10-Q 1 v393000_10q.htm 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2014

 

¨ 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 þ No ¨

 

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

 

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

 

Large accelerated filer ¨ Accelerated filer þ

Non-accelerated filer ¨

( Do not check if a smaller reporting company )

 Smaller reporting company ¨

 

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

  

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: 32,474,005 shares of common stock, $.001 par value, as of November 3, 2014.

 

 
 

  

TABLE OF CONTENTS

 

    Page
PART I   FINANCIAL INFORMATION    
         
Item 1.   Financial Statements   3
         
    Consolidated Condensed Balance Sheets    
    As of September 30, 2014 and June 30, 2013 (Unaudited)   3
         
    Consolidated Condensed Statements of Income and Comprehensive Income    
    For the Three Months Ended September 30, 2014 and 2013 (Unaudited)   4
         
    Consolidated Condensed Statements of Cash Flows    
    For the Three Months Ended September 30, 2014 and 2013 (Unaudited)   5
         
    Notes to Consolidated Condensed Financial Statements    
    As of September 30, 2014 (Unaudited)   6
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   21
         
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   31
         
Item 4.   Controls and Procedures   32
         
PART II   OTHER INFORMATION   32
         
Item 5.   Other Information   32
         
Item 6.   Exhibits   33
         
Signatures   34
     
Exhibits/Certifications   35

 

2
 

  

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CHINA GREEN AGRICULTURE INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(UNAUDITED)

 

 

   September 30, 2014   June 30, 2014 
         
ASSETS
Current Assets        
Cash and cash equivalents  $41,116,016   $26,890,321 
Accounts receivable, net   75,058,824    88,781,608 
Other receivable, net   1,977,502    3,942,542 
Inventories   100,583,401    75,486,898 
Prepaid expenses and other current assets   529,147    480,432 
Advances to suppliers, net   37,809,606    32,630,865 
Total Current Assets   257,074,496    228,212,666 
           
Plant, Property and Equipment, Net   47,275,996    48,061,611 
Other Receivables, Net of current portion   2,628,361    2,628,361 
Deferred Asset, Net   77,637,538    83,680,425 
Other Assets   120,342    98,018 
Intangible Assets, Net   24,823,031    25,225,143 
Goodwill   5,203,986    5,203,986 
           
Total Assets  $414,763,750   $393,110,210 
           
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities          
Accounts payable  $2,812,361   $3,378,248 
Customer deposits   36,870,502    25,700,586 
Accrued expenses and other payables   4,420,750    4,309,073 
Amount due to related parties   1,958,736    1,758,336 
Taxes payable   3,933,954    1,921,455 
Short term loans   22,947,120    24,002,720 
Total Current Liabilities   72,943,423    61,070,418 
           
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, 32,474,005 and 32,362,534 shares issued and outstanding as of September 30, 2014 and June 30, 2014, respectively   32,474    32,362 
Additional paid-in capital   116,280,266    114,605,214 
Statutory reserve   23,435,997    22,540,394 
Retained earnings   179,224,810    172,021,331 
Accumulated other comprehensive income   22,846,780    22,840,491 
Total Stockholders' Equity   341,820,327    332,039,792 
           
Total Liabilities and Stockholders' Equity  $414,763,750   $393,110,210 

 

 

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 September 30, 
   2014   2013 
Sales        
 Jinong  $34,464,165   $31,762,002 
 Gufeng   15,986,074    17,756,082 
 Yuxing   851,551    785,263 
 Net sales   51,301,790    50,303,347 
Cost of goods sold          
 Jinong   13,380,623    13,969,831 
 Gufeng   12,599,185    13,209,632 
 Yuxing   648,548    654,196 
 Cost of goods sold   26,628,356    27,833,659 
 Gross profit   24,673,434    22,469,688 
Operating expenses          
 Selling expenses   11,066,721    5,796,190 
 General and administrative expenses   3,119,632    3,339,776 
 Total operating expenses   14,186,353    9,135,966 
 Income from operations   10,487,081    13,333,722 
Other income (expense)          
 Other income (expense)   41,955    (116,383)
 Interest income   29,385    55,654 
 Interest expense   (455,744)   (233,186)
 Total other income (expense)   (384,404)   (293,915)
 Income before income taxes   10,102,677    13,039,807 
Provision for income taxes   2,003,595    2,661,350 
 Net income   8,099,082    10,378,457 
Other comprehensive income          
 Foreign currency translation gain   6,289    694,716 
 Comprehensive income  $8,105,371   $11,073,173 
           
Basic weighted average shares outstanding   32,377,250    29,973,726 
Basic net earnings per share  $0.25   $0.35 
Diluted weighted average shares outstanding   32,377,250    29,973,726 
Diluted net earnings per share   0.25    0.35 

 

 

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)

 

 

 

   Three Months Ended September 30, 
   2014   2013 
Cash flows from operating activities        
Net income  $8,099,082   $10,378,457 
Adjustments to reconcile net income to net cash provided by  (used in) operating activities          
Issuance of common stock and stock options for compensation   1,475,164    1,984,494 
Depreciation and amortization   11,749,194    5,666,842 
Changes in operating assets          
Accounts receivable   13,714,334    (9,882,111)
Other current assets   (48,687)   8,843 
Inventories   (25,081,049)   (15,498,332)
Advances to suppliers   (5,175,552)   1,174,510 
Other assets   (22,310)   20,620 
Changes in operating liabilities          
Accounts payable   (565,539)   508,712 
Customer deposits   11,163,038    2,680,539 
Tax payables   2,011,259    (1,875,760)
Accrued expenses and other payables   111,790    549,836 
Amount due to related parties   -    - 
Net cash provided by (used in) operating activities   17,430,724    (4,283,350)
           
Cash flows from investing activities          
Purchase of plant, property, and equipment   (231,115)   (646,170)
Proceeds from other receivables   1,963,830    - 
Deferred assets   (4,291,918)   (25,771,964)
Net cash used in investing activities   (2,559,203)   (26,418,134)
           
Cash flows from financing activities          
    Proceeds from the sale of common stock   200,000    - 
Proceeds from loans   -    162,800 
Repayment of loans   (1,054,950)   - 
Advance from related party   200,400    100,000 
Net cash provided by (used in) financing activities   (654,550)   262,800 
           
Effect of exchange rate change on cash and cash equivalents   8,724    297,697 
Net increase (decrease) in cash and cash equivalents   14,225,695    (30,140,987)
           
Cash and cash equivalents, beginning balance   26,890,321    75,031,489 
Cash and cash equivalents, ending balance  $41,116,016   $44,890,502 
           
Supplement disclosure of cash flow information          
Interest expense paid  $455,744   $348,675 
Income taxes paid  $-   $4,558,400 
           
Supplemental Disclosure of Non-Cash Financing Activities:          
Issuance 118,778 shares of common stock for repayment of          
       amount due to related party  $-   $525,000 

  

 

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

SEPTEMBER 30, 2014

 

 

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 September 30, 2014 is set forth in the diagram below:

 

 

 

6
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

 

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 three months ended September 30, 2014, are not necessarily indicative of the results to be expected for the year ending June 30, 2015.

