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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)

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

 

For the quarterly period ended: June 30, 2013

 

or

¨ 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: 333-174874

 

GENERAL AGRICULTURE CORPORATION

(Exact name of the registrant as specified in its charter)

 

Delaware   35-2379917
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     

Room 801, Plaza B, Yonghe Building,

No.28 AnDingMen East Street,

Dongcheng District, Beijing, China.

  Postal Code : 100007
(Address of principal executive offices)   (Zip Code)

 

Phone: +86-10-64097316

Fax: +86-10-64097026

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

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 (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

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

 

Large accelerated filer ¨   Accelerated filer ¨
Non-accelerated filer ¨

(Do not check if a smaller

reporting company)

Smaller Reporting Company x

 

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

 

Number of shares of common stock outstanding as of August 10, 2013: 15,918,940

 

 
 

 

TABLE OF CONTENTS

 

  Page
   
PART I – FINANCIAL INFORMATION 3
   
ITEM 1. FINANCIAL STATEMENTS 3
   
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 15
   
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24
   
ITEM 4. CONTROLS AND PROCEDURES 24
   
PART II – OTHER INFORMATION 25
   
ITEM 1. LEGAL PROCEEDINGS 25
   
ITEM 1A. RISK FACTORS 25
   
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 25
   
ITEM 3. DEFAULT UPON SENIOR SECURITIES 25
   
ITEM 4. MINE SAFETY DISCLOSURES 25
   
ITEM 5. OTHER INFORMATION 25
   
ITEM 6. EXHIBITS 25

 

2
 

 

PART I– FINANCIAL INFORMATION

 

ITEM 1.    FINANCIAL STATEMENTS

 

GENERAL AGRICULTURE CORPORATION

(FORMERLY GELTOLOGY INC.)

 

CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2013 AND 2012

 

(UNAUDITED)

 

Table of Contents

 

    Page
Consolidated Balance Sheets   4
Consolidated Statements of Operations and Comprehensive Income   5
Consolidated Statements of Cash Flows   6
Notes to Consolidated Financial Statements   7

 

3
 

 

GENERAL AGRICULTURE CORPORATION

(FORMERLY GELTOLOGY INC.)

Consolidated Balance Sheets

 

   June 30,   September 30, 
   2013   2012 
   (Unaudited)     
Assets          
Current assets:          
Cash and cash equivalents  $1,457,582   $351,045 
Restricted cash   -    277,025 
Accounts receivable   1,894,717    - 
Inventory   2,666,499    3,592,468 
Advance payments   88,513    37,699 
Prepaid leases – current   2,357,925    1,559,648 
Other current assets   36,134    20,679 
Total current assets   8,501,370    5,838,564 
           
Property and equipment, net   15,209,525    15,586,175 
           
Other assets:          
Intangible assets, net   157,980    157,096 
Prepaid leases - non current   18,519,037    11,311,206 
Total other assets   18,677,017    11,468,302 
           
Total assets  $42,387,912   $32,893,041 
           
Liabilities          
Current liabilities:          
Accounts payable and accrued expenses  $622,226   $559,646 
Short-term bank loans   5,508,000    4,163,290 
Due to related party   253,648    151,994 
Customer deposits   -    1,393,040 
Other current liabilities   68,231    45,709 
           
Total current liabilities   6,452,105    6,313,679 
           
Total liabilities   6,452,105    6,313,679 
           
Stockholders’ Equity          
Common stock, $0.0001 par value, 200,000,000 shares authorized 15,918,940 shares issued and outstanding at June 30, 2013 and September 30, 2012, respectively   1,592    1,592 
Additional paid-in capital   4,909,572    4,909,572 
Statutory reserve   2,872,331    2,079,158 
Retained earnings   25,483,539    17,663,566 
Accumulated other comprehensive income   2,668,773    1,925,474 
Total stockholders’ equity   35,935,807    26,579,362 
           
Total liabilities and stockholders’ equity  $42,387,912   $32,893,041 

 

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

 

4
 

 

GENERAL AGRICULTURE CORPORATION

(FORMERLY GELTOLOGY INC.)

Consolidated Statements of Operations and Comprehensive Income(Loss)

(Unaudited)

 

   For the Three Months Ended
June 30,
   For the Nine Months Ended
June 30,
 
   2013   2012   2013   2012 
                 
Sales  $1,606,108   $761,422   $17,424,349   $16,835,368 
                     
Cost of sales   419,187    378,226    7,576,417    8,234,202 
                     
Gross profit   1,186,921    383,196    9,847,932    8,601,166 
                     
Operating expenses                    
Selling expenses   95,194    248,785    881,482    1,306,318 
General and administrative expenses   128,392    117,871    453,460    645,180 
Total operating expenses   223,586    366,656    1,334,942    1,951,498 
                     
Income from operations   963,335    16,540    8,512,990    6,649,668 
                     
Other income:                    
Government subsidy   19,127    47,655    275,391    106,939 
Interest income   2,272    1,462    8,544    6,011 
Interest expense   (83,921)   (90,326)   (217,921)   (228,147)
Other income, net   11,299    12,193    34,142    36,418 
Total other income (expense)   (51,223)   (29,016)   100,156    (78,779)
                     
Income (loss) before provision for income taxes   912,112    (12,476)   8,613,146    6,570,889 
                     
Provision for income taxes   -    -    -    - 
                     
Net income (loss)   912,112    (12,476)   8,613,146    6,570,889 
                     
Other comprehensive income                    
Foreign currency translation adjustment   501,924    10,520    743,299    298,114 
                     
Total comprehensive income (loss)  $1,414,036   $(1,956)  $9,356,445   $6,869,003 
                     
Earnings (loss) per share:                    
Basic and diluted  $0.06   $(0.00)  $0.54   $0.42 
                     
Weighted average number of shares outstanding:                    
Basic and diluted   15,918,940    15,639,100    15,918,940    15,639,100 

 

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

 

5
 

 

GENERAL AGRICULTURE CORPORATION

(FORMERLY GELTOLOGY INC.)

