Attached files
| file | filename |
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| EXCEL - IDEA: XBRL DOCUMENT - AMAYA Global Holdings Corp. | Financial_Report.xls |
| EX-31.2 - EXHIBIT 31.2 - AMAYA Global Holdings Corp. | v380481_ex31-2.htm |
| EX-32.2 - EXHIBIT 32.2 - AMAYA Global Holdings Corp. | v380481_ex32-2.htm |
| EX-32.1 - EXHIBIT 32.1 - AMAYA Global Holdings Corp. | v380481_ex32-1.htm |
| EX-31.1 - EXHIBIT 31.1 - AMAYA Global Holdings Corp. | v380481_ex31-1.htm |
| EX-21 - EXHIBIT 21 - AMAYA Global Holdings Corp. | v380481_ex21.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the Fiscal Year Ended September 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 Registrant as specified in its charter)
| Delaware | 35-2379917 |
| (State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) |
| organization) | |
| Room 801, Plaza B, Yonghe Building, | |
| No.28 AnDingMen East Street | |
| Dongcheng District | |
| Beijing, China | 100007 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number:
Phone: 86-10-64097316
Fax: 86-10-64097026
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No ¨
* The registrant is a voluntary filer of reports required to be filed by certain companies under Section 13 or 15(d) of the Securities Exchange Act of 1934 and has filed all reports that would have been required to have been filed by the registrant during the preceding 12 months had it been subject to such filing requirements during the entirety of such period.
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 (§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 ¨ *The registrant has not completed the construction of its corporate Web site.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained herein, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer ¨ |
| Non-accelerated filer ¨ | Smaller reporting company x |
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No x
As of March 31, 2013, the aggregate market value of the voting stock held by non-affiliates of the Registrant (3,754,849 shares of common stock held by non-affiliate shareholders) was $ 4,505,818.
On December 15, 2013, we had 15,918,940 shares of common stock issued and outstanding. On July 12, 2013, the Company effected the 1 for 8 reverse split of the Company’s common stock
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
We are filing this Amendment No. 1 to amend the Form 10-K (the “Report”) of General Agriculture Corporation (the “Company”) for the fiscal year ended September 30, 2013, as filed with the Securities and Exchange Commission on December 27, 2013, to correct the cover page to indicate that the Company is a voluntary filer, to add exhibits in Item 15, to conform signatures on the signature page and to insert a new audit opinion for the following reason:
On April 3, 2014, the Company engaged Friedman LLP as its independent registered public accounting firm to re-audit the consolidated financial statements for the years ended September 30, 2013 and 2012, in order to replace the report issued by the predecessor auditors. Friedman LLP’s report dated June 4, 2014 is included in this amended Form 10-K. The re-audit of our consolidated financial statements by Friedman LLP for these two years did not find any material misstatements to warrant any restatements of the previously issued financial statements audited by the predecessor auditors for the same periods. We have also updated Item 9 and Item 14 to reflect this change of auditors.
Other than as discussed in this Explanatory Note, no other changes have been made in this Amendment No. 1 and does not reflect events that may have occurred subsequent to the original filing date and does not modify or update in any way other disclosures made in the original Report, except as disclosed in Note 15 to our financial statements. However, for the convenience of the reader, this Amendment No. 1 sets forth the original Report in its entirety as amended by the corrections discussed above.
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CAUTION REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements. All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. Forward-looking statements usually contain the words “estimate,” “anticipate,” “believe,” “expect,” or similar expressions, and are subject to numerous known and unknown risks and uncertainties. In evaluating such statements, prospective investors should carefully review various risks and uncertainties identified in this Report on Form 10-K (“Report”), including the matters set forth under the captions “Risk Factors” and in the Company’s other SEC filings. These risks and uncertainties could cause the Company’s actual results to differ materially from those indicated in the forward-looking statements.
Although forward-looking statements in this Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading “Risks Relating to Our Business” below, as well as those discussed elsewhere in this Report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. We file reports with the Securities and Exchange Commission (“SEC”). You can read and copy any materials we file with the SEC at the SEC’s Public Reference Room, 100 F. Street, NE, Washington, D.C. 20549 on official business days during the hours of 10 a.m. to 3 p.m. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Company.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Report. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
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References to “GELT” shall refer to General Agriculture Corporation. References to the “Company” “we,” “our,” “ours” and “us,” shall refer to General Agriculture Corporation, and include our operating subsidiaries in the PRC, Xingguo General Fruit Industry Development Co., Ltd. (“General Fruit”) and its wholly owned subsidiary Xingguo General Red Navel Orange Preservation Company Ltd. (“General Preservation”).
BUSINESS
Company Background
General Agriculture Corporation (“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. GELT, through its direct operating subsidiaries General Fruit and General Preservation, 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.
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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.