 

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 by 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 assets

 

Deferred assets represent amounts that the distributors owed to the Company in their marketing efforts and developing standard stores to expand the Company’s products’ competitiveness and market shares. The amount owed to the Company to assist its distributors will be expensed over three years as long as the distributors are actively selling the Company’s products, according to the terms in the cooperation agreement by and between the Company and its distributors. For the three months ended September 30, 2014, the Company amortized $10,331,084 of the deferred assets. If a distributor breaches, defaults, or terminates the agreement with the Company within the three year period, the outstanding unamortized portion of the amount owed will become payable to the Company immediately. The Company’s Chairman, Mr. Li, guaranteed to the Company of amounts remaining unpaid due from distributors. These deferred assets are subject to annual impairment testing. The estimated amortization expense of the deferred assets for the twelve months ending September 30, 2015, 2016, and 2017 is $43,238,911, $28,891,621 and $5,507,006, respectively.

 

Earnings per share

 

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

 

7
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

 

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

 

   For the Three Months Ended
September 30,		 
   2014   2013 
Net Income for Basic Earnings Per Share  $8,099,082   $10,378,457 
Basic Weighted Average Number of Shares   32,377,250    29,973,726 
Net Income per Share – Basic  $0.25   $0.35 
Net Income for Diluted Earnings Per Share  $8,099,082   $10,378,457 
Diluted Weighted Average Number of Shares   32,377,250    29,973,726 
Net Income per Share – Diluted  $0.25   $0.35 

 

Reclassification

 

Certain reclassifications have been made to the prior year’s consolidated financial statements to conform to the 2014 consolidated financial statement presentation. Such reclassifications did not affect total revenues, operating income or net income or cash flows as previously reported.

 

Recent accounting pronouncements

 

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.

 

FASB Accounting Standards Update No. 2014-09

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is not permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard beginning January 1, 2017.

 

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

 

 

NOTE 3 – INVENTORIES

 

Inventories consist of the following:

 

   September 30,   June 30, 
   2014   2014 
Raw materials  $52,402,159   $24,618,225 
Supplies and packing materials   639,812    492,954 
Work in progress   312,410    440,935 
Finished goods   47,229,020    49,934,784 
Total  $100,583,401   $75,486,898 

 

8
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

 

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consist of the following:

 

   September 30,   June 30, 
   2014   2014 
Building and improvements  $29,930,241   $29,930,240 
Auto   732,684    732,684 
Machinery and equipment   36,424,759    36,193,501 
Agriculture assets   826,549    826,549 
Total property, plant and equipment   67,914,233    67,682,974 
Less: accumulated depreciation   (20,638,237)   (19,621,363)
Total  $47,275,996   $48,061,611 

 

 

NOTE 5 - INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

   September 30,   June 30, 
   2014   2014 
Land use rights, net  $11,658,736   $11,723,976 
Technology patent, net   435,774    498,027 
Customer relationships, net   6,086,686    6,350,586 
Non-compete agreement   32,155    42,874 
Trademarks   6,609,680    6,609,680 
Total  $24,823,031   $25,225,143 

 

 

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 $11,885,227). 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 $169,862). The intangible asset is being amortized over the grant period of 50 years using the straight line method.

 

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 $1,183,100). The intangible asset is being amortized over the grant period of 50 years using the straight line method.

 

 

The Land Use Rights consist of the following:

 

   September 30,   June 30, 
   2014   2014 
Land use rights  $13,238,189   $13,238,189 
Less: accumulated amortization   (1,579,453)   (1,514,213)
Total land use rights, net  $11,658,736   $11,723,976 

 

9
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

 

TECHNOLOGY PATENT

 

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 $1,494,080) and is amortized over the remaining useful life of six years using the straight line method.

 

The technology know-how consisted of the following:

 

   September 30,   June 30, 
   2014   2014 
Technology know-how  $2,448,191   $2,448,191 
Less: accumulated amortization   (2,012,417)   (1,950,164)
Total technology know-how, net  $435,774   $498,027 

 

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 $10,556,000) and is amortized over the remaining useful life of ten years.

 

   September 30,   June 30, 
   2014   2014 
Customer relationships  $10,556,000   $10,556,000 
   Less: accumulated amortization   (4,469,314)   (4,205,414)
Total customer relationships, net  $6,086,686   $6,350,586 

 

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 $214,368) and is amortized over the remaining useful life of five years using the straight line method.  

 

   September 30,   June 30, 
   2014   2014 
Non-compete agreement  $214,368   $214,368 
    Less: accumulated amortization   (182,213)   (171,494)
Total non-compete agreement, net  $32,155   $42,874 

 

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 $6,609,680) and is subject to an annual impairment test.

 

AMORTIZATION EXPENSE

 

Estimated amortization expenses of intangible assets for the next five twelve months periods ended September 30, 2014, are as follows:

 

AMORTIZATION TABLE    
Year Ends  Expense ($) 
September 30, 2015   1,612,251 
September 30, 2016   1,558,659 
September 30, 2017   1,258,111 
September 30, 2018   1,320,364 
September 30, 2019   1,320,364 

 

10
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

 

NOTE 6 - ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables consist of the following:

 

   September 30,   June 30, 
   2014   2014 
Payroll payable  $7,964   $7,964 
Welfare payable   166,727    166,727 
Accrued expenses   3,205,855    2,948,727 
Other payables   904,332    1,049,783 
Other levy payable   135,872    135,872 
Total  $4,420,750   $4,309,073 

 

 

NOTE 7 - AMOUNT DUE TO RELATED PARTIES

 

As of September 30, 2014 and June 30, 2014, the amount due to related parties was $1,958,736 and $1,758,336, respectively. At September 30, 2014 and June 30, 2014, $1,136,800 and $1,136,800, 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. The total amount under this Agreement is $133,168.

