5.6%, from $66,612,586 for the nine months ended March 31, 2013. The increase was mainly attributable to Gufeng’s expanded marketing promotion strategy.

 

For the nine months ended March 31, 2014, Yuxing’s net sales were $2,654,517, an increase of $8,594, or 0.3%, from $2,645,923 during the nine months ended March 31, 2013. The increase was not significant.

 

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 Cost of Goods Sold

 

Total cost of goods sold for the nine months ended March 31, 2014 was $93,752,011, an increase of $1,508,357, or 1.6%, from $92,243,654 for the nine months ended March 31, 2013. This increase was not significant. 

 

Cost of goods sold by Jinong for the nine months ended March 31, 2014 was $37,013,941, an increase of $1,019,247, or 2.8%, from $35,994,694 for the nine months ended March 31, 2013. The increase was primarily attributable to the increase in sales offset by lower product costs.

 

Cost of goods sold by Gufeng for the nine months ended March 31, 2014 was $54,759,629, an increase of $420,464, or 0.77%, from $54,339,165 for the nine months ended March 31, 2013. The increase was primarily due to the increase in Gufeng’s fertilizer sales offset by slightly lower raw material cost and manufacturing costs.

 

For nine months ended March 31, 2014, cost of goods sold by Yuxing was $1,978,441, an increase of $68,646, or 3.6%, from $1,909,795 for the nine months ended March 31, 2013. The increase was mainly due to the increased raw material costs and labor costs during the nine months ended March 31, 2014.

 

Gross Profit

 

Total gross profit for the nine months ended March 31, 2014 increased by $12,609,307 to $67,481,918, as compared to $54,872,611 for the nine months ended March 31, 2013. Gross profit margin was approximately 41.9% and 37.3% for the nine months ended March 31, 2014 and 2013, respectively.

 

Gross profit generated by Jinong increased by $9,384,200, or 22.4%, to $51,247,262 for the nine months ended March 31, 2014 from $41,863,062 for the nine months ended March 31, 2013. Gross profit margin from Jinong’s sales was approximately 58.1% and 53.8% for the nine months ended March 31, 2014 and 2013, respectively. The increase in gross profit margin was mainly due to the increased weight for higher-margin products sales in Jinong’s total sales.  

 

For the nine months ended March 31, 2014, gross profit generated by Gufeng was $15,558,580, an increase of $3,285,159, or 26.8%, from $12,273,421 for the nine months ended March 31, 2013. Gross profit margin from Gufeng’s sales was approximately 22.1% and 18.4% for the nine months ended March 31, 2014 and 2013, respectively. The increase in gross profit margin was mainly due to the decrease in raw material and the increased weight for higher-margin products sales in Gufeng’s total sales.

 

For the nine months ended March 31, 2014, gross profit generated by Yuxing was $676,076 a decrease of $60,052, or 8.2% from $736,128 for the nine months ended March 31, 2013.  The gross profit margin of approximately 25.5% and 27.8% for the nine months ended March 31, 2014 and 2013, respectively. The decrease in gross profit was mainly due to the reduced government procurement demand for higher margin flowers during the nine months ended March 31, 2014, comparing to the same period of 2013.

 

Selling Expenses

 

Our selling expenses consisted primarily of salaries of amortization of the deferred assets, sales personnel, advertising and promotion expenses, freight-out costs and related compensation. Selling expenses were $25,723,977, or 16.0%, of net sales for the nine months ended March 31, 2014, as compared to $10,044,863, or 6.8% of net sales for the nine months ended March 31, 2013, an increase of $15,679,114, or 156.1%. The selling expenses of Gufeng were $986,548, or 1.4% of Gufeng’s net sales for the nine months ended March 31, 2014, as compared to $874,621, or 1.3% of Gufeng’s net sales for the nine months ended March 31, 2013. The selling expenses of Jinong for the nine months ended March 31, 2014 were $24,698,831, or 28.0% of Jinong’s net sales, as compared to selling expenses of $9,123,052, or 11.7% of Jinong’s net sales for the nine months ended March 31, 2013. Most of this increase in Jinong’s selling expenses was due to the amortization of $5,394,360 of the deferred assets related to assisting the distributors in certain marketing efforts and developing standard stores to expand our competitive advantage and market shares.

 

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General and Administrative Expenses

 

General and administrative expenses consisted primarily of related salaries, rental expenses, business development, depreciation and travel expenses incurred by our general and administrative departments and legal and professional expenses including expenses incurred and accrued for certain litigations. General and administrative expenses were $11,368,835, or 7.1% of net sales for the nine months ended March 31, 2014, as compared to $7,381,015, or 5.0%, of net sales for the nine months ended March 31, 2013, an increase of $3,987,820, or 54.0%.  The increase in general and administrative expenses was mainly due to the related expense in the stock compensation awarded to the employees for fiscal year 2013.