Consolidated Statements of Cash Flows

(Unaudited)

 

   For the Nine Months Ended
June 30,
 
   2013   2012 
         
Cash flows from operating activities:          
Net Income  $8,613,146   $6,570,889 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Depreciation and amortization   828,619    859,199 
Prepaid leases amortized in current period   1,643,982    1,169,976 
Changes in assets and liabilities:          
Accounts receivable   (1,869,688)   (1,623,844)
Inventory   996,596    1,423,848 
Advance payments   (49,275)   (21,305)
Prepaid leases   (9,247,469)   (12,002,436)
Other current assets   (16,372)   5,750 
Accounts payable and accrued expenses   53,418    553,795 
Customer deposits   (1,406,768)   - 
Other current liabilities   21,173    410,607 
Total adjustments   (9,045,784)   (9,224,410)
           
Net cash used in operating activities   (432,638)   (2,653,521)
           
Cash flows from investing activities:          
Acquisition of property and equipment   (94,704)   (106,595)
           
Net cash used in investing activities   (94,704)   (106,595)
           
Cash flows from financing activities:          
Restricted cash   279,755    (134,504)
Proceeds from short-term bank loans   5,435,240    3,370,512 
Repayment of short-term bank loans   (4,204,318)   - 
Due to related party   98,935    2,798 
           
Net cash provided by financing activities   1,609,612    3,238,806 
           
Effect of foreign currency translation   24,267    17,905 
           
Net increase in cash and cash equivalents   1,106,537    496,595 
           
Cash and cash equivalents – beginning   351,045    770,267 
           
Cash and cash equivalents – ending  $1,457,582   $1,266,862 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $217,921   $228,147 
Cash paid for income taxes  $-   $72,142 

 

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

 

6
 

 

GENERAL AGRICULTURE CORPORATION

(FORMERLY GELTOLOGY INC.)

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1 – Organization and Nature of Business

 

Geltology Inc. (“Gelt”) was established under the laws of the State of Delaware on March 24, 2010. On July 12, 2013, Gelt filed with the Secretary of State, Delaware a Certificate of Amendment to change its name to General Agriculture Corporation. The accompanying consolidated financial statements include the financial statements of General Agriculture Corporation and its subsidiaries (collectively, the “Company”). The Company is primarily engaged in planting, preserving, packaging and marketing premium navel oranges for distribution and sale throughout the People’s Republic of China (“PRC”).

 

On July 11, 2012, Gelt completed a reverse acquisition of General Red Holding, Inc. (“GRH”), which was established under the laws of the State of Delaware on January 18, 2011. To accomplish the Share Exchange Agreement, Gelt issued to GRH an aggregate of 125,112,803 shares of the common stock of Gelt, at par value of $0.0001 per share. Gelt was delivered with zero assets and zero liabilities at time of closing. Immediately prior to the Share Exchange, Gelt had 6,750,000 shares of Common Stock issued and outstanding. Simultaneously with the transaction, the two principal shareholders of Gelt surrendered for cancellation an aggregate of 4,513,252 shares of Common Stock beneficially owned by them. The transaction was regarded as a reverse merger whereby GRH was considered to be the accounting acquirer. Although the Company is a legal parent company, the share exchange was treated as a recapitalization of GRH. Thus, GRH is the continuing entity for financial reporting purposes. The financial statements have been prepared as if GRH had always been the reporting company and then on the share exchange date, had reorganized its capital stock.

 

On September 30, 2011, GRH entered into a Share Transfer and Issuance Agreement (the “Agreement”) with Han Glory International Investment Limited (“Han Glory International”), a company incorporated on April 28, 2011 under the laws of British Virgin Islands and Hua Mei Investments Limited (“Hua Mei”), a company incorporated on April 26, 2011 under the laws of the British Virgin Islands. Under the Agreement, GRH issued 74,814,862 shares to Hua Mei, the sole stockholder of Han Glory International, in exchange for all shares and beneficial interest of Han Glory International. This transaction is treated as a reverse merger, and therefore, after the share exchange, Han Glory International became the wholly owned subsidiary of GRH.

 

On May 18, 2011, Han Glory International purchased all shares of Greater China International Investment Limited (“Greater China International”), a company incorporated on December 4, 2009 under the laws of Hong Kong, from Zhihao Zhang, the sole stockholder of Greater China International, for $1,290 (HK$10,000). As a result, Greater China International became the wholly owned subsidiary of Han Glory International.

 

On January 13, 2010, Greater China International formed Nanchang Hanxin Agriculture Technology Co., Ltd, a wholly foreign-owned enterprise (“WFOE”) in the city of Nanchang, Jiangxi Province, the PRC.

 

On February 5, 2010, WFOE purchased all shares of Xingguo General Fruit Industry Development Co., Ltd (“General Fruit”) from Jiangjun Hong Group Co., Ltd., Xingping Hou and Jiefeng Ren for $293,400. As a result, WFOE acquired 100% interest in General Fruit. This transaction was a capital transaction in substance. That is, the transaction was a reverse recapitalization, equivalent to the issuance of stock by General Fruit for the net monetary assets of WFOE accompanied by a recapitalization.

 

General Fruit was formed in Xingguo County, Jiangxi Province, under the corporate laws of PRC on March 5, 2003. The primary business of General Fruit is to grow and sell navel oranges. On July 14, 2008, after a series of equity transfer agreements, General Fruit acquired 90% interest in Xingguo General Red Navel Orange Preservation Company, Ltd. (“General Preservation”). On July 25, 2010, General Fruit purchased the remaining 10% interest in General Preservation from Xingping Hou, the minority stockholder, for $295,000 (RMB 2,000,000) and owns 100% of General Preservation thereafter.

 

7
 

 

Note 1 – Organization and Nature of Business (continued)

 

General Preservation, a citrus fruits company primarily engaged in preserving, packaging and marketing premium navel oranges, was formed as a limited liability company in Xingguo County, Jiangxi Province under PRC laws on November 22, 2005. General Preservation provides wholesale, retail, and institutional customers in China and several other countries with premium navel orange fruits under the trademark of “General Red”.

 

On September 26, 2011, GRH purchased all shares of Sheng Da Holding Limited (“Sheng Da BVI”), a company incorporated on May 18, 2011 under the laws of the British Virgin Islands, from General Red Company, Ltd (“General Red BVI”), a limited liability company incorporated on August 28, 2008 under the laws of British Virgin Islands, for $23,000. As a result, Sheng Da BVI became the wholly owned subsidiary of GRH. On September 29, 2011, Sheng Da BVI entered into a series of new agreements to terminate the old agreements with General Preservation, which were originally signed between General Red BVI and General Preservation on November 17, 2008, amended on June 10, 2011, and transferred to Sheng Da BVI by General Red BVI on June 30, 2011. The old agreements included a Consultation Agreement, an Operating Agreement, a Share Pledge Agreement, a Proxy Agreement and an Option Agreement. Upon the entry of these new agreements, General Preservation is no longer the Variable Interest Entity of Sheng Da BVI.

 

Note 2 – Summary of Significant Accounting Policies

 

Basis Of Presentation and Consolidation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United Stated of America (“US GAAP”). The consolidated financial statements include the accounts of General Agriculture Corporation and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited financial statements have been prepared in accordance with US GAAP applicable to interim financial information and the requirements of Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by US GAAP for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included.