 

On August 10, 2010, Yuxing, 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 $492,072. The project is currently ongoing, and RMB1,212,000 or $196,829 had been paid by Yuxing to Kingtone as of September 30, 2014.

 

On June 29, 2014, 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, 2014 with monthly rent of RMB24,480 (approximately $4,000).

 

NOTE 8- LOAN PAYABLES

 

As of September 30, 2014, the short-term loan payables consist of eleven loans which mature on dates ranging from October 29, 2014 through September 23, 2015 with interest rates ranging from 6.00% to 7.80%. The loans No 4,7 and 8 below are collateralized by Tianjuyan’s land use right and building ownership right. The loan No.5 is collateralized by deposit. The loans No.3 collateralized by Jinong’s land use right and Jinong’s credit. The loan No. 6 and 10 are guaranteed by Jinong’s credit. The loans No. 1, 2 and 11 are guaranteed by a bonding company in Zhongguancun Beijing, and counter guaranteed by Jinong’s credit. The loan No.9 is guaranteed by Jinong and Tianjuyuan’s deposit.

 

11
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

 

No.  Payee  Loan period per agreement  Interest
Rate		     As of Sep 30,
2014		 
1  Beijing International Trust Co., Ltd   Oct 30, 2013- Oct 29, 2014   7.80%    $1,299,200 
2  Beijing International Trust Co., Ltd   Dec 12, 2013 - Dec 11, 2014   7.80%     1,299,200 
3  Bank of Tianjin- Beijing Branch   Jan 8, 2014- Jan 7, 2015   6.60%     5,684,000 
4  Agriculture Bank of China-Pinggu Branch   Jan 15, 2014-Jan 14, 2015   6.60%     1,364,160 
5  Bank of Tianjin- Beijing Branch   Jan 23, 2014- Jan 22, 2015   6.00%     3,053,120 
6  China Merchants Bank- Chaoyangmen Branch   Feb 19, 2014- Feb 18, 2015   7.20%     2,436,000 
7  Agriculture Bank of China-Pinggu Branch   Mar 24, 2014- Mar 23, 2015   6.60%     1,299,200 
8  Agriculture Bank of China-Pinggu Branch   Apr 25, 2014- Apr 24, 2015   6.60%     1,640,240 
9  Bank of Beijing- Pinggu Branch   Aug 6, 2014- Aug 5, 2015   7.20%     1,624,000 
10  China Merchants Bank- Chaoyangmen Branch   Aug 27, 2014- Aug 26, 2015   7.80%     1,624,000 
11  Beijing International Trust Co., Ltd   Sep 24, 2014- Sep 23, 2015   7.80%     1,624,000 
　  Total             $22,947,120 

 

As of June 30, 2014, the short-term loan payables consist of eleven loans which mature on dates ranging from August 14, 2014 through April 24, 2015 with interest rates ranging from 6.00% to 7.80%. The loans No. 7, 10 and 11 below are collateralized by Tianjuyan’s land use right and building ownership right. The loan No. 2 is collateralized by Gufeng and Tianjuyuan. The loan No.8 is collateralized by deposit. The loans No. 1, 3, 4, 5 and 9 are guaranteed by Jinong’s credit. The loan No. 6 is collateralized by the land use rights of Jinong. The loans No. 1 and 2 were subsequently paid off during August 2014.

 

No.   Payee   Loan period per agreement     Interest
Rate		     As of June 30, 2014  
1   China Merchants Bank Chaoyang Branch     Feb 25, 2014 - Aug 14, 2014      6.90 %   $ 2,030,000  
2   Beijing Bank Pinggu Branch     Aug 16, 2013 - Aug 15, 2014      7.20 %     1,624,000  
3   Beijing International Trust Co., Ltd     Sep 25, 2013 - Sep 24, 2014      7.80 %     1,624,000  
4   Beijing International Trust Co., Ltd     Oct 30, 2013-Oct 29, 2014      7.80 %     1,624,000  
5   Beijing International Trust Co., Ltd     Dec 12, 2013-Dec 11, 2014      7.80 %     1,624,000  
6   Tianjin Bank Beijing Branch     Jan 8, 2014-Jan 7, 2015      6.60 %     5,684,000  
7   Agriculture Bank of China-Pinggu Branch     Jan 15, 2014-Jan 14, 2015      6.60 %     1,364,160  
8   Tianjin Bank Beijing Branch     Jan 23, 2014 - Jan 22,2015      6.00 %     3,053,120  
9   China Merchants Bank Chaoyang Branch     Feb 19, 2014-Feb 18, 2015      7.20 %     2,436,000  
10   Agriculture Bank of China-Pinggu Branch     Mar 24, 2014- Mar 23, 2015      6.60 %     1,299,200  
11   Agriculture Bank of China-Pinggu Branch     Apr 25, 2014- Apr 24, 2015      6.60 %     1,640,240  
     Total                 $ 24,002,720  

 

 

The interest expense from short-term loans were $455,744 and $233,186 for the three months ended September 30, 2014 and 2013, respectively.

 

NOTE 9 – 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 three months ended September 30, 2014 and 2013 of $1,516,587 and $1,825,650, 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 $487,008 and $835,700 for the three months ended September 30, 2014 and 2013, respectively.

 

12
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

 

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 but a nominal amount of agricultural products sold by Jinong.