 

Impairment of assets

 

During the quarter ended March 31, 2014, we determined that the fair value of Jintai’s assets held for sale less disposal costs was less than the carrying amounts of the assets and took an impairment charge of $1,659,729. The carrying value of the assets held for sale at March 31, 2014 was reduced to $10,060,219 which is fair value less disposal costs. There was no such impairment charge during 2013.

 

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 nine months ended March 31, 2014 was $1,015,730; as compared to total other expense of $175,942 for the nine months ended March 31, 2013, an increase in expense of $839,788, or 477.3%. The increase in total other expense was mainly resulted from a decrease by $730,601 in other income, to $(120,877) during the nine months ended March 31, 2014, as compared to $609,724 during the nine months ended March 31, 2013 and a decrease in interest income by $120,353 or 51.2% to $114,675 during the nine months ended March 31, 2014, as compared to $235,028 during the nine months ended March 31, 2013.

 

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 $3,698,296 for the nine months ended March 31, 2014, as compared to $4,746,988 for the nine months ended March 31, 2013, a decrease of $1,048,692, or 22.1%, due to Jinong’s decreased net income.

 

Gufeng, subject to a tax rate of 25%, incurred income tax expenses of $2,752,026 for the nine months ended March 31, 2014, as compared to $2,010,416 for the nine months ended March 31, 2013, an increase of $741,610, or 36.9%, which was primarily due to Gufeng’s increased net income.

 

Yuxing has no income tax for the nine months ended March 31, 2014 as a result of being exempted from paying income tax due to its products fall into the tax exemption list set out in the EIT.

 

Net Income

 

Net income for the nine months ended March 31, 2014 was $21,263,325adecrease of $9,250,062 or 30.3%, compared to $30,513,387 for the nine months ended March 31, 2013. The decrease was attributable to the increase in selling expenses and the impairment charge related to the writedown of Jintai’s assets held for sale. Net income as a percentage of total net sales was approximately 13.2% and 20.7 % for the nine months ended March 31, 2014 and 2013, respectively.

 

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Discussion of Segment Profitability Measures

 

As of March 31, 2014, we were engaged in the following businesses: the production and sale of fertilizers through Jinong and Gufeng and the production and sale of high-quality agricultural products by Yuxing. For financial reporting purpose, our operations were organized into three main business segments based on locations and products: Jinong (fertilizer production), Gufeng (fertilizer production) and Yuxing (agricultural products production). While each of the segments has its own annual budget with regard to development, production and sales.  Jintai is in its migrating process into Yuxing.

 

Each of the three 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 24.5% by $6,576,020 to $20,317,816 for the nine months ended March 31, 2014 from $26,893,836 for the nine months ended March 31, 2013.

 

For Gufeng, the net income increased 39.2% by $2,294,076 to $8,142,956 for the nine months ended March 31, 2014 from $5,848,880 for the nine months ended March 31, 2013.

 

For Yuxing, the net income decreased66.6% by $548,682 to $275,229for the nine months ended March 31, 2014 from $823,911 for the nine months ended March 31, 2013.

 

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 March 31, 2014, cash and cash equivalents were $23,887,359, a decrease of $51,144,130, or 68.2%, from $75,031,489 as of June 30, 2013.

 

The decrease in cash and cash equivalents was due to the incurrence of a deferred asset of $59,314,664 as of March 31, 2014, as advances by Jinong to the distributors in marketing the Company’s products with credit guarantee by Mr. Tao Li, Chairman and CEO of the Company. 

     

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. We believe that we have sufficient cash on hand and positive projected cash flow from operations to support our business growth for the next twelve months to the extent we do not have further significant acquisitions or expansions. However, if events or circumstances occur and we do not meet our operating plan as expected, we may be required to seek additional capital and/or to reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives. Notwithstanding the foregoing, we may seek additional financing as necessary for expansion purposes and when we believe market conditions are most advantageous, which may include additional debt and/or equity financings. There can be no assurance that any additional financing will be available on acceptable terms, if at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.

 

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

  

   Nine Months Ended March 31, 
   2014   2013 
Net cash provided by operating activities  $1,281,974   $17,266,584 
Net cash used in investing activities   (66,092,306)   (15,012,937)
Net cash provided by financing activities   13,212,900    2,943,885 
Effect of exchange rate change on cash and cash equivalents   453,302    476,483 
Net increase (decrease) in cash and cash equivalents   (51,144,130)   5,674,015 
Cash and cash equivalents, beginning balance   75,031,489    71,978,630 
Cash and cash equivalents, ending balance  $23,887,359   $77,652,645 

 

Operating Activities

 

Net cash provided in operating activities was $1,281,974 for the nine months ended March 31, 2014; a decrease of $15,984,610, or 92.6% from cash provided by operating activities of $17,266,584 for the nine months ended March 31, 2013. The decrease was mainly attributable to the increase in accounts receivable and inventory balances during the three months ended March 31, 2014 to the same period in 2013. Jinong assisted its distributors in marketing to expand its competitive product advantage and market share during the three months ended March 31, 2014. 