Our current corporate structure is as follows:
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Our Current Business and Products
We are one of the leading companies engaged in the planting, post-harvest processing and temperature controlled preservation and storage of navel oranges in China. We contract with approximately 30 farmers to plant and harvest oranges in our orchards and provide them with not only the raw materials necessary to plant, but also technical guidance and services to monitor quality of the crops. When navel oranges are harvested, we preserve, store and subsequently sell them throughout many regions in the PRC. In addition to contracting with local farmers for the planting and harvesting work in our orchards, we purchase oranges from farmers and cooperatives who do not use our land. The oranges purchased from other farmers and cooperatives are not necessarily planted and harvested as organic navel oranges. However, once purchased we commercially process and preserve them according to the standards of organic navel oranges. Even though we plant navel oranges in our orchards certified as organic, we do not market any of our navel oranges as organic to the consumer market. All of the navel oranges we sell use the “General Red” brand name. We have received numerous honors and certifications due to the quality of our branded navel oranges, including “High Quality Navel Orange” awarded by China (Ganzhou) Navel Orange Festival committee, and “China Famous Fruit” awarded by China Fruit Distribution Association.
Our goal is to become the largest integrated grower, packager and distributor of navel oranges in China. We have invested in our business by devoting resources to the establishment of significant orange orchards, by building a state of the art storage and preservation facility and by marketing and advertising our products. Currently, we have 701,864 orange trees in 20,112.84 mu of land (approximately 3,313.3 acres) in Ganzhou of Jiangxi Province. We acquired 10,027.94 mu of the land (approximately 1,651.97 acres) from the local government, and developed our own orange orchards on that land, in which about 228,606 orange trees were planted. In addition, we leased from individual farmers 10,084.9 mu of orange orchards (approximately 1,661.36 acres and 473,258 orange trees).
There are four models that our company implements to operate our business of the orange production and procurement. In the company owned orchards, we have direct employees working in the orchards, and there is no involvement of unrelated third parties in production. In other orchards that we own, we hire local farmers to take care of orchards at a fixed fee per tree, which has been in the range of approximately $ 8.0 to $ 9.0 per tree since 2011. We provide local farmers with raw materials, such as seedlings and fertilizer, as well as production tools, electricity and irrigation facilities necessary for planting and harvesting the oranges. Our in-house fruit forest management and protection team provide technical support and guidance to the farmers to optimize cultivation, irrigation, fertilization, water and soil conservation, administration of organic pesticides for weed and pest control, and protection against frost and rain. We instruct farmers on how to implement these quality control measures. For the leased orange orchards, we adopt a different model. Prior to the growing season, the farmers enter into short-term sales contracts with us, which provide that we will purchase a specified quantity of oranges from the farmers, based on weight, at a specified purchase price. We divide the production yield with farmers, so that 60% of all product is for us, and 40% is for the farmers. These contracts further provide that we are only obligated to purchase those oranges that meet our quality specifications. We believe that this is an attractive model for farmers, as it allows them to bypass the logistics and added costs of going through wholesale or retail markets to sell their oranges. This model is also beneficial to us because we have an ongoing supply of oranges, which we know are grown according to our specifications, enabling us to consistently maintain our high level of quality. In addition to production in our owned and leased orchards, we buy navel oranges from outside parties. However, the production volume from our owned and leased orchards has increased from 35% of total sales in fiscal year 2009, to 72% in fiscal year 2012, and 77% in fiscal year 2013.
In Ganzhou, Jiangxi, we constructed one of the largest navel orange temperature-controlled preservation facilities in the Southern Jiangxi region of China on 19,176.31 square meters of land (approximately 4.74 acres), of which 14,907.92 square meters (approximately 3.68 acres) is the construction area of the main structure for the preservation facility. We have approximately 4,268.39 square meters (approximately 1.05 acres) of administrative offices, dormitories and power supply rooms next to the facility. The maximum storage capacity is 7,000 tons. Currently, most of the navel orange storage facilities in the Southern Jiangxi region are cold storage, with few that are temperature controlled facilities. The temperature-controlled storage and preservation technology used in our facility comes from Beijing Furui Ventilation Protection Company (“Beijing Furui”), which was previously a subsidiary of China Agricultural University and Chinese Academy of Agricultural Sciences. Beijing Furui was the construction contractor in the design and build of our temperature-controlled preservation facility, and provided the main equipment used in the facility. We purchased our post-harvest processing equipment, which includes our selection and packaging lines, from MAF RODA Group of Spain (“MAF RODA”). As part of the purchasing contract, MAF RODA provides us with technical training on how to operate the equipment, which includes educating our employees about the automatic control technology used in the equipment. We have two modern sorting lines at our Ganzhou facility. The sorting line has a sorting capacity of 40 tons/hour. These sorting lines clean, disinfect and apply wax coating to the oranges, and then select, classify, and send the naval oranges to pre-storage.
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Industry and Market Overview
There are three primary areas of business operations in the navel orange industry: production, post-harvest processing and preservation.
Navel Orange Production
The navel orange industry has been growing rapidly in China due to governmental support and an increase in demand for navel oranges. The Ministry of Agriculture and the Municipal Government of Ganzhou have provided incentives to encourage the production of navel oranges, including tax reduction, subsidies, free education, seedling promotion, and production standardization.