 

In preparing the accompanying consolidated financial statements, the Company evaluated the period from June 30, 2013 through the date the financial statements were issued for material subsequent events requiring recognition or disclosure. See Note 18.

 

Interim Financial Statements

 

These interim financial statements should be read in conjunction with the audited consolidated financial statements for the transition period ended September 30, 2012, as not all disclosures required by US GAAP for transition period financial statements are presented. The consolidated interim financial statements follow the same accounting policies and method of computations as the audited financial statements for the transition period ended September 30, 2012.

 

Change In Fiscal Year

 

On September 28, 2012, the Company’s board of directors approved a change in fiscal year-end from December 31 to September 30. The fiscal year-end change became effective September 30, 2012 and thus resulted in a nine months transition period from December 31, 2011 through September 30, 2012. Accordingly, the financial statements and financial comparisons included in Form 10-Q relate to the nine months ended June 30, 2013 and 2012 and the financial results for the nine months ended June 30, 2012 have been recast to allow for comparison based on the new fiscal periods.

 

8
 

 

Note 2 – Summary of Significant Accounting Policies (continued)

 

Seasonal Nature of Operations

 

The Company’s operations are seasonal based on the maturity stage of its products. Sales are concentrated during the months from October through March, corresponding to the Company’s product maturity cycle which begins in the month of October when the products mature and are ready for sale.

 

Note 3 – Accounts Receivable

 

Trade accounts receivable are stated at original invoice amount less allowance for doubtful receivables based on management’s periodic review of aging of outstanding balances and customer credit history. As of June 30, 2013 and September 30, 2012, no allowance was deemed necessary as all receivables were aged less than six months.

 

Note 4 – Inventory

 

Inventories as of June 30, 2013 and September 30, 2012 by major categories are summarized as follows:

 

   June 30, 2013   September 30, 2012 
         
Raw materials  $88,515   $143,651 
Work in process   2,577,984    3,448,817 
           
Total  $2,666,499   $3,592,468 

 

Work in process consists of depreciation of navel orange orchards, rental, salary, fertilizer, utility, labor spent in cultivating and producing navel oranges. Work in process is posted to finished goods after the navel oranges are harvested. The harvest season of navel oranges usually starts in October.

 

Note 5 – Property and Equipment

 

Property and equipment as of June 30, 2013 and September 30, 2012 consist of the following:

 

   June 30, 2013   September 30, 2012 
         
Electronic equipment  $111,830   $110,100 
Vehicles   323,569    316,178 
Machinery and equipment   2,055,773    2,004,449 
Buildings and improvements   7,717,035    7,462,284 
Navel orange orchards   10,557,846    10,316,711 
Subtotal   20,766,053    20,209,722 
Less: Accumulated depreciation   5,856,006    4,904,449 
    14,910,047    15,305,273 
Add: Construction in progress   299,478    280,902 
Total  $15,209,525   $15,586,175 

 

Depreciation expense was $277,150 and $263,018 for the three months ended June 30, 2013 and 2012, respectively, and $825,868 and $856,476 for the nine months ended June 30, 2013 and 2012, respectively.

 

9
 

 

Note 6 – Intangible Assets

 

Intangible assets as of June 30, 2013 and September 30, 2012 consist of the following:

 

   June 30, 2013   September 30, 2012 
         
Land use rights  $185,859   $181,613 
Less: Accumulated amortization   27,879    24,517 
Total  $157,980   $157,096 

 

Amortization expense was $925 and $909 for the three months ended June 30, 2013 and 2012, respectively, and $2,751 and $2,723 for the nine months ended June 30, 2013 and 2012, respectively.

 

Note 7 – Prepaid Leases

 

Prepaid leases as of June 30, 2013 and September 30, 2012 consist of the following:

 

   June 30, 2013   September 30, 2012 
         
Current  $2,357,925   $1,559,648 
Non current   18,519,037    11,311,206 
Total  $20,876,962   $12,870,854 

 

On April 1, 2011, General Fruit entered into lease contracts with a group of individual orchard owners, pursuant to which General Fruit was authorized to operate the orchards for 10 years starting January 1, 2011. The lease terms are effective from January 1, 2011 through December 31, 2020. The aggregate lease amount is approximately RMB 98,524,800 ($15,507,803) and pursuant to the contract terms, as of September 30, 2012, the Company paid off the entire lease amount using cash generated from operations.

 

On December 30, 2012 and January 1, 2013, General Fruit entered into lease contracts with another group of individual orchard owners, pursuant to which General Fruit was authorized to operate the orchards for 10 years starting January 1, 2013. The lease terms are effective from January 1, 2013 through December 31, 2022. The aggregate lease amount is approximately RMB 46,997,300 ($7,453,772) and pursuant to the contract terms, as of March 31, 2013, the Company paid off the entire lease amount using cash generated from operations.

 

These leases are accounted for as operating leases in accordance with FASB ASC 840-20 and the aggregate lease amounts will be expensed each year on a straight-line basis over the lease terms. Lease expense was approximately $672,629 and $390,618 for the three months ended June 30, 2013 and 2012, respectively, and approximately $1,643,982 and $1,169,976 for the nine months ended June 30, 2013 and 2012, respectively.

 

Lease expense attributable to future periods is as follows:

 

Twelve months ended June 30:     
2013  $2,316,611 
2014   2,316,611 
2015   2,316,611 
2016   2,316,611 
2017   2,316,611 
Thereafter   9,293,907 
   $20,876,962 

 

10
 

 

Note 8 – Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses as of June 30, 2013 and September 30, 2012 consist of the following:

 

   June 30, 2013   September 30, 2012 
         
Accounts payable  $444,820   $333,444 
Accrued expenses   177,406    226,202 
Total  $622,226   $559,646 

 

The carrying value of accounts payable and accrued expenses approximates their fair value due to the short-term nature of these obligations.

 

Note 9 – Short-Term Bank Loans

 

Short-term bank loans as of June 30, 2013 and September 30, 2012 consist of the following:

 

   June 30,   September 30, 
   2013   2012 
On November 17, 2011, the Company obtained a loan from Agricultural Development Bank of China, the principal of which was repaid in full on November 16, 2012. The interest was calculated using an annual fixed interest rate of 6.56% and paid monthly. The loan was secured by the Company’s property.  $-   $4,163,290 
           
On November 30, 2012 and December 21, 2012, the Company obtained a loan from Agricultural Development Bank of China, the principal of which will be repaid on November 19, 2013. The interest was calculated using an annual fixed interest rate of 6.00% and paid monthly. The loan was secured by the Company’s property and equipment and guaranteed by the CEO.  $5,508,000   $- 
           
Total  $5,508,000   $4,163,290 

 

Note 10 – Due to Related Party

 

As of June 30, 2013 and September 30, 2012, the Company had outstanding debts from a related party, Hua Mei, of $253,648 and $151,994, respectively.