 

Investing Activities

 

Net cash used in investing activities for the nine months ended March 31, 2014 was $66,092,306, an increase of $51,079,369, or 340.2% from $15,012,937 for the nine months ended March 31, 2013. During the nine months ended March 31, 2014, Jinong assisted its distributors in marketing to expand its competitive product advantage and market share by advancing them $64,964,848.

 

Financing Activities

 

Net cash provided in financing activities in the nine months ended March 31, 2014 was $13,212,900,comparing to $2,943,885 for the same period ended March 31, 2013, an increase of $10,269,015, or 348.8%. The increase was mainly attributable to the short-term loans borrowed by Gufeng from its local banks.

 

As of March 31, 2014 and June 30, 2013, our loans payable were as follows:

 

   March 31, 2014   June 30, 2013 
Short term loans payable:  $28,856,940   $16,099,100 
Total  $28,856,940   $16,099,100 

    

Accounts Receivable

 

We had accounts receivable of $87,361,396 as of March 31, 2014, as compared to $85,323,442 as of June 30, 2013, an increase of $2,037,954 or 2.4%, which is mainly attributable to the increase in Jinong’s fertilizer sales as of March 31, 2014.

 

Allowance for doubtful accounts in account receivable for the nine months ended March 31, 2014 was $200,955, an increase of $78,680, or 64.3% from $122,275 as of June 30, 2013. And the allowance for doubtful accounts as a percentage of accounts receivable was 0.22% as of March 31, 2014 and 0.29% as of June 30, 2013.

 

Deferred Asset

 

We had a deferred asset of $59,314,664 as of March 31, 2014, as compared to $0 as of June 30, 2013.  During the nine 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 as long as 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 Company’s Chairman and CEO, Mr. Li, provided credit backup guarantee toward potential losses to the Company of any amounts due from distributors in this matter.

 

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Inventories

 

We had an inventory of $72,315,948 as of March 31, 2014, as compared to $34,511,167 as of June 30, 2013, an increase of $37,804,781, or 109.5%.  The principal reason for the increase is attributed to Gufeng’s increased inventory. As of March 31, 2014, Gufeng’s inventory was $55,661,286 as a result of the acquisition of raw materials at lower prices for the expected production and accumulation of finished goods. These products are expected to be sold and shipped during the fourth quarter of fiscal year of 2014. 

 

Advances to Suppliers

 

We had advances to suppliers of $21,338,781 as of March 31, 2014 as compared to $20,224,206 as of June 30, 2013, representing an increase of $1,114,575 or 5.5%. To ensure our ability to deliver compound fertilizer to the distributor timely prior to the planting season, we need to have sufficient raw material in stock to feed the production. To build up the inventory, we typically make advance payment to the supplier to secure the supply of raw material of basic fertilizer. Our inventory level may fluctuate from time to time, depending how fast the raw material gets consumed and replenished during the production process, and how fast the finished goods get sold. The replenishment of raw material relies on the management’s estimate of numerous factors, including but not limited to, the raw material’s future price, and spot price along with their volatility, as well as the seasonal demand and future price of finished fertilizer products. Such estimate may not be accurate, and the purchase decision of raw materials based on the estimate can cause excessive inventories in slow sales and insufficient inventories in peak sales.

 

Accounts Payable

 

We had accounts payable of $3,036,980 as of March 31, 2014 as compared to $3,375,333 as of June 30, 2013, representing a decrease of $338,353, or 10%. The decrease was primarily due to the timing of vendor payments.

 

Unearned Revenue

 

We had unearned revenue of $6,371,128 as of March 31, 2014 as compared to $1,433,661 as of June 30, 2013, representing an increase of $4,937,467, or 344.4%.  The principal reason for the increase is due to Gufeng, which had $6,166,492 unearned revenue as of March 31, 2014,   largely attributable to the advancement deposits made by its clients for the following purposes: 1) reservation and storage for the coming plant season; and 2) locking up a lower price in anticipation of increased price while price of raw material tends to rise in February.

    

Tax Payable

 

We had taxes payable of $9,669,371 as of March 31, 2014 as compared to $25,728,759 as of June 30, 2013, representing a decrease of $16,059,388, or 62.4%. This decrease was mainly due to estimated tax payments exceeding the tax liability incurred during the nine months ended March 31, 2014.