Navel orange production requires stringent climate conditions, therefore, there are limited areas in the world where navel oranges can be produced. As a result, production is primarily concentrated in warmer climates, such as California, Spain, South Africa, Australia, and “Gannan – Southern Hunan – Northern Guangxi” in China. The Chinese government has identified the Gannan area as "the hometown of the navel orange in China", and has been supportive of local producers. The Ministry of Agriculture named Gannan navel oranges as one of the nine competitive agricultural products in the country, and listed Gannan as one of the key developing areas.
General Fruit is one of six leading enterprises in Gannan and plays a decisive role in Gannan’s navel orange industry. “Ganan Navel Orange” is the common brand shared by all producers in Gannan area. We believe that “General Red” stands out among all of the Gannan brands because of the measures we take to ensure quality along with our consistent branding strategy.
We anticipate that the demand for navel oranges in China will continue to increase. According to the Ministry of Agriculture of China, the per capita consumption of fresh oranges is 12.7 kg in China, compared to 17.2 kg worldwide. Approximately 98% of navel oranges produced in China are sold in the domestic market, with only 2% exported to other countries. More than 95% of citrus fresh fruit is sold domestically in China, with less than 5% of such fruit exported. A large portion of raw materials for orange juice is imported from Brazil and the US. We believe that such data indicates there is a significant room for growth in this industry in China.
Post-harvest processing
The post-harvest processing of harvested fruits also has broad prospects in China. Post-harvest processing includes selecting, grading, cleaning, pre-cooling, waxing and packaging. Proper processing can minimize post-harvest loss, maintain the high nutritional content and freshness, slow down the metabolic process of fruit in its natural state, enhance the appearance of the fruit and extend the life of the fruit. Currently, 95% of citrus fresh fruit are sold in domestic market in China with the rest of about 5% exported overseas, and 10% of fresh fruit are processed in the post-harvesting period in China, lower than the average level of 35% worldwide.
Preservation
The storaging and preserving technology in China lags behind that of developed countries in the citrus exports area due to grossly inadequate storage and preservation facilities. According to data published in the “Agricultural Product Cold-Chain Logistics Development Plan” formulated by China National Development and Reform Commission, the rate of cold chain distribution of fruits and vegetables is only 5%, and the rate of refrigerated transportation hardly reaches 15%, which is much lower than in developed countries. Cold chain distribution is a temperature controlled distribution supply chain, resulting in an uninterrupted series of storage and distribution activities by maintaining a given temperature. It is used to help extend and ensure the shelf life of products, including agricultural products. According to China National Development and Reform Commission, the loss rate in distribution of oranges in China is 20-30%, compared with less than 5% in developed countries. The National Development and Reform Commission of China developed a "cold chain logistics development plan" in 2010, to improve the cold chain distribution rate to 20% and refrigerated transportation rate to 30%, and reduce loss rate in distribution to 15%.
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Most navel oranges mature in October and November, and are distributed during the months of October through January. General Fruit can extend its sales cycle to June of the following year due to its strong preservation abilities, which enables us to sell navel oranges at a higher price during the off-season when other distributors may not have sufficient supply.
Our Competitive Strengths
Our competitive strengths include:
Quality of Oranges and Brand Name. We are committed to distributing oranges that our management believes meet high quality standards. Our agreements with the farmers and suppliers provide that each orange must have a solid shape, even stem and a smooth surface, and be free of any black spots, fertilizer spots, cracks or worms. For the farmers we contract with, our agreements further provide that oranges may not be picked when it is raining, or within three days of rain, when it is foggy or before the dew on the orange tree has dried. Pursuant to the terms of our supply contracts, we will not buy navel oranges if the quality standards are not met. For the orchards that we farm with our own employees, we apply the same quality standards described above. The Company has received more than 20 honors related to navel oranges and the Company’s preservation facility. Among the honors the Company has received are the titles of “Chinese Famous Brand” by the Fruits Logistics Association of China, “Famous Agricultural Brand of Jiangxi” by the Jiangxi provincial government, and “Key Leading Enterprise of Ganzhou in Agricultural Industrialization” by the Ganzhou municipal government.
Geographical Advantage. Compared to navel orange competitors located outside of our region, the location of our planting area affords us numerous advantages, including proximity to China’s transportation network of highways, desirable climate conditions and soil for cultivating organic oranges. Our planting area is close to the Beijing-Kowloon railroad, 105 state road, 323 national highway, 319 state road, Kunsha Highway, and Quannan Highway. Using these roads, Jinggangshan airport is approximately one hour drive while the port cities of Shenzhen, Guangzhou and Xiamen are all within five hours by car. Our planting area is located in a subtropical monsoon climate, with abundant rainfall, sunshine and four distinct seasons. The average annual temperature is 18.9°C with a low of -3°C and relative humidity of 70-80%. There is an average annual sunshine exposure of 1,992.3 hours and approximately 1,600 mm of annual rainfall making it very suitable for growing oranges. The soil at our planting area is rich in organic matter with soil pH levels of 6-6.3 (optimal for orange cultivation). Soil sample tests are conducted by experts to comply with the provisions of the Chinese government’s NY5016-2001 standard. In July 2007, Jiangxi Province Academy of Agricultural Sciences Green Food Environment Test Center conducted tests on the soil, irrigation water and air quality of the Company’s navel orange planting base located in Chongxian Township, Xingguo County, Jiangxi Province and concluded that the planting base was suitable for the production of organic products.