 

Income Taxes and Related Payables

 

Taxes payable consist of the following:

 

   September 30,   June 30, 
   2014   2014 
VAT provision  $52,840   $61,506 
Income tax payable   3,171,512    1,166,683 
Other levies   709,602    693,266 
Total  $3,933,954   $1,921,455 

 

Tax Rate Reconciliation

 

Our effective tax rates were approximately 19.8% and 20.4% for the three months ended September 30, 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 three months ended September 30, 2014 and 2013, for the following reasons:

 

September 30, 2014                        
   China   United States         
   15% - 25%   34%   Total     
                               
Pretax income (loss)  $12,208,311        $(2,105,634)       $10,102,677      
Expected income tax expense (benefit)   3,052,078    25.0%   (715,916)   34.0%   2,336,162      
 
High-tech income benefits on Jinong		   (591,405)   (4.8)%   -    -    (591,405)     
Losses from subsidiaries in which no benefit is recognized   (457,078)   (3.7)%   -    -    (457,078)     
Change in valuation allowance on deferred tax asset from US tax benefit   -         715,916    (34.0)%   715,916      
Actual tax expense  $2,003,595    16.4%  $-            -%  $2,003,595    19.8%

  

13
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

September 30, 2013                        
   China   United States         
   15% - 25%   34%   Total     
                               
Pretax income (loss)  $15,349,063        $(2,309,256)       $13,039,807      
                               
Expected income tax expense (benefit)   3,837,266    25.0%   (785,147)   34.0%   3,052,119      
High-tech income benefits on Jinong   (696,553)   (4.5)%   -    -    (696,553)     
Losses from subsidiaries in which no benefit is recognized   (479,363)   (3.1)%   -    -    (479,363)     
Change in valuation allowance on deferred tax asset from US tax benefit   -         785,147    (34.0)%   785,147      
Actual tax expense  $2,661,350    17.3%  $-    -%  $2,661,350    20.4%

 

 

NOTE 10 – STOCKHOLDERS’ EQUITY

 

Common Stock

 

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 the repayment for $200,000 he previously advanced to the Company and $325,000 for the 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 year ended June 30, 2014, the Company issued 17,356 shares of common stock for consulting services valued at $65,535. The shares were valued at the market price on the date of issuance.

 

Effective July 28, 2014, the Company issued 23,752 shares of common stock for professional fees valued at $54,444. The shares were valued at the market price on the date of issuance.

 

On September 30, 2014, the Company granted an aggregate of 1,750,000 shares of restricted stock under the 2009 Plan to certain executive officers, directors and employees. among which (i) 240,000 shares of restricted stock to Mr. Tao Li, the CEO; (ii) 100,000 shares of restricted stock to Mr. Ken Ren, the CFO, (iii) 40,000 shares of restricted stock to Mr. Yizhao Zhang, 30,000 shares of restricted stock to Ms. Yiru Shi, and 20,000 shares of restricted stock to Mr. Lianfu Liu, each an independent director of the Company; and (iv) 1,320,000 shares of restricted stock to key employees.   The stock grants are subject to time-based vesting schedules, vesting in various installments until March 31, 2015 for the CFO and the three independent directors, until June 30, 2015 for the CEO and until December 31, 2016 for the employees.

 

On September 12, 2014, the Company’ Compensation Committee, approved the issuance of 87,719 shares of common stock to its ten employees under the Company’s Amended and Restated 2012 Employee Stock Purchase Plan for a cash contribution of a total of $200,000. The issuance is at the closing price $2.28 per share on September 11, 2014.

  

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.

 

14
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

 

As of September 30, 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 11 – STOCK OPTIONS

 

There were no issuances of stock options during the three months ended September 30, 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, 2014   115,099   $14.66   $- 
Granted   -           
Forfeited/Canceled   -           
Exercised   -           
Outstanding, September 30, 2014   115,099   $14.66   $- 

 

 

NOTE 12 –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 21.5% and 12.5% of its raw materials for the three months ended September 30, 2014. Total purchase from these two venders amounted to $16,907,966 as September 30, 2014. The total amount payable to these two venders as of September 30, 2014 was $4,700,415.

 

There were two vendors from which the Company purchased 16.1% and 15.1% of its raw materials for the three months ended September 30, 2013. Total purchase from these two venders amounted to $6,399,605 as September 30, 2013. The total amount payable to these two venders as of September 30, 2013 was $3,269,988.

 

One customer was accounted for 11.5% of the Company’s sales for the three months ended September 30, 2014. There was no customer that accounted for over 10% of the total sales as of three months ended September 30, 2013.

 

15
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

 

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 last version of the complaint alleges that the Company and certain 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 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 two individual defendants from the complaint but 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 the remaining 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. On August 12, 2014, the Nevada Federal Court entered an order and final judgment granting final approval to the settlement and dismissing all claims in accordance with the settlement agreement. The Company’s insurers funded the full amount of the settlement of $2.5 million.

 

NOTE 13 – SEGMENT REPORTING

 

As of September 30, 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.

 

         
   Three months ended September 30, 
Revenues from unaffiliated customers:  2014   2013 
   Jinong  $34,464,165   $31,762,002 
   Gufeng   15,986,074    17,756,082 
   Yuxing   851,551    785,263 
Consolidated  $51,301,790   $50,303,347 
           
Operating income :          
Jinong  $9,933,764   $11,861,728 
Gufeng   2,395,978    3,677,606 
Yuxing   262,993    103,646 
Reconciling item (1)   -    - 
Reconciling item (2)   (684,934)   (324,764)
Reconciling item (2)--stock compensation   (1,420,720)   (1,984,494)
Consolidated  $10,487,081   $13,333,722 
           
Net income:          
Jinong  $8,431,966   $10,088,808 
Gufeng   1,410,711    2,495,095 
Yuxing   362,039    103,810 
Reconciling item (1)   20    - 
Reconciling item (2)   (2,105,654)   (2,309,256)
Consolidated  $8,099,082   $10,378,457 
           
Depreciation and Amortization:          
Jinong  $10,568,569   $4,608,681 
Gufeng   836,514    731,201 
Yuxing   344,110    326,960 
Consolidated  $11,749,194   $5,666,842 
           
Interest expense:          
Gufeng   455,744    233,186 
Consolidated  $455,744   $233,186 
           
Capital Expenditure:          
Jinong  $4,254,470   $25,771,964 
Gufeng   9,187    4,900 
Yuxing   259,375    641,270 
Consolidated  $4,523,033   $26,418,134 

 

16
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

 

   As of September 30,   As of June 30, 
   2014   2014 
Identifiable assets:        
Jinong  $204,001,609   $195,331,283 
Gufeng   166,678,111    153,655,110 
Yuxing   43,896,977    44,003,970 
Reconciling item (1)   189,690    123,753 
Reconciling item (2)   (2,637)   (3,906)
Consolidated  $414,763,750   $393,110,210 

 

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

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

 

 

NOTE 14 - COMMITMENTS AND CONTINGENCIES

 

On June 29, 2014, 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, 2014 with monthly rent of approximately $4,000 (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). However, the land lease contract was terminated since Company sold Jintai’s assets by the year ended June 30, 2014.