 

These debts are non-interest bearing and payable on demand. The proceeds of these debts were utilized as working capital. During the nine months period ended September 30, 2012, Hua Mei and the Company entered into an agreement to convert a debt in the amount of $307,720, owed to Greater China International to equity. Pursuant to the agreement, the additional paid in capital of the Company increased to $4,909,572 after the conversion.

 

11
 

 

Note 11 – Income Taxes

 

The Company is a Delaware corporation and conducts all of its business through its Chinese subsidiaries, which operate in the PRC only. Gelt is a U.S. holding company and does not generate any U.S. income and accordingly there is no provision or benefit for U.S. income tax purposes.

 

Han Glory International is not subject to tax on income or capital gains under the laws of British Virgin Islands.

 

Under the Corporate Income Tax Law of the PRC, the corporate income tax rate is 25%. However, as an agricultural company engaged in cultivation, General Fruit has been approved for tax exemption since its formation. General Preservation was also approved for such exemption from income tax for the years 2013 and 2012. As a result, for the nine months ended June 30, 2013 and 2012, there was no income tax provision for the Company.

 

Note 12 – Stock Authorization and Issuance

 

On July 11, 2012, the Company entered into a Share Exchange Agreement with GRH and acquired all of the outstanding capital stock of GRH. In connection with the Share Exchange Agreement, the Company issued to GRH an aggregate of 125,112,803 shares of the common stock of the Company, at par value of $0.0001 per share. Immediately prior to the Share Exchange, the Company had 6,750,000 shares of Common Stock issued and outstanding. In connection with the transaction, the two principal shareholders of the Company surrendered for cancellation an aggregate of 4,513,252 shares of Common Stock beneficially owned by them.

 

On July 12, 2013, the Company affected the 1 for 8 reverse split of the Company’s issued and outstanding common stock, decreasing the number of outstanding shares from 127,349,551 to 15,918,940. These statements have been retroactively adjusted to reflect this reverse split.

 

Note 13 – Statutory Reserve

 

The Company is required to make appropriations to statutory reserve, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (the “PRC GAAP”). Appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the entities’ registered capital. For the nine months ended June 30, 2013, for the nine months ended September 30, 2012 and for the twelve months ended December 31, 2011 and 2010, statutory reserve activity was as follows:

 

Balance – December 31, 2010  $968,127 
Addition to statutory reserve   793,915 
Balance – December 31, 2011   1,762,042 
Addition to statutory reserve   317,116 
Balance – September 30, 2012   2,079,158 
Addition to statutory reserve   793,173 
Balance – June 30, 2013  $2,872,331 

 

Note 14 – Government Subsidy Income

 

The Company obtained government subsidy in cash from local governments, such as bank loan interest discount and eco-irrigation subsidy. The amount obtained differed each year. For the nine months ended June 30, 2013 and 2012, the government subsidy received was $275,391 and $106,939, respectively.

 

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Note 15 – Earnings Per Share

 

The Company reports earnings per share in accordance with the provisions of the FASB’s related accounting standard. This standard requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution, but includes vested restricted stocks and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.

 

The following is a reconciliation of the basic and diluted earnings per share computation:

 

   For the Three Months Ended June 30, 
   2013   2012 
         
Net income (loss)  $912,112   $(12,476)
           
Weighted average common shares   15,918,940    15,639,100 
(denominator for basic earnings (loss) per share)          
           
Effect of diluted securities:   -    - 
           
Weighted average common shares   15,918,940    15,639,100 
(denominator for diluted earnings (loss) per share)          
           
Basic earnings (loss) per share  $0.06   $(0.00)
Diluted earnings (loss) per share  $0.06   $(0.00)

 

   For the Nine Months Ended June 30, 
   2013   2012 
         
Net income  $8,613,146   $6,570,889 
           
Weighted average common shares   15,918,940    15,639,100 
(denominator for basic earnings per share)          
           
Effect of diluted securities:   -    - 
           
Weighted average common shares   15,918,940    15,639,100 
(denominator for diluted earnings per share)          
           
Basic earnings per share  $0.54   $0.42 
Diluted earnings per share  $0.54   $0.42 

 

Note 16 – Risk Factors

 

The Company's operations are carried out 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 as well as by the general state of the PRC’s economy. The Company's business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

Note 17 – Risk of Concentration and Credit Risk

 

For the nine months ended June 30, 2013, four vendors accounted for approximately 67% of the Company’s raw materials, while for the nine months ended June 30, 2012, four vendors accounted for approximately 68% of the Company’s raw materials. Purchases from these vendors were $4,227,467 and $3,171,123 for the nine months ended June 30, 2013 and 2012, respectively.

 

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Note 17 – Risk of Concentration and Credit Risk (continued)

 

For the nine months ended June 30, 2013, two customers accounted for 20% of the Company’s total sales. For the nine months ended June 30, 2012, no single customer accounted for more than 10% of the Company’s total sales.

 

Note 18 – Subsequent Event

 

At the annual meeting on June 28, 2013 the stockholders of the Company approved an amendment to the Company’s Certificate of Incorporation. On June 28, 2013, the Company filed with the Secretary of State, Delaware a Certificate of Amendment to the Charter (the “Charter Amendment”). Pursuant to the Charter Amendment, the Company’s Charter was amended, effective as of July 12, 2013, to effect a reverse stock split of the Company’s shares of common stock. On July 12, 2013, the Company affected the 1 for 8 reverse split of the Company’s common stock.

 

On July 12, 2013, the Company filed with the Secretary of State, Delaware a Certificate of Amendment to the Company’s Certificate of Incorporation (the “Second Charter Amendment”). Pursuant to the Second Charter Amendment, the Company’s Charter was amended to change the name of the Company from Geltology Inc. to General Agriculture Corporation.

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

  

The following discussion of the financial condition and results of operation of General Agriculture Corporation (formerly Geltology Inc.) for the three and nine months ended June 30, 2013 and 2012 should be read in conjunction with the selected consolidated financial data, the financial statements and the notes to those statements that are included elsewhere in this Quarterly Report on Form 10-Q (the “Report”). In addition to historical information, the following discussion contains certain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as “may”, “will”, “could”, “expect”, “anticipate”, “intend”, “believe”, “estimate”, “plan”, “predict”, and similar terms or terminology, or the negative of such terms or other comparable terminology. Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bound of our knowledge of our business, our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of the Company's Transition Report on Form 10-KT filed with the SEC on December 28, 2012. We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future.