Top of the Line Sorting Machines. Our processing facilities utilize top of the line sorting machines purchased from leading manufacturers in this industry, such as MAF RODA Group and Yantai Sinclair Economic and Trade Co., Ltd. MAF Roda is the world's largest fresh produce procurement, processing, and packaging equipment manufacturer, leading the world in the development of agricultural products packaging industry, and its products represent the top of the line in the field. Yantai Sinclair Economic and Trade Co., Ltd., is the world's leading provider of fresh fruits and vegetables labeling systems. All of the world's major fruit producing areas are served by Sinclair's systems, which meet European specifications and regulations regarding fruits and vegetables, the U.S. Food and Drug Administration (FDA), and the world's leading supermarket chain requirements. Sinclair currently has tens of thousands of devices running worldwide.
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Technology Advantage. Our controlled atmosphere storage and preservation technology allows us to maintain a storage period of up to 6-8 months, improve orange appearance and color, and retain a fresh flavor. This is necessary for our oranges to achieve the status of "Gannan navel orange" that meets the national standard (Standard No. GB/T200355-2006). Our controlled atmosphere storage equipment is primarily provided by the China Agricultural University, Chinese Academy of Agricultural Sciences, and its affiliated company, Beijing Furuitong Technology Ltd. Beijing Furuitong Technology Ltd. specializes in the research and development of fruit and vegetable storage and preservation technology, manufacturing of cold atmosphere equipment, and construction of controlled atmosphere storage projects.
Management and Expert Team. We have established a specialized fruit forest management and expert team, who work with the contract farmers to optimize cultivation, irrigation, fertilization, water and soil conservation, administration of pesticides for weed and pest control, and to educate about protection against frost and rain. Our team has learned through various lectures taught by a professor of Huazhong Agricultural University, a member of the Chinese Academy of Engineering, and by other fruit experts in China. These lectures were part of an agricultural technology promotional series, provided by the Chinese government for free in support of the planting of navel oranges in the Southern Jiangxi region. In these seminars and lectures, our team received introduction of some high-yield (in terms of quantity) and high-quality (in terms of quality) navel orange varieties suitable for the Southern Jiangxi region, and our team was taught standardized production, pollution-free cultivation and other cultivation techniques.
Growth Strategy
We intend to leverage our existing operations to create a fully integrated business that grows, preserves and distributes high-quality navel oranges, other fruits and vegetables. Our growth strategy will be focused on the increase of orchard and orange trees in the short term, and then distribution of general fruits and vegetables in the long term, and our approach includes:
Increasing Navel Orange Orchards in Gannan. Within the next 2 years, we will continue to build, acquire and lease navel orange orchards in Gannan region, because of the geographic advantage of Gannan we discussed earlier. During the year ended September 30, 2013, we leased 165,278 orange trees in Gannan. We aim to increase the number of orange trees in our own and leased orange orchards by 150,000 trees within the next 1 to 2 years. We plan to spend approximately $8.3 million (about RMB50 million) to implement this strategy, financed through cash flow of existing operations or outside financing.
Developing Planting Areas in Key Sales Regions. In the long term, our fully integrated business model begins with the planting and growing of fruits and vegetables. To that end, we plan on establishing planting areas in each of the major fruit producing areas in the PRC.
Establishing Temperature Controlled Warehouses and Distribution Centers in Key Sales Regions. In the long term, we plan to purchase or construct modern, temperature-controlled preservation warehouses in major fruit and vegetable consumer markets, including the Yangtze River Delta, Pearl River Delta, Beijing-Tianjin region, and the provincial capital cities. We also plan to build fruit and vegetable distribution centers with cold-storage services.
Promoting General Red Brand Name. As part of continuous efforts in the next few years, we plan to promote and enhance the “General Red” brand by placing General Red trademark signs and advertisements in member stores and in the target markets, employing consistent product management system and high standards for product quality, conducting customer feedback surveys, and bringing added convenience to end-customers. During the years ended September 30, 2013 and 2012, the Company spent advertising expenses of $31,833 and $250,647, respectively. For the next 12 months (October 1, 2013 through September 30, 2014), we anticipate spending approximately $83,333 (about RMB500,000) to promote our brand name, primarily through stores, Internet, TV and radio advertisements. The implementation of this strategy is to be financed through cash flow of existing operations.
Competition
To our knowledge, we are one of the largest integrated navel orange companies with both growing areas and post-harvest processing and preservation facilities in China. Our competitors are pure navel orange growers, pure post-harvest processors, or both. The largest competitor in navel orange growing is Jiangxi Wangpin Agricultural Science and Technology Development Co. Ltd. with 6,880 mu of navel orange groves. The largest competitors in post-harvest processing and preservation are Anyuan Shengda Fruit Industrial Co. Ltd with 20,000 metric ton of preservation capacity, and Xinfeng Yuhe Agricultural Development Co. Ltd. with 7,000 metric tons of preservation capacity.