 

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 $3,975 and $15,882 as rent expenses for the three months ended September 30, 2014 and 2013, respectively. Rent expenses for the next five years months ended September 30, are as follows:

 

Years ending September 30,
2015  $15,898 
2016   15,898 
2017   15,898 
2018   8,298 
2019   5,765 
      

 

17
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

 

NOTE 15 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.

 

18
 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

 

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 September 30, 2014 and June 30, 2014:

 

   September 30,   June 30, 
   2014   2014 
         
ASSETS        
Current Assets        
Cash and cash equivalents  $29,067   $102,777 
Accounts receivable, net   180,342    61,248 
Inventories   16,462,953    16,538,621 
Other current assets   31,931    12,745 
Advances to suppliers   42,060    53,168 
Total Current Assets   16,746,353    16,768,559 
           
Plant, Property and Equipment, Net   16,424,845    16,450,206 
Construction In Progress   48,883    48,883 
Intangible Assets, Net   10,676,896    10,736,322 
     Total Assets  $43,896,977   $44,003,970 
           
   LIABILITIES AND STOCKHOLDERS' EQUITY          
Current Liabilities          
Accounts payable  $269,239   $739,526 
Accrued expenses and other payables   3,556    3,086 
Amount due to related parties   43,142,842    43,142,280 
Total Current Liabilities   43,415,637    43,884,892 
           
Stockholders' equity   481,340    119,078 
           
     Total Liabilities and Stockholders' Equity  $43,896,977   $44,003,970 

 

 

   Three months ended September 30, 
   2014   2013 
Revenue  $851,551   $785,263 
Expenses   489,512    681,453 
Net income (loss)  $362,039   $103,810 

 

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NOTE 16 – SUBSEQUENT EVENT

 

On October 1, 2014, the Company’s Board of Directors approved a private placement investment in the Company’s common stock from Mr. Tao Li, Chairman and CEO of the Company. Subject to the stockholders approval, the Company may issue 496,445 shares of its common stock at a purchase price of $2.25 per share, the closing price of the Common Stock that day, for an aggregate purchase price of $1,117,000.

 

On October 17, 2014, the Company’s Compensation Committee approved the issuance of 464,776 shares of Common Stock to its 47 employees under the Company’s Amended and Restated 2012 Employee Stock Purchase Plan for a cash contribution of a total of $1,045,757. The issuance is at the closing price $2.25 per share on October 16, 2014.

 

On September 26, 2014, the Board of Directors approved the issuance of 5,415 shares to its consultant for its consulting services valued at $14,000, and 17,367 shares of common stock to its counsel for the legal services valued at $36,298.47. The shares were not issued until October 15, 2014.

 

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

 

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

 

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

 

Unless the context indicates otherwise, as used in the 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 98.3% and 98.4% of our total revenues for the three months ended September 30, 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 affect 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 and was now in its final stage of dissolution.

 

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Fertilizer Products

 

As of September 30, 2014, we had developed and produced a total of 456 different fertilizer products in use, of which 125 were developed and produced by Jinong and 331 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
September 30,		   Change 2013 to 2014 
   2014   2013   Amount   % 
   (metric tons)         
Jinong   14,618    17,872    (3,224)   18.0%
Gufeng   38,101    38,075    26    0.1%
    52,719    55,947    (3,198)     
                     

 

   Three Months Ended
September 30,		         
   2014   2013         
   (revenue per ton)         
Jinong  $1,588   $1,777           
Gufeng   416    466           

 

For the three months ended September 30, 2014, we sold approximately 52,719 metric tons of fertilizer products, as compared to 55,947 metric tons for the three months ended September 30, 2013. For the three months ended September 30, 2014, Jinong sold approximately 14,618 metric tons of fertilizer products, a decrease of 3,224 metric tons, or 18.0%, as compared to 17,872 metric tons for the three months ended September 30, 2013. The decrease is due to Jinong’s implementation of its sales strategy that focus on producing high-margin liquid fertilizer in replacing powder fertilizer during the last three months. For the three months ended September 30, 2014, Gufeng sold approximately 38,101 metric tons of fertilizer products, as compared to 38,075 metric tons for the three months ended September 30, 2013. 

 

Our sales of fertilizer products to five provinces accounted for approximately 40.8% of our fertilizer revenue for three months ended September 30, 2014. Specifically, the provinces and their respective percentage contributed to our fertilizer revenues were: Shaanxi (16.0%), Beijing (12.6%), Shandong (7.4%), Jiangsu (7.2%) and Hebei (5.8%).

 

As of September 30, 2014, we had a total of 1,229 distributors covering 27 provinces, four autonomous regions and three central government-controlled municipalities in China. Jinong had 961 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 1.7% of its fertilizer revenues for the three months ended September 30, 2014. Gufeng had 268 distributors, including some large state-owned enterprises. Gufeng’s top five distributors accounted for 81.0% of its revenues for the three months ended September 30, 2014.

 

Agricultural Products

 

Through Yuxing, we develop, produce and sell high-quality flowers, green vegetables and fruits to local marketplaces and various horticulture and planting companies. We also use certain of Yuxing’s greenhouse facilities to conduct research and development activities for our fertilizer products. The three PRC provinces that accounted for 90.8% of our agricultural products revenue for the three months ended September 30, 2014 were Shaanxi (82.3%), Sichuan (5.4%), and Hubei (2.9%).

 

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Recent Developments

 

New Products

 

During the three months ended September 30, 2014, Jinong did not launch any new fertilizer product. However, Jinong added 31 new distributors during this period. Jinong’s new distributors accounted for approximately $1,223,957, or 3.6% of Jinong’s fertilizer revenues for the three months ended September 30, 2014. During the quarter ended September 30, 2014, no revenue of Jinong was attributable to the new products distributed by its new distributors.

 

During the three months ended September 30, 2014, Gufeng launched three new fertilizer products. Gufeng’s new products generated approximately $308,618, or 1.9% of Gufeng’s fertilizer revenues for the three months ended September 30, 2014. Gufeng also added five new distributors during the three months ended September 30, 2014, which accounted for approximately $2,804,765, or 17.5%, of Gufeng’s fertilizer revenues. During the quarter ended September 30, 2014, no revenue of Gufeng was attributable to the new products distributed by its new distributors.