 

Our financial statements are prepared in United States dollars (“U.S. Dollar” or “US$” or “$”) and in accordance with accounting principles generally accepted in the United States. See “Critical Accounting Policies and Estimates - Foreign currency translation” below for information concerning the exchanges rates at which Renminbi (“RMB”) were translated into U.S. Dollars at various pertinent dates and for pertinent periods. In this Report, references to “we”, “our”, “us”, the “Company” or the “Registrant” refer to General Agriculture Corporation, a Delaware corporation, and its subsidiaries and affiliated companies.

 

COMPANY OVERVIEW

 

The Company was incorporated under the laws of the State of Delaware on March 24, 2010. On July 12, 2013, we filed a Certificate of Amendment to our Certificate of Incorporation with the Secretary of State of Delaware to change our name from Geltology, Inc. to General Agriculture Corporation. The Company is primarily engaged in planting, preserving, packaging and marketing premium navel oranges for distribution and sale throughout the People’s Republic of China (“PRC”).

 

On July 11, 2012, GELT completed a reverse acquisition of General Red Holding, Inc. (“GRH”), which was established under the laws of the State of Delaware on January 18, 2011, entered into a share exchange agreement (the “Exchange Agreement”) with GRH and acquired all of the outstanding capital stock of GRH. Pursuant to the Exchange Agreement, GELT issued to GRH an aggregate of 125,112,803 shares of the common stock of GELT, at par value of $0.0001 per share (“Common Stock”) (such transaction is hereinafter referred to as the “Share Exchange”). GELT was delivered with zero assets and zero liabilities at time of closing.

 

Immediately prior to the Share Exchange, GELT had 6,750,000 shares of Common Stock issued and outstanding. Simultaneously with the transaction, the two principal shareholders of GELT surrendered for cancellation an aggregate of 4,513,252 shares of Common Stock beneficially owned by them. The transaction was regarded as a reverse merger whereby GRH was considered to be the accounting acquirer. Although the Company is the legal parent company, the share exchange was treated as a recapitalization of GRH. Thus, GRH is the continuing entity for financial reporting purposes. The financial statements have been prepared as if GRH had always been the reporting company and then on the share exchange date, had reorganized its capital stock.

 

Upon completion of the Share Exchange, the shareholders of GELT owned approximately 98.24% of the fully diluted outstanding shares of the Company prior to the issuance of the shares to the investors. Accordingly, GRH became the wholly owned subsidiary of GELT.

 

On September 30, 2011, GRH entered into an Agreement and Plan of Reorganization with Han Glory International Investment Limited (“Han Glory International”), a company incorporated on April 28, 2011 under the laws of British Virgin Islands and Hua Mei Investments Limited (“Hua Mei”), a company incorporated on April 26, 2011 under the laws of the British Virgin Islands. Under the agreement, GRH issued 74,814,862 shares to Hua Mei, the sole stockholder of Han Glory International, in exchange for all shares and beneficial interest of Han Glory International. This transaction is treated as a reverse merger, and therefore, after the share exchange, Han Glory International became the wholly owned subsidiary of GRH.

 

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On May 18, 2011, Han Glory International purchased all shares of Greater China International Investment Limited (“Greater China International”), a company incorporated on December 4, 2009 under the laws of Hong Kong, from Zhihao Zhang, the sole stockholder of Greater China International, for $1,290 (HK$10,000). As a result, Greater China International became the wholly owned subsidiary of Han Glory International.

 

On January 13, 2010, Greater China International formed Nanchang Hanxin Agriculture Technology Co., Ltd (“WFOE”) in the city of Nanchang, Jiangxi Province, the PRC.

 

On February 5, 2010, WFOE purchased all shares of Xingguo General Fruit Industry Development Co., Ltd (“General Fruit”) from Jiangjun Hong Group Co., Ltd., Xingping Hou and Jiefeng Ren for $293,400. As a result, WFOE acquired 100% interest in General Fruit. This transaction was a capital transaction in substance. That is, the transaction was a reverse recapitalization, equivalent to the issuance of stock by General Fruit for the net monetary assets of WFOE accompanied by a recapitalization.

 

General Fruit was formed in Xingguo County, Jiangxi Province, under the corporate laws of the PRC. On March 5, 2003. The primary business of General Fruit is to grow and sell navel oranges. On July 14, 2008, after a series of equity transfer agreements, General Fruit acquired 90% interest in Xingguo General Red Navel Orange Preservation Company, Ltd. (“General Preservation”). On July 25, 2010, General Fruit purchased the remaining 10% interest in General Preservation from Xingping Hou, the minority stockholder, for $295,000 (RMB 2,000,000) and owns 100% of General Preservation thereafter.

 

General Preservation, a citrus fruits company primarily engaged in preserving, packaging and marketing premium navel oranges, was formed as a limited liability company in Xingguo County, Jiangxi Province under PRC laws on November 22, 2005. General Preservation provides wholesale, retail, and institutional customers in China and several other countries with premium navel orange fruits under the trademark of “General Red”.

 

On September 26, 2011, GRH purchased all shares of Sheng Da Holding Limited (“Sheng Da BVI”), a company incorporated on May 18, 2011 under the laws of the British Virgin Islands, from General Red Company, Ltd (“General Red BVI”), a limited liability company incorporated on August 28, 2008 under the laws of British Virgin Islands, for $23,000. As a result, Sheng Da BVI became the wholly owned subsidiary of GRH. On September 29, 2011, Sheng Da BVI entered into a series of new agreements to terminate the old agreements with General Preservation, which were originally signed between General Red BVI and General Preservation on November 17, 2008, amended on June 10, 2011, and transferred to Sheng Da BVI by General Red BVI on June 30, 2011. The old agreements included a Consultation Agreement, an Operating Agreement, a Share Pledge Agreement, a Proxy Agreement and an Option Agreement. Upon the entry of these new agreements, General Preservation is no longer the Variable Interest Entity of Sheng Da BVI.

 

On June 28, 2013, at the Annual Meeting of stockholders the stockholders of the Company approved an amendment to the Company’s Certificate of Incorporation. On June 28, 2013, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment to the Charter (the “Charter Amendment”). Pursuant to the Charter Amendment, the Company’s Charter was amended, effective as of July 12, 2013, to affect a reverse stock split of the Company’s shares of common stock. On July 12, 2013, the Company affected the 1 for 8 reverse split of the Company’s issued and outstanding common stock, decreasing the number of outstanding shares from 127,349,551 to 15,918,940. These statements in this Report have been retroactively adjusted to reflect this reverse split.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, inventories, recovery of long-lived assets, income taxes, and the valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements.

 

While our significant accounting policies are fully described in Note 2 to our consolidated financial statements for the year ended September 30, 2012, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management’s discussion and analysis.

 

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Variable interest entities

 

The accounting standards require a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which we, through contractual arrangements, bear the risk of, and enjoy the rewards normally associated with ownership of the entity, and therefore we are the primary beneficiary of the entity. On September 29, 2011, Sheng Da BVI entered into a series of new agreements to terminate the VIE agreements.