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The following table lists our competitors in China and their profiles, based upon information accessible to us:
| Planting Base (mu) | ||||||||||||||||||
| Company Name | Total Area (mu) | Area of Organic Planting Base for Navel Orange | Sorting Line Capacity (ton/hour) | Storage Facility Capacity (tons) | Leading Enterprise Qualification1 | |||||||||||||
| Anyuan County Anshengda Fruit Industry Co., Ltd. | 5,000 | None | 40 | 20000 | Provincial Level | |||||||||||||
| Jiangxi Gannan Fruit Industry Holdings Co., Ltd. | 3,250 | None | 20 | None | None | |||||||||||||
| Jiangxi Yangshi Nanbei Fresh Fruit Co., Ltd. | None | None | 60 | None | Provincial Level | |||||||||||||
| Jiangxi Wangpin Agricultural Science and Technology Development Co., Ltd. | 6,880 | 1,000 | 80 | None | Provincial Level | |||||||||||||
| Jiangxi Shengwei Fruit Industry Co., Ltd. | None | None | 20 | 6000 | None | |||||||||||||
| Jiangxi Shengdi Fruit Industry Development Co., Ltd. | 3,000 | None | None | None | None | |||||||||||||
| Xinfeng County Yuhe Agricultural Development Co., Ltd. | None | None | 40 | 10000 | Provincial Level | |||||||||||||
| Xunwu County Yuanxing Fruit Industry Co., Ltd. | 3,000 | None | 25 | 5000 | Provincial Level | |||||||||||||
| Huichang County Lvfeng Fruit Industry Co., Ltd. | None | None | 15 | 3000 | Provincial Level | |||||||||||||
| Anyuan County Jinfeng Linong Products Co., Ltd. | None | None | 15 | None | None | |||||||||||||
(1) The Leading Enterprise Qualification is designated by the government based on the company’s operational scale, economic benefits, and influence in the region. It represents a company’s prestigious status in the industry and in the region. There are three levels of Leading Enterprise Qualifications, National, Provincial and Municipal, designated by central government, provincial government and municipal government respectively.
Our competitive advantages are that we are an integrated player and one of the largest growers of navel oranges in China. We control the source of the navel oranges with our company’s high quality standards. In addition, our preservation facility is an air-controlled facility in which we control not only the temperature but also the composition of the air. A nitrogen rich air environment slows down the oxidation process and prolongs the reservation life of the fruits. Our competitors in orange preservation space mostly use temperature controlled facility instead of the more advanced air controlled technology.
Suppliers
In addition to the production of oranges in our own and leased orchards, we source oranges from outside parties. We are supplied with what is referred to as “raw navel oranges,” which are oranges prior to post-harvest processing.
Set forth below is a list of our top four suppliers during the year ended September 30, 2013:
| Supplier | Percentage of total supply | |||
| Ningdu County Qingtang Township Xiangyun Fruits Professional Cooperative | 20.30 | % | ||
| Ningdu County Anfu Township Shuoguomanyuan Professional Cooperative | 16.27 | % | ||
| Ningdu County Qingtang Township Qinglong Fruits Professional Cooperative | 10.40 | % | ||
| Yudu Xinyuan Fruits development Co., Ltd. | 10.12 | % | ||
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In a typical supply contract that we enter into with an outside party, we require the supplier to supply a certain amount of navel oranges at a predefined price pursuant to our quality standards during the harvest season. The suppliers are responsible for the cost of transportation to our facility. Upon execution of purchase contracts with local farmer collectives, as a measure to secure title in the navel oranges to be purchased, the Company usually makes an advance payment equivalent to approximately 10% to 20% of the total contract price when executing purchase contracts with local farmer collectives. Upon receipt of navel oranges, these advance payments will be applied against related invoices.
The ratio of outside supplies of navel oranges has declined from approximately 55% in fiscal year 2011, 28% in fiscal year 2012 to 23% in fiscal year 2013, due to the increase in navel orange trees that we own and lease.
When we initially develop the orange groves, our fruit seedlings are sourced from seedling cultivation centers, which are typically the result of the joint efforts among the agriculture research institutes, and government agency in agriculture technology promotion.
We purchase the fertilizers, other production materials and tools from the public market. We have not had any problems in sourcing the supplies.
Significant Customers
Our products are currently sold through distributors in over 11 provinces of China including Jiangxi, Beijing, Shanghai, Zhejiang, Guangxi, Shandong, Guangdong, Anhui, Helongjiang, Inner Mongolia and Jiangsu. We currently do not sell directly to consumers or retail markets.