 

Business development

 

The agriculture industry in China has currently undergone a revolutionary restructuring throughout the country. Such restructuring is characterized by the massive consolidation of arable farming lands along with the ongoing urbanization, the replacement of traditional distribution of agricultural material and goods with the new online, offline or online-to-offline channels, and the transition from historically smaller farmer families and farms to large-scale farming organizations.

 

To accommodate the Company's growth in such restructuring environment, we currently established a comprehensive business framework that consists of various online, offline, online-to-offline ("O2O") infrastructure channels to enhance the sales strategies of the Company's products. It is critical for us to own such infrastructure assets to induce offline demands, and then transform such demands to online orders via offline network of retail outlets. Our efforts for the above framework include the development of the Company's proprietary internet platform and the sale of the Company's fertilizer products at the subsidiary level. The platform has become live at http://www.900cga.com since the end of October 2014.

 

Results of Operations

 

Three months ended September 30, 2014 Compared to the Three months ended September 30, 2013.

 

   For the Three Months Ended September 30, 
   2014   2013   change $   change % 
 Sales                    
   Jinong  $34,464,165   $31,762,002   $2,702,163    8.5%
   Gufeng   15,986,074    17,756,082    (1,770,008)   -10.0%
   Yuxing   851,551    785,263    66,288    8.4%
 Net sales   51,301,790    50,303,347    998,443    2.0%
 Cost of goods sold                    
   Jinong   13,380,623    13,969,831    (589,208)   -4.2%
   Gufeng   12,599,185    13,209,632    (610,447)   -4.62%
   Yuxing   648,548    654,196    (5,648)   -0.9%
 Cost of goods sold   26,628,356    27,833,659    (1,205,303)   -4.3%
 Gross profit   24,673,434    22,469,688    2,203,746    9.8%
 Operating expenses                    
 Selling expenses   11,066,721    5,796,190    5,270,531    90.9%
 General and administrative expenses   3,119,632    3,339,776    (220,144)   -6.6%
 Total operating expenses   14,186,353    9,135,966    5,050,387    55.3%
 Income from operations   10,487,081    13,333,722    (2,846,641)   -21.3%
 Other income (expense)                    
 Other income (expense)   41,955    (116,383)   158,338    -136.0%
 Interest income   29,385    55,654    (26,269)   -47.2%
 Interest expense   (455,744)   (233,186)   (222,558)   95.4%
 Total other income (expense)   (384,404)   (293,915)   (90,489)   30.8%
 Income before income taxes   10,102,677    13,039,807    (2,937,130)   -22.5%
 Provision for income taxes   2,003,595    2,661,350    (657,755)   -24.7%
 Net income   8,099,082    10,378,457    (2,279,375)   -22.0%
 Other comprehensive income                    
 Foreign currency translation gain   6,289    694,716    (688,427)   -99.1%
 Comprehensive income  $8,105,371   $11,073,173   $(2,967,802)   -26.8%
                     
Basic weighted average shares outstanding   32,377,250    29,973,726    2,403,524    8.0%
Basic net earnings per share  $0.25   $0.35   $(0.10)   -27.8%
Diluted weighted average shares outstanding   32,377,250    29,973,726    2,403,524    8.0%
Diluted net earnings per share  $0.25   $0.35   $(0.10)   -27.8%

 

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Net Sales

 

Total net sales for the three months ended September 30, 2014 were $51,301,790, an increase of $998,443, or 2.0%, from $50,303,347 for the three months ended September 30, 2013. This increase was due to an increase in Jinong’s net sales offset by a decrease in Gufeng’s net sales.

 

For the three months ended September 30, 2014, Jinong’s net sales increased $2,702,163, or 8.5%, to $34,464,165 from $31,762,002 for the three months ended September 30, 2013. This increase was mainly attributable to Jinong’s latest implementation of the sales strategy that focus on promoting the sales of high-margin liquid fertilizer despite the decrease in Jinong’s sales volume during the last three months.

 

For the three months ended September 30, 2014, net sales at Gufeng were $15,986,074, a decrease of $1,770,008 or 10.0% from $17,756,082 for the three months ended September 30, 2013. The decrease was mainly attributable the delayed fertilization time due to climatic impact compared to the same period in last year.

 

For the three months ended September 30, 2014, Yuxing’s net sales were $851,551, an increase of $66,288 or 8.4%, from $785,263 during the three months ended September 30, 2013. The increase was mainly attributable to the increased in sales demand of Yuxing’s top-grade flowers.

 

Cost of Goods Sold

 

Total cost of goods sold for the three months ended September 30, 2014 was $26,628,356, a decrease of $1,205,303, or 4.3%, from $27,833,659 for the three months ended September 30, 2013. This decrease was mainly due to the 10.0% decrease in Gufeng’s net sales. 

 

Cost of goods sold by Jinong for the three months ended September 30, 2014 was $13,380,623, a decrease of $589,208, or 4.2%, from $13,969,831 for the three months ended September 30, 2013. The decrease was primarily attributable to lower product costs for the mix of products being sold.

 

Cost of goods sold by Gufeng for the three months ended September 30, 2014 was $12,599,185, a decrease of $610,447, or 4.6%, from $13,209,632 for the three months ended September 30, 2013 as a result of the reduction in net sales.

 

For three months ended September 30, 2014, cost of goods sold by Yuxing was $648,548, a decrease of $5,648, or 0.9%, from $654,196 for the three months ended September 30, 2013. The decrease is not significant.

 

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Gross Profit

 

Total gross profit for the three months ended September 30, 2014 increased by $2,203,746 to $24,673,434, as compared to $22,469,688 for the three months ended September 30, 2013. Gross profit margin was 48.1% and 44.7% for the three months ended September 30, 2014 and 2013, respectively.

 

Gross profit generated by Jinong increased by $3,291,371, or 18.5%, to $21,083,542 for the three months ended September 30, 2014 from $17,792,171 for the three months ended September 30, 2013. Gross profit margin from Jinong’s sales was approximately 61.2% and 56.0% for the three months ended September 30, 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 due to Jinong’s sales strategy. Jinong has adjusted its production process to focus on producing the high-margin liquid fertilizer during the last three months.