 

Seasonal nature of operations

 

Typically the first (October to December) and second (January to March) quarters of our fiscal year are more profitable because of the maturity stage of the Company's products, which is usually from the month of October to March in the next year.

 

Accounts receivable

 

We have a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in our existing accounts receivable. We periodically review our accounts receivable and other receivables to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

 

As a basis for accurately estimating the likelihood of collection has been established, we consider a number of factors when determining reserves for uncollectable accounts. We believe that we use a reasonably reliable methodology to estimate the collectability of our accounts receivable. We review our allowances for doubtful accounts on at least a quarterly basis. We also consider whether the historical economic conditions are comparable to current economic conditions. If the financial condition of our customers or other parties with which we have business were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

 

Inventories

 

Inventories, consisting of raw materials, work in process and finished goods related to our products are stated at the lower of cost or market utilizing the weighted average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, we will record additional reserves for the difference between the cost and the market value. These reserves are recorded based on estimates. We review inventory quantities on hand and on order and record, on a quarterly basis, a provision for excess and obsolete inventory, if necessary. If the results of the review determine that a write-down is necessary, we recognize a loss in the period in which the loss is identified, whether or not the inventory is retained. Our inventory reserves establish a new cost basis for inventory and are not reversed until we sell or dispose of the related inventory. Such provisions are established based on historical usage, adjusted for known changes in demands for such products, or the estimated forecast of product demand and production requirements.

 

Property and equipment

 

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets are as follows:

 

  Estimated Useful Life
Electronic equipment 5 years
Vehicles 10 years
Machinery and equipment 5-15 years
Buildings and improvements 5-20 years
Navel orange orchards 11-30 years

   

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Revenue recognition

 

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. The Company recognizes revenues from the sale of navel oranges upon shipment and transfer of title.

 

Foreign currency translation

 

The Company has evaluated the determination of its functional currency based on the guidance in ASC Topic, “Foreign Currency Matters,” which provides that an entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash.

 

On its own, the Company raises financing in the U.S. Dollar, pays its own operating expenses primarily in the U.S. Dollar, paid dividends to its shareholders of common stock and expects to receive any dividends that may be declared by its subsidiaries in U.S. Dollars.

 

Therefore, it has been determined that the Company’s functional currency is the U.S. Dollar based on the expense and financing indicators, in accordance with the guidance in ASC 830-10-85-5.

 

The Company uses U.S. Dollars for financial reporting purposes. The subsidiaries within the Company maintain their books and records in RMB, the currency of the currency of China, the economic environment in which the Company’s primary subsidiaries conduct their operations. Assets and liabilities of the subsidiaries in RMB are translated into U.S. Dollars using the applicable exchange rates prevailing at the balance sheet date. Items on the statements of operations and comprehensive income and cash flows are translated at average exchange rates during the reporting period. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the Company’s financial statements are recorded as accumulated other comprehensive income.

 

Results of Operations for the Three Months Ended June 30, 2013 Compared to the Three Months Ended June 30, 2012 and the Nine Months Ended June 30, 2013 Compared to the Nine Months Ended June 30, 2012.

 

Revenues

 

For the three months ended June 30, 2013, we had net revenues of $1,606,108, as compared to net revenues of $761,422 for the three months ended June 30, 2012, an increase of approximately $844,686 or 111%. The increase in net revenues was primarily attributable to an increase in sales volume and an increase in our sales prices.

 

Our sales volume increased by approximately 76.5% for the three months ended June 30, 2013, while the average sales price per kg increased by approximately 18.6%, as shown below:

 

   Sales   Sale Price     
   Volume   Per KG   Total Sales 
Three months ended  (in KG)   (in US$)*   Revenue 
30-Jun-13   1,745,770    0.92    1,606,108 
30-Jun-12   988,860    0.77    761,422 
Variance   756,910    0.14    844,686 
% Variance   76.5%   18.6%   110.9%

* The price of processing navel orange was not included in the calculation of sale price because there is no revenue from processing navel orange during the same period of year 2012 and the sale price of processing navel orange per KG is approximately $0.03 during 2013.

 

For the nine months ended June 30, 2013, we had net revenues of $17,424,349, as compared to net revenues of $16,835,368 for the nine months ended June 30, 2012, an increase of approximately $588,980 or 3.5%. The increase in net revenues was primarily attributable to an increase in the total sales volume for the nine months ended June 30, 2013 as compared to the nine months ended June 30, 2012.

 

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Our sales volume decreased by approximately 0.4% for the nine months ended June 30, 2013, while the average sales price per kg increased by approximately 4.0%, as shown below:

 

   Sales   Sale Price     
   Volume   Per KG   Total Sales 
Nine months ended  (in KG)   (in US$)*   Revenue 
30-Jun-13   21,768,860    0.80    17,424,349 
30-Jun-12   21,864,115    0.77    16,835,368 
Variance   -95,255    0.03    588,980 
% Variance   -0.4%   4.0%   3.5%

* The price of processing navel orange was not included in the calculation of sale price because there is no revenue from processing navel orange during the same period of year 2012 and the sale price of processing navel orange per KG is approximately $0.03 during 2013.

 

Cost of sale.

 

Cost of sales increased by $40,961, or 11%, from $378,226 for the three months ended June 30, 2012 to $419,187 for the nine months ended June 30, 2013, as a result of a 111% increase in sales volume and cost reductions attributable to our increased cultivation of orange groves. Although the labor cost and prices we paid to our suppliers continued to increase, we were able to lower our costs by turning to more self-cultivation, which usually costs less than direct purchases of navel oranges.

 

Cost of sales decreased by $657,785, or 8%, from $8,234,202 for the nine months ended June 30, 2012 to $ 7,576,417 for the nine months ended June 30, 2013.

 

Gross profit and gross margin

 

Our gross profit was $1,186,921 for the three months ended June 30, 2013 as compared to $383,196 for the three months ended June 30, 2012, representing a gross margin of 74% and 50%, respectively. The increase in our gross profit margin for the three months ended June 30, 2013 was mainly attributable to the increase of sales volume, the increase in sales price per kg and the decrease of our cost of sales during the three months ended June 30, 2013.

 

For the nine months ended June 30, 2013, our gross profit was $9,847,932 as compared to $8,601,166 for the nine months ended June 30, 2012; representing a gross margin of 57% and 51%, respectively. The increase in our gross profit margin for the nine months ended June 30, 2013 was mainly attributable to the same reasons mentioned above.

 

Selling expenses

 

Selling expenses were $95,194 and $248,785 for the three months ended June 30, 2013 and 2012, respectively, decreased by $153,591 or 61.7%, mainly due to reduction in advertising and other expenses.