 

Non-Cash Financing Activities

 

During the nine months ended March 31, 2014, we issued 118,778 shares of common stock to Mr. Tao Li, Chairman and CEO as repayment for $200,000 previously advanced to us and $325,000 in unpaid compensation.

 

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 more critical accounting policies that currently affect our financial condition and results of operations:

 

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Use of estimates

 

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

 

Revenue recognition

 

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

 

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

 

Cash and cash equivalents

 

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

 

Accounts receivable

 

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

 

Assets held for sale

 

Assets held for sale represent certain equipment from our Jintai facility that has been relocated.

 

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Deferred asset

 

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

 

Segment reporting

 

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

 

As of March 31, 2014, we were organized into three main business segments: Jinong (fertilizer production), Gufeng (fertilizer production) and Yuxing (agricultural products production).

 

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Disclosures About Market Risk

 

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

 

Currency Fluctuations and Foreign Currency Risk

 

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

 

Our reporting currency is the U.S. dollar. Except for the U.S. holding companies, all of our consolidated revenues, consolidated costs and expenses, and our assets are denominated in the RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. dollars and RMB. If the RMB depreciates against the U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. Assets and liabilities are translated at the exchange rates as of the balance sheet dates, revenues and expenses are translated at the average exchange rates, and shareholders’ equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of shareholders’ equity. As of March 31, 2014, our accumulated other comprehensive income was $22,616,844. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk. The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in the PRC’s political and economic conditions. Since July 2005, the RMB has not been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that, in the future, PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

 

Interest Rate Risk

 

We deposit surplus funds with Chinese banks earning daily interest. We do not invest in any instruments for trading purposes. All of our outstanding debt instruments carry fixed rates of interests. The amount of short-term debt outstanding as of March 31, 2014 and June 30, 2013 was $28,856,940 and $16,099,100, respectively. We are exposed to interest rate risk primarily with respect to our short-term bank loans. Although the interest rates, which are based on the banks’ prime rates with respect to our short-term loans, are fixed for the terms of the loans, the terms are typically three to twelve months for short-term bank loans and interest rates are subject to change upon renewal. There were no material changes in interest rates for short-term bank loans renewed during the three months ended March 31, 2014. The original loan term on average is one year, and the remaining average life of the short term-loans is approximately five months.

 

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

 

Credit Risk

 

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

 

Inflation Risk

 

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

 

Item 4. Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures

 

At the conclusion of the period ended March 31, 2014 we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, our CEO and CFO concluded that as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective and adequately designed to ensure that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that such information was accumulated and communicated to our management, including our CEO and CFO, in a manner that allowed for timely decisions regarding required disclosure.

 

(b) Changes in internal controls

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

On October 15, 2010, a class action lawsuit was filed against us and certain of our current and former officers in the United States District Court for the District of Nevada (the "Nevada Federal Court") on behalf of purchasers of our common stock between November 12, 2009 and September 1, 2010. The current version of the complaint alleges that we and certain of our current and former officers and directors violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended, by making material misstatements and omissions in our financial statements, securities offering documents, and related disclosures during the class period.

 

On October 7, 2011, the defendants moved to dismiss the amended complaint and to strike portions of it. On November 2, 2012, the Nevada Federal Court issued an order dismissing the claims for violation of sections 11, 12(a)(2) and 15 of the Securities Act of 1933 as to all defendants and dismissing certain individual defendants from the complaint and allowing the claims for violations of section 10(b) and 20(a) of the Securities Exchange Act of 1934 to continue with respect to the Company and certain of the individual defendants. The Nevada Federal Court also denied the defendants’ motion to strike.

 

The parties to the securities class action held a mediation on March 7, 2013, which led to an agreement in principle to settle the case for a payment of $2.5 million by our insurers in exchange for a release of all claims against all defendants. Plaintiffs filed an upopposed motion for preliminary approval of the proposed settlement on March 19, 2014, and the court granted the motion on March 20, 2014. The court will hold a final approval hearing on the proposed settlement on July 22, 2014.

 

 

Item 6. Exhibits

 

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

 

 

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SIGNATURES

 

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

 

 

  CHINA GREEN AGRICULTURE, INC.
   
  By:  /s/ Tao Li
Date: May 12, 2014 Name: Tao Li
  Title: President and Chief Executive Officer
  (principal executive officer)
   
   
Date: May 12, 2014 By: /s/ Ken Ren
  Name: Ken Ren
  Title: Chief Financial Officer
  (principal financial officer and principal accounting officer)

 

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EXHIBIT INDEX

 

No. Description
   
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS* XBRL Instance Document
   
101.SCH* XBRL Taxonomy Extension Schema Document
   
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

* Furnished and not deemed filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise not subject to liability under these sections.

 

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