  

For the three months ended September 30, 2014, gross profit generated by Gufeng was $3,386,889, a decrease of $1,159,561, or 25.5%, from $4,546,450 for the three months ended September 30, 2013. Gross profit margin from Gufeng’s sales was approximately 21.2% and 25.6% for the three months ended September 30, 2014 and 2013, respectively. The decrease in gross profit percentage was mainly due to the increased weight for lower-margin products sales in Gufeng’s total sales answering to market demand.

 

For the three months ended September 30, 2014, gross profit generated by Yuxing was $203,003, an increase of $71,936, or 54.9% from $131,067 for the three months ended September 30, 2013.  The gross profit margin was approximately 23.8% and 16.7% for the three months ended September 30, 2014 and 2013, respectively. The increase in gross profit percentage was mainly due to the rising price for flowers during the three months ended September 30, 2014, comparing to the same period of 2013.

 

Selling Expenses

 

Our selling expenses consisted primarily of amortization of our deferred assets, salaries of sales personnel, advertising and promotion expenses, freight-out costs and related compensation. Selling expenses were $11,066,721, or 21.6%, of net sales for the three months ended September 30, 2014, as compared to 5,796,190 or 11.5% of net sales for the three months ended September 30, 2013, an increase of $5,270,531, or 90.9%. The selling expenses of Gufeng were $185,978 or 1.20% of Gufeng’s net sales for the three months ended September 30, 2014, as compared to $154,010, or 0.9% of Gufeng’s net sales for the three months ended September 30, 2013. The selling expenses of Jinong for the three months ended September 30, 2014 were $10,873,605 or 31.6% of Jinong’s net sales, as compared to selling expenses of $5,629,531, or 17.7% of Jinong’s net sales for the three months ended September 30, 2013. Most of this increase in Jinong’s selling expenses was due to the amortization of $10,331,084 of the deferred tax assets for the three months ended September 30, 2014 related to our business strategy implemented since the first quarter of fiscal year of 2014 that assists distributors in certain marketing efforts and develops standard stores to expand our competitive advantages 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 $3,119,632, or 6.1% of net sales for the three months ended September 30, 2014, as compared to $3,339,776, or 6.6%, of net sales for the three months ended September 30, 2013, a decrease of $220,144, or 6.6%. The decrease in general and administrative expenses was mainly due to the related expenses in the stock compensation awarded to the employees which amounted to $1,420,720 for the three months ended September 30, 2014 as compared to $1,984,494 for the three months ended September 30, 2013.

 

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Total Other Expenses

 

Total other expenses consisted of income from subsidies received from the PRC government, interest income, interest expenses and bank charges. The total other expense for the three months ended September 30, 2014 was $384,404, as compared to $293,915 for the three months ended September 30, 2013, an increase of $90,489, or 30.8%, which resulted from an increase of $158,338 to $41,955 in other income during the three months ended September 30, 2014, as compared to expense of $116,383 during the three months ended September 30, 2013, a decrease of $26,269 or 47.2%, to $29,385 in interest income during the three months ended September 30, 2014 as compared to $55,654 during the three months ended September 30, 2013; and an increase of $222,558 or 95.4% to $455,744 in interest expenses during the three months ended September 30, 2014, as compared to $233,186 during the three months ended September 30, 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 $1,516,587 for the three months ended September 30, 2014, as compared to $1,825,650 for the three months ended September 30, 2013, a decrease of $309,063, or 16.9%. The decrease was mainly due to Jinong’s increased selling expense.

 

Gufeng, subject to a tax rate of 25%, incurred income tax expenses of $487,008 for the three months ended September 30, 2014, as compared to $835,700 for the three months ended September 30, 2013, a decrease of $348,692, or 41.7%, which was primarily due to Gufeng’s decreased net income.

 

Yuxing has no income tax for the three months ended September 30, 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 September 30, 2014 was $8,099,082, a decrease of $2,279,375, or 22.0%, compared to $10,378,457 for the three months ended September 30, 2013. The decrease was attributable to the increase in selling expenses offset by an increase in our gross margin. Net income as a percentage of total net sales was approximately 15.8% and 20.6% for the three months ended September 30, 2014 and 2013, respectively.

 

Discussion of Segment Profitability Measures

 

As of September 30, 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). 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 by $1,656,844 or 16.4% to $8,431,966 for three months ended September 30, 2014 from $10,088,810 for the three months ended September 30, 2013.

 

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For Gufeng, the net income decreased by $1,084,382 or 43.5% to $1,410,711 for three months ended September 30, 2014 from $2,495,095 for three months ended September 30, 2013.

 

For Yuxing, the net income increased by $258,229 or 248.8% to $362,039 for three months ended September 30, 2014 from $103,810 for three months ended September 30, 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 September 30, 2014, cash and cash equivalents were $41,116,016, an increase of $14,225,695, or 52.9%, from $26,890,321 as of June 30, 2014.

      

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

 

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

 

   Three Months Ended September 30, 
   2014   2013 
Net cash provided by (used in) operating activities  $17,430,724   $(4,283,350)
Net cash used in investing activities   (2,559,203)   (26,418,134)
Net cash provided by (used in) financing activities   (654,550)   262,800 
Effect of exchange rate change on cash and cash equivalents   8,724    297,697 
Net increase (decrease) in cash and cash equivalents   14,225,695    (30,140,987)
Cash and cash equivalents, beginning balance   26,890,321    75,031,489 
Cash and cash equivalents, ending balance  $41,116,016   $44,890,502 

 

Operating Activities

 

Net cash provided in operating activities was $17,430,724 for the three months ended September, 2014, an increase of $21,714,074, or 506.9% from cash used in operating activities of $4,283,350 for the three months ended September 30, 2013. The increase was mainly attributable to the decrease in accounts receivable, increase in customer deposits, increase in tax payable and an increase in depreciation and amortization, offset by an increase in inventories and advances to suppliers, during the three months ended September 30, 2014 as compared to the same period in 2013.

 

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Investing Activities

 

Net cash used in investing activities for the three months ended September 30, 2014 was $2,559,203, a decrease of $23,858,931, or 90.3% from $26,418,134 for the three months ended September 30, 2013. During the three months ended September 30, 2014, Jinong assisted its distributors in marketing to expand its competitive product advantage and market share by advancing them $4,291,918 during the three months ended September 30, 2014 compared to $25,711,964 during the three months ended September 30, 2013.