 

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Selling expenses consisted of the following:

 

   For the Three Months Ended June 30,   Increase/decrease 
   2013   2012   $   % 
Shipping and handling   73,256    62,577    10,679    17.1%
Compensations and related benefits   7,096    3,822    3,274    85.7%
Advertising and promotion   1,751    166,664    -164,913    -98.9%
Others   13,091    15,722    -2,631    -16.7%
Total   95,194    248,785    -153,591    -61.7%
Selling expenses as % of revenue   5.93%   32.67%   -26.7%   -81.9%

 

Shipping and handling expenses increased by $10,680 or 17.1%, as a result of the increase in shipping volume.

 

Compensation and related benefits increased by $3,274, or 85.7%, in the three months ended June 30, 2013 compared to the three months ended June 30, 2012, due to the implementation of automated planting starting in October 2012.

 

Advertising and promotion expense decreased by $164,914 or 98.9%, as a result of the down-sizing of our marketing campaign in the three months ended June 30, 2013.

 

Other expense mainly includes customer entertainment, vehicle maintenance and miscellaneous office expenses.

 

Selling expenses were $881,482 and $1,306,318 for the nine months ended June 30, 2013 and 2012, respectively, decreased by 424,836 or 33%, mainly due to reduction in advertising and other expenses.

 

Selling expenses consisted of the following:

 

   For the Nine Months Ended
June 30,
   Increase/decrease 
   2013   2012   $   % 
Shipping and handling   765,757    686,275    79,482    11.6%
Compensation and related benefits   25,661    24,408    1,253    5.1%
Advertising and promotion   28,325    359,683    -331,358    -92.1%
Others   61,739    235,952    -174,213    -73.8%
Total   881,482    1,306,318    -424,836    -32.5%
Selling expenses as % of revenue   5.06%   15.86%   -10.8%   -68.1%

 

Shipping and handling expenses increased by $79,482 or 11.6 %, as a result of the increase in shipping volume.

 

Compensation and related benefits increased by $1,253, or 5.1%, in the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012, due to the expansion of our sales force beginning in October 2012.

 

Advertising and promotion expense decreased by $331,358 or 92.1%, as a result of the reduction of the investment in our marketing campaign during the nine months ended June 30, 2013.

 

Other expense mainly includes customer entertainment, vehicle maintenance and miscellaneous office expenses.

 

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General and administrative expenses

 

General and administrative expenses amounted to $128,392 for the three months ended June 30, 2013, as compared to $117,871 for the same period in 2012, a decrease of $10,521 or 8.9%. General and administrative expenses consisted of the following:

 

   For the Three Months Ended
June 30,
   Increase/decrease 
   2013   2012   $   % 
Compensation and related benefits   52,588    57,250    -4,662    -8.1%
Depreciation   24,377    24,808    -431    -1.7%
Professional service   14,355    5,781    8,574    148.3%
Office expenses   4,703    6,899    -2,196    -31.8%
Other   32,369    23,133    9,235    39.9%
Total   128,392    117,871    10,521    8.9%
G&A expense as of revenues   8.0%   15.5%   -7.5%   -48.4%

 

Compensation and related benefits decreased by $4,662 or 8.1%, mainly because in October 2012, we laid off certain staff in our purchasing department and certain related supporting staff .

 

Depreciation expense decreased by $431, or 1.7%, in the three months ended June 30, 2013, as compared to the same period in 2012. The decrease was primarily because some fixed assets have been fully depreciated during the reporting period.

 

Professional service fees increased by 8,574 mainly due to the increase in the audit and legal fees.

 

Office expense decreased by $2,195, or 31.8%, in the three months ended June 30, 2013, as compared to the same period in 2012, as our Hanxin Agriculture, located in Nanchang, Jiangxi Province was able to cut down its office expense.

 

Other general and administrative expenses mainly include customer entertainment, utilities, repairs, telecommunication, insurance and certain low-value miscellaneous items. Their amounts varied period over period due to different circumstances.

 

General and administrative expenses amounted to $453,460 for the nine months ended June 30, 2013, as compared to $645,180 for the same period in 2012, a decrease of $191,720 or 29.7%.

 

General and administrative expenses consisted of the following:

 

   For the Nine Months Ended
June 30,
   Increase/decrease 
   2013   2012   $   % 
Compensation and related benefits   154,643    255,111    -100,468    -39.4%
Depreciation   112,674    99,028    13,646    13.8%
Professional service   29,727    69,211    -39,484    -57.0%
Office expenses   16,903    26,451    -9,548    -36.1%
Other   139,513    195,379    -55,866    -28.6%
Total  $453,460    645,180    -191,720    -29.7%
G&A expense as of revenues   2.60%   3.83%   -1.23%   -32.1%

 

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Compensation and related benefits decreased by $100,468 or 39.4%, mainly because in October 2012, we laid off certain staff in our purchasing department and certain related supporting staff.

 

Depreciation expense increased by $13,646, or 13.8%, in the nine months ended June 30, 2013, as compared to the same period in 2012. The increase was primarily due to the completion of construction of our Plastic Sorting Workshop worth approximately $132,000 and the addition of certain equipment in December 2011, for which we started to record depreciation of workshop and equipment in 2012.

 

Professional service fees decreased by $39,484 mainly due to the decrease in audit and legal fees related to reverse merger during 2012.

 

Office expense decreased by $9,548, or 36.1 %, in the three months ended June 30, 2013, as compared to the same period in 2012, as our Hanxin Agriculture, located in Nanchang, Jiangxi Province was able to cut down its office expense.

 

Other general and administrative expenses mainly include customer entertainment, utilities, repairs, telecommunication, insurance and certain low-value miscellaneous items. Their amounts varied period over period due to different circumstances.

 

Income from operations

 

For the three months ended June 30, 2013, income from operations was $963,335, as compared to $16,540 for the three months ended June 30, 2012, an increase of $946,795 or 5724%, mainly due to increase in our sales volume and sales price and reduction in our cost of sales during three months ended June 2013 compared the same period in 2012

 

For the nine months ended June 30, 2013, income from operations was $8,512,989, as compared to $6,649,668 for the nine months ended June 30, 2012, an increase of $1,863,321 or 28%.

 

Other income (expenses)

 

For the three months ended June 30, 2013, other expense amounted to $51,223 as compared to other expense of $29,016 for the same period in 2012. For the three months ended June 30, 2013 and 2012, other income (expense) mainly included: (i) interest expense, which decreased by $6,405 or 4% period over period due to a decrease in the average interest rate of our bank loans, and (ii) certain government subsidies, such as bank loan interest discount and an eco-irrigation subsidy. In the three months ended June 30, 2013, we received government subsidies of approximately $19,127, as compared to $47,655 for the three months ended June 30, 2012. Government subsidies vary from time to time.