Set forth below is a list of our top five customers during the year ended September 30, 2013:
| Customer | Percentage of total sales | |||
| Beijing laoliao Fruit Trade Co., Ltd. | 9.79 | % | ||
| Sichun Huaxinghongcheng Investment Co., Ltd. | 9.78 | % | ||
| Fen Xin | 8.47 | % | ||
| Shenzhen Jialun Xingnong Fruit Trade Co., Ltd. | 7.89 | % | ||
| Beijing Yuanhen Xingye Fruit Trade Co., Ltd. | 7.15 | % | ||
Our sales contract usually provides that our distributors will buy from us a certain minimum amount of navel oranges during a predefined period of the year, at market price. Each distributor is assigned to a geographic region for sales of our branded navel oranges to end consumers. Within its assigned region, a distributor must execute our company’s sales strategy, and protect our company’s brand name. We split the long-distance transportation cost with distributors equally. Some distributors deposit a small amount with us as a security deposit, and settle the payment to us on a monthly basis.
PRC Government Regulation
Agriculture Laws
On July 2, 1993, the Standing Committee of National People's Congress of the PRC promulgated the Agriculture Law, which sets forth certain principles and various measures designed to ensure the steady development of the agricultural industry. For example, the production or operation of agricultural products that affect the health of people or animals, such as seeds, must meet registration and approval requirements of the PRC laws and regulations. The Agriculture Law regulates the planting, processing, selling, preservation and transportation of agricultural products. Agricultural Law stipulates that farmers and organizations for production and operation of agriculture products shall keep good maintenance of their lands, make a rational use of chemical fertilizers and pesticides, increase their application of organic fertilizers so as to improve soil fertility and prevent the land from pollution, destruction and soil fertility declination. The Company believes it is in material compliance with the Agricultural Law.
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According to Law of the People's Republic of China on Quality and Safety of Agricultural Products passed by Standing Committee of National People’s Congress on April 29, 2006, effective on November 1, 2006, the administrative departments for agriculture under the governments at or above the county level shall be responsible for supervision and control of the quality and safety of agricultural products; and the relevant departments of the people's governments at or above the county level shall, in compliance with the division of their duties, be responsible for the work related to the quality and safety of agricultural products. Agricultural production enterprises and specialized cooperative economic organizations of farmers shall test the quality and safety of their products themselves or entrust the testing to a testing agency. The Company has engaged a testing agency to test soil, cultivating water and air for certain planting areas to ensure the quality and safety of its products.
According to Law of the People's Republic of China on Quality and Safety of Agricultural Products, when agricultural products is marketed by agricultural production enterprises, specialized cooperative economic organizations of farmers, and by units or individuals engaged in the purchase of agricultural products, then such agriculture products will be required to be packed or labeled in case the packing and labeling is necessary according to related regulations and shall be marketable only after they are packaged or labeled. The Company believes that it has packed and labeled its orange products as in compliance with the relevant laws and regulations.
New Plant Varieties Regulation
The Regulation for the Protection of New Plant Varieties of was promulgated by the State Council on March 20, 1997 and became effective on October 1, 1997. The administrative departments of the State Council in charge of agriculture and forestry are, according to their respective functions, jointly responsible for the acceptance and examination of applications for the rights to new varieties of plants and the grant of such rights. A person that has completed the production, sale or dissemination of a new variety of plant which has been granted a variety right will have an exclusive right in its protected variety. Unless otherwise provided in the regulations, no other person may use such variety for commercial purposes without a license from the owner of the rights to the variety. The Company does not currently have the exclusive rights of a protected variety to any brand of navel orange. As its business develops, the Company may file for protection of its own orange variety in the future.
Forest Laws
The PRC Forestry Law passed by the Standing Committee of the National People’s Congress on April 29, 1998 and effective as of July 1, 1998, as well as its implement promulgated by State Council on January 29, 2000 (“Forest Law”), is enacted to protect, cultivate and reasonably use of forest resources. It governs the afforestation, cultivation, felling, utilization, management and administration of forests within the PRC territory. PRC Forestry Law divided the forests into the following five categories: (1) Protection forests: forests, trees and bushes mainly aimed at protection, inclusive of water source storage forests, forests for water and soil conservation, wind protection and sand bind forests, forests for farmland and grassland protection, river bank protective belts and road protection belts; (2) Timber stands: forests and trees mainly at timber production, inclusive of bamboo groves mainly aimed at bamboo production; (3) Economic forests: trees mainly aimed at the production of fruits; edible oils, soft drinks and ingredients; industrial raw materials; and medicinal materials; (4) Firewood forests: trees mainly aimed at the production of fuels; (5) Forests for special uses: forests and trees mainly aimed at national defense, environmental protection and scientific experiments, inclusive of national defense forests, experimental forests, parent stands, environmental protection forests, scenic beauty forests, trees for sites of historical interests and the forests of natural protection areas. Forest Law prohibits land reclamation at the expense of deforestation, rock quarrying, sand quarrying, soil extracting and other activities at the expense of deforestation. The Company believes it is in material compliance with the Forestry Law.