 

Financing Activities

 

Net cash used in financing activities for the three months ended September 30, 2014 was $654,550, a decrease of $917,350 or 349.1% from cash provided by financing activities of $262,800 for the three months ended September 30, 2013. During the three months ended September 30, 2014, we received $4,869,000 from the proceeds from loans and repaid loans of $5,923,950 compared to $162,800 of proceeds and $0 repayments during the three months ended September 30, 2013.  In addition, during the three months ended September 30, 2014, we sold 87,719 shares of our common stock for proceeds of $200,000 to our employees under our employee stock purchase program.  

 

As of September 30, 2014 and June 30, 2014, our loans payable were as follows:

 

   September 30, 2014   June 30,
2014		 
Short term loans payable:  $22,947,120   $24,002,720 
Total  $22,947,120   $24,002,720 

 

Accounts Receivable

 

We had accounts receivable of $75,058,824 as of September 30, 2014, as compared to $88,781,608 as of June 30, 2014, a decrease of $13,722,784 or 15.5%, which is mainly attributable to Gufeng. As of September 30, 2014, Gufeng had account receivable of $3,291,661, a decrease of $15,365,497, or 82.4%, comparing to $18,657,158 as of June 30, 2014. The decrease is mainly due to a number of large clients paid up their account payable to Gufeng during the last three months.

 

Allowance for doubtful accounts in account receivable for the three months ended September 30, 2014 was $227,328, a decrease of $10,266 or 4.3% from $237,594 as of June 30, 2014. And the allowance for doubtful accounts as a percentage of accounts receivable was 0.30% as of September 30, 2014 and 0.27% as of June 30, 2014. The decrease is not significant.

 

Deferred assets

 

We had deferred assets of $77,637,538 as of September 30, 2014, as compared to $83,680,425 as of June 30, 2014. We have been assisting our distributors in certain marketing efforts and developing standard stores to enhance our competitive advantages and market shares since September 30, 2013. Based on the distributor agreements, the amount owed by the distributors in certain marketing efforts and store development will be expensed over three years as long as the distributors are actively selling our products. If a distributor defaults, breaches, or terminates the agreement with us earlier than the realization of contractual terms, the unamortized portion of the amount owed by the distributor has to be refunded to us immediately. The Company’s Chairman and CEO, Mr. Li, provided credit backup to guarantee toward potential losses to the Company of any amounts due from distributors in this matter.

 

Inventories

 

We had an inventory of $100,583,401 as of September 30, 2014, as compared to $75,486,898 as of June 30, 2014, an increase of $25,096,503, or 33.2%. The increase is in the inventory level was seasonal, which is mainly due to Gufeng’s $83,062,024 inventory as of September 30, 2014. Such increase was largely attributable to the preparatory replenishment of raw material at a lower price for the expected large production of fertilizer in the incoming winter to meet the anticipated large orders, as well as the accumulation of finished fertilizer products in expecting a huge demand in the near future.

 

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Advances to Suppliers

 

We had advances to suppliers of $37,809,606 as of September 30, 2014 as compared to $32,630,865 as of June 30, 2014, representing an increase of $5,178,741 or 15.9%. To ensure our ability to deliver compound fertilizer to the distributor timely prior to the planting season, we need to have sufficient raw material in stock to stabilize the production. To build up the inventory, we typically make advance payment to the suppliers to secure the supply of raw material of basic fertilizer. Our inventory level may fluctuate from time to time, depending how fast the raw material gets consumed and replenished during the production process, and how fast the finished goods get sold. The replenishment of raw material relies on the management’s estimate of numerous factors, including but not limited to, the raw material’s future price, and spot price along with their volatility, as well as the seasonal demand and future price of finished fertilizer products. Such estimate may not be accurate, and the purchase decision of raw materials based on the estimate can cause excessive inventories in slow sales and insufficient inventories in peak times.

 

Accounts Payable

 

We had accounts payable of $2,812,361 as of September 30, 2014 as compared to $3,378,248 as of June 30, 2014, representing a decrease of $565,887, or 16.8%. The decrease was primarily due to the decrease in Yuxing’s account payable from $738,801 as of June 30, 2014 to $269,239 as of September 30, 2014.

 

Unearned Revenue

 

We had unearned revenue of $36,870,502 as of September 30, 2014 as compared to $25,700,586 as of June 30, 2014, representing an increase of $11,169,916, or 43.5%.  The increase was caused by the advancement deposits made by Gufeng’s clients, which were largely attributable to Gufeng’s $36,559,952 unearned revenue, for the following purposes: 1) reservation and storage for the coming plant season; and 2) locking up a lower price in anticipation of rising price of raw material.

 

Tax Payable

 

We had taxes payable of $3,933,954 as of September 30, 2014 as compared to $1,921,455 as of June 30, 2014, representing an increase of $2,012,499, or 104.7%. This increase was mainly due to the fact that the estimated tax payments being less than the tax liability during the three months ended September 30, 2014.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

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

 

Use of estimates

 

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

 

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Revenue recognition

 

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

 

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

 

Cash and cash equivalents

 

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

 

Accounts receivable

 

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

 

Deferred assets

 

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

 

Segment reporting

 

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

 

As of September 30, 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 September 30, 2014, our accumulated other comprehensive income was $22,846,780. 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 September 30, 2014 and June 30, 2014 was $22,947,120 and $24,002,720, 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 September 30, 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 September 30, 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 September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 5. Other Information

 

On September 30, 2014, the Compensation Committee (the “Committee”) of the Board of Directors of the Company approved the grant of restricted stock to certain directors, executive officers and employees of the Company under the Company’s 2009 Equity Incentive Plan, as amended (the “Plan”).

 

Under the Plan, effective September 30, 2014, the Committee granted (i) 240,000 shares of restricted stock to Mr. Tao Li, the Company’s Chief Executive Officer (the “CEO”); (ii) 100,000 shares of restricted stock to Mr. Ken Ren, the Company’s Chief Financial Officer (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) a total of 1,320,000 shares of restricted stock to certain employees (the “Stock Grants”).

 

The Stock Grants are subject to time-based vesting schedules, vesting in various installments until March 31, 2015 for the CFO and the three independent directors, until June 30, 2015 for the CEO and until December 31, 2016 for the employees.

 

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The Stock Grants were made on the terms of the Company’s Form of Restricted Stock Grant Agreement, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 11, 2010.

 

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: November 10, 2014 Name: Tao Li
  Title: President and Chief Executive Officer
  (principal executive officer)
   
Date: November 10, 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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