 

For the nine months ended June 30, 2013, other income amounted to $100,156 as compared to other expense of $78,779 for the same period in 2012. For the nine months ended June 30, 2013 and 2012, other income (expense) mainly included: (i) interest expense, which decreased by $10,226 or 4.5% period over period due to a decrease in the average balance and interest rate of our bank loans, and (ii) certain government subsidies, such as bank loan interest discount and an eco-irrigation subsidy. In the nine months ended June 30, 2013, we received government subsidies of approximately $275,291, as compared to $106,939 for the nine months ended June 30, 2012. Government subsidies vary from time to time.

 

Income tax expense

 

For both the three months ended June 30, 2013 and 2012, and also for both the nine months ended June 30, 2013 and 2012 income tax amounted to $0. We began enjoying an income tax exemption for year 2013 and 2012 for processing agricultural commodities. General Fruit has been approved for tax exemption since its formation.

 

Net income

 

As a result of the factors described above, our net income for the three months ended June 30, 2013 was $912,112. For the three months ended June 30, 2012, we had net loss of $12,476. For the nine months ended June 30, 2013 and June 30, 2012, the net income was $8,613,145 and $6,570,889, respectively.

 

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Foreign currency translation gain

 

The functional currency of our subsidiaries operating in the PRC is the Chinese Yuan or Renminbi (“RMB”). The financial statements of our subsidiaries are translated to U.S. Dollars using period end rates of exchange for assets and liabilities, and average rates of exchange (for the period) for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. As a result of these translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $501,924 for the three months ended June 30, 2013 as compared to $10,520 for the same period in 2012. This non-cash gain had the effect of increasing our reported comprehensive income.

 

For the nine months ended June 30, 2013 and same period in 2012, we reported a foreign currency translation gain of $743,299 and $298,114, respectively. This non-cash gain had the effect of increasing our reported comprehensive income.

 

Comprehensive income

 

For the three months ended June 30, 2013, comprehensive income of $1,414,036 is derived from the sum of our net income of $912,112 plus foreign currency translation gain of $501,924.

 

For the nine months ended June 30, 2013, comprehensive income of $9,356,445 is derived from the sum of our net income of $8,613,145 plus foreign currency translation gain of $ 743,299.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We have historically funded our operation primarily through paid-in capital, sales of goods, loan from stockholders and short term loans from financial institutions in China.  The Company currently generates its cash flow through operations, which it believes will be sufficient to sustain current level operations for at least the next twelve months.

 

As of June 30, 2013, our balance of cash and cash equivalents was $1,457,582. As of September 30, 2012, our balance of cash and cash equivalents was $ 351,045, an increase of 1,106,537 or 315.2%, mainly due to net cash provided by financing activities.

 

The following summarizes the key components of the Company’s cash flows for the nine months ended June 30, 2013 and 2012:

 

   For the Nine Months Ended
June 30,
   Increase/decrease 
   2013   2012   $   % 
Net cash used in operating activities   (432,638)   (2,653,521)   2,220,883    -83.7%
Net cash used in investing activities   (94,704)   (106,595)   11,891    -11.2%
Net cash provided by financing activities   1,609,612    3,238,806    (1,629,194)   -50.3%
Effect of foreign currency translation   24,267    17,905    6,362    35.5%
Net increase in cash and cash equivalents   1,106,537    496,595    609,942    122.8%

 

In summary, our cash flows were:

 

Net cash used in operating activities decreased in the nine months ended June 30, 2013 by $2,220,883 to $432,639, from net cash used in operating activities of $2,653,521 for the nine months ended June 30, 2012. These changes were mainly brought about by the following changes: an increase in net income of $2,2042,257, a decrease in cash used in prepaid leases of $2,754,967, an decrease in cash provided by customer deposits of $1,406,768 and a decrease in cash tied in inventory of $427,252.

 

Net cash used in investing activity decreased by $11,891, from $106,595 to $94,704, in the nine months ended June 30, 2013 compared to the same period ended in 2012, which is mainly due to less cash expenditures on property and equipment.

 

Net cash provided by financing activities decreased by $1,629,194 to $1,609,612 in the nine months ended June 30, 2013 compared to $3,238,806 provided by financing activities at the same period ended in 2012. This was due to the repayment of short-term bank loans of $4,204,318.

 

Working capital as of June 30, 2013 increased by $2,524,380 to $2,049,265 from $(475,115) as of September 30, 2012.  In order to stay cost competitive in the long-run, we leased 165,278 additional orange trees within the past nine months. Based on the lease rate of approximately $55.96(RMB350) per tree in 2013, the total spending is estimated to be no more than $9,247,469 (RMB46, 997,300).

 

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As we are listed by the lending bank as a good credit customer, we believe that our short-term bank loans will be renewed at their maturity dates. On November 30 and December 21, 2012, as a replacement of an existing short-term bank loan that matured in November 16, 2012, the Company obtained a new bank loan of approximately $5,508,000 (RMB34, 0000, 000) from Agricultural Development Bank of China.

   

Although we will continue to invest in our business, with expected positive operating cash flow fueled by our profit, we believe our operating cash is sufficient to sustain current level operations for at least the next twelve months.

 

Off-Balance Sheet Financing Arrangements

 

We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or entered into any non-financial assets.

 

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company, we are not required to respond to this Item.

 

ITEM 4.     CONTROLS AND PROCEDURES

 

Disclosure controls and procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer to allow timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness, as of the end of the period covered by this report, of our disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective.

 

Changes in internal control over financial reporting

 

During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II– OTHER INFORMATION

 

ITEM 1.    LEGAL PROCEEDINGS

 

None.

 

ITEM 1A.    RISK FACTORS

 

As a smaller reporting company, we are not required to respond to this Item.

 

ITEM 2.      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None in the Quarterly Period ended June 30, 2013.

 

ITEM 3.      DEFAULT UPON SENIOR SECURITIES

 

None.

 

ITEM 4.      MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5.     OTHER INFORMATION

 

None.

 

ITEM 6.    EXHIBITS

 

Exhibit No.   Description
3.1   Certificate of Incorporation of the Company, as amended
31.1   Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification of the Chief Executive Officer and Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

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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.

 

  GENERAL AGRICULTURE CORPORATION
   
Date: August 14, 2013 By: /s/ Xingping Hou
  Name: Xingping Hou
  Title: Chief Executive Officer
    (Principal Executive Officer)
     
Date: August 14, 2013 By: /s/ Amy Xue
  Name: Amy Xue
  Title: Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit
No.
  Description
3.1   Certificate of Incorporation of the Company, as amended
31.1   Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification of the Chief Executive Officer and Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

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