PRC Quarantine Law on the Import and Export of Plants and relevant rules and regulations
The PRC Quarantine Inspection Law on the Import and Export of Plants passed by the Standing Committee of the National People’s Congress on October 30, 1991, and effective as of April 1, 1992, is aimed at preventing diseases, insect pests and harmful organisms from spreading into or out of the country, protecting the production of agriculture, forestry, animal husbandry and fishery as well as human health, and promoting the development of foreign economic relations and trade. The implement rule of PRC Quarantine Inspection Law on the Import and Export of Plants was promulgated by State Council on December 2, 1996 and effective as of January 1, 1997. Administration Rule of Quarantine Inspection of Exporting Fruits was promulgated by General Administration of Quality Supervision, Inspection and Quarantine of PRC (“AQSIQ”) on December 25, 2006 and effective on February 1, 2007.
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Pursuant to PRC Quarantine Inspection Law on the Import and Export of Plants and its implementing regulations, (i) the Ministry of Agriculture shall be responsible for the import and export quarantine of animal and plant; and (ii) enterprises importing plant seeds, seedlings or other propagating materials must submit an application in advance and go through the formalities of quarantine inspection. In addition, according to Administration Rule of Quarantine Inspection of Exporting Fruits, the fruits may export after the pass of quarantine inspection.
We believe that we have taken reasonable measures to ensure material compliance with PRC Quarantine Law and its related implementing regulations. We have obtained registration certificates issued by Jiangxi Entry-Exit Inspection and Quarantine Bureau for the export by our orchard and packaging factory of navel oranges in accordance with the Administration Rule of Quarantine Inspection of Exporting Fruits promulgated by AQSIQ. The Administration Rule of Quarantine Inspection of Exporting Fruits also provides that the Bureau for Inspection and Quarantine execute the inspection and quarantine for exporting fruits and the goods shall be permitted for export if the exporting fruits pass such inspection and quarantine and obtain related certificates issued accordingly. Our exported oranges have passed the inspection and quarantine.
Foreign Currency Exchange
Pursuant to the Foreign Currency Administration Rules promulgated on January 29, 1996 and amended on August 1, 2008, as well as various regulations issued by State Administration of Foreign Exchange (“SAFE”) and other relevant PRC government authorities, the RMB is freely convertible into a foreign currency for current account items, including trade-related receipts and payments, interest and dividends, but not for capital account items, such as direct equity investments, loans and repatriation of investment, unless prior approval from SAFE or a local branch has been obtained. Transactions that occur within the PRC must be settled in RMB. Unless otherwise approved, PRC companies must repatriate foreign currency payments received from abroad and domestic enterprises must convert all of their foreign currency receipts into RMB. Foreign-invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks subject to a cap set by SAFE or its local branch.
Intellectual Property
The PRC Trademark Law, adopted on August 23, 1982 and revised on October 27, 2001, protects the proprietary rights of registered trademarks. The State Administration for Industry and Commerce’s Trademark Office handles trademark registrations and grants an initial term of rights of ten years to registered trademarks. Upon the initial term’s expiration, a second term of ten years may be granted under a renewal. Trademark license agreements must be filed with the Trademark Office or a regional office. In addition, if a registered trademark is recognized as a well-known trademark in a specific case, the proprietary right of the trademark holder may be extended beyond the registered sphere of products and services to which the trademark relates.
We own and utilize the domain of www.jiangjunhong.com and the trademarks listed below. We continuously look to increase the number of our trademarks where necessary to protect valuable intellectual property. We regard our trademarks and other intellectual property as valuable assets and believe that they have significant value in the marketing of our products. We vigorously protect our trademarks against infringement, including through the use of cease and desist letters, administrative proceedings and lawsuits.
We rely on trademark, and trade secret protection, non-disclosure agreements and licensing arrangements to establish, protect and enforce intellectual property rights in our logos, trade names and in the marketing of our products. In particular, we believe that our future success will largely depend on our ability to maintain and protect the “General Red” trademark. Despite our efforts to safeguard and maintain our intellectual property rights, we cannot be certain that we will be successful in this regard. Furthermore, we cannot be certain that our trademarks, products and promotional materials or other intellectual property rights do not or will not violate the intellectual property rights of others, that our intellectual property would be upheld if challenged or that we would, in such an event, not be prevented from using our trademarks or other intellectual property rights. Such claims, if proven, could materially and adversely affect our business, financial condition and results of operations. In addition, although any such claims may ultimately prove to be without merit, the necessary management attention to, and legal costs associated with, litigation or other resolution of future claims concerning trademarks and other intellectual property rights could materially and adversely affect our business, financial condition and results of operations.
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The laws of certain foreign countries do not protect intellectual property rights to the same extent or in the same manner as do the laws of the PRC. Although we continue to implement protective measures and intend to defend our intellectual property rights vigorously, these efforts may not be successful or the costs associated with protecting our rights in certain jurisdictions may be prohibitive. From time to time we may discover products in the marketplace that are counterfeit reproductions of our products or that otherwise infringe upon intellectual property rights held by us. Actions taken by us to establish and protect our trademarks and other intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violating trademarks and intellectual property rights. If we are unsuccessful in challenging a third party’s products on the basis of infringement of our intellectual property rights, continued sales of such products by that or any other third party could adversely impact the “General Red” brand, result in the shift of consumer preferences away from our products and generally have a material adverse effect on our business, financial condition and results of operations.
Trademarks
Through General Fruit and General Preservation, we are licensed to use the following trademarks registered with the Trademark Office, State Administration for Industry and Commerce in the PRC:
We plan to file for an extension with the appropriate trademark offices before expiration of the trademarks listed above.
Employees
Currently, we have 99 employees and temporary staff. Set forth below is a breakdown of our employees by category:
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| Category | Number of employees | |
| Administrative and finance | 32 | |
| Sales and marketing | 4 | |
| Technician | 6 | |
| Workers* | 57 |
| * | The number of workers we hired for seasonal work was 57 as the peak of seasonal picking was postponed to November during 2013. It was in October last year. |
General Fruit and General Preservation, our operating companies in PRC, have signed employment contracts with all employees, either full-time or part-time. Pursuant to the labor regulations in PRC, we are required to pay social insurance for full-time employees, but not for part-time employees.
Corporation Information
Our principal executive offices are located at Room 801, Plaza B, Yonghe Building, No.28 AnDingMen East Street, Dongcheng District, Beijing, China. Postal Code: 100007
Our telephone number is + 86-10-64097316.
Any investment in our common stock involves a high degree of risk. You should consider carefully the specific risk factors described below in addition to the other information contained in this Report, including our consolidated financial statements and related notes included elsewhere in the report, before making a decision to invest in our common stock. If any of these risks actually occurs, our business, financial condition, results of operations or prospects could be materially and adversely affected. This could cause the trading price of our common stock to decline and a loss of all or part of your investment.
Risks Related to Our Business
We have a relatively short operating history and are subject to the risks of a new enterprise, any one of which could limit growth, or market development.
Our short operating history makes it difficult to predict how our businesses will develop. Accordingly, we face all of the risks and uncertainties encountered by early-stage companies, such as:
| · | uncertain growth in the market for our products; and | |
| · | competition or evolving customer preferences that could harm sales of our products. |
If we are not able to meet the challenge of building our business, our growth may be slowed, which could result in lower margins, additional operational costs and lower income.
Because we face significant competition, we could lose market share and may need to respond by lowering our prices, which could materially and adversely affect our results of operations.
The agricultural citrus business in China is highly fragmented and competitive, and we expect competition in this sector to persist and intensify. We face competition in each geographic market in which we operate. While we are trying to enter into agreements with additional farmers, we face competition from other producers and may not succeed in our efforts.
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We have agreements with a limited number of farmers to grow and supply us with oranges. Any disruption in supply, breach of our agreements, or failure to deliver products, could adversely impact our distribution capabilities or increase our costs, which could harm our reputation or materially and adversely affect our business, results of operations and financial condition.
We purchase our products from farmers with whom we enter into seasonal contracts. The failure of our farmers to supply oranges that satisfy our quality, quantity and cost requirements, the decision by farmers not to re-enter into contracts with us, or a breach of the contracts, could have an adverse effect on our ability to maintain our distribution network. If we fail to maintain our relationships with these farmers or fail to develop new relationships with other farmers, our business, results of operations and financial condition would be materially adversely impacted.
We derive most of our sales from the PRC.
Most of our sales are generated from the PRC. Although we have explored the exportation of oranges outside of the PRC, at this time we anticipate that sales of our oranges in the PRC will continue to represent a substantial proportion of our total sales in the near future. Any significant decline in the condition of the PRC economy could adversely affect consumer demand of our products, among other things, which in turn would have a material adverse effect on our business and financial condition.
If our land use rights are revoked, we would have no operational capabilities or ability to conduct our business.
Under Chinese law, land is owned by state or rural collective economic organizations. The state issues tenants the rights to use property. Rights to use property can be revoked and tenants can be forced to vacate at any time when redevelopment of the land is in the public interest. The public interest rationale is interpreted broadly and the process of land appropriation may be less than transparent. Since production of oranges is dependent on having land to grow, we rely on these land use rights as the cornerstone of our operations, and the loss of such rights would have a detrimental effect on our business.
Weather and other environmental factors may affect our harvesting season, and a reduction in the quality or quantity of our orange supplies may have a detrimental effect on our revenues.
Our business may be adversely affected by weather and environmental factors beyond our control, such as adverse weather conditions during the growing season. We have no control over such forces of nature. A significant reduction in the quantity or quality of oranges harvested resulting from adverse weather conditions, disease to the crops or other factors could result in increased per unit processing costs and decreased production, with adverse financial consequences to us.
Concerns over food safety and public health may affect our operations by increasing our costs and negatively impacting demand for our products.
We could be adversely affected by diminishing confidence in the safety and quality of certain food products or ingredients, even if our practices and procedures are not implicated. As a result, we may also elect or be required to incur additional costs aimed at increasing consumer confidence in the safety of our products. For example, a crisis in China over melamine-contaminated milk in 2008 adversely impacted overall Chinese food exports since October 2008, as reported by the Chinese General Administration of Customs, even though most foods exported from China were not implicated by the melamine-contaminated milk. Our success depends on our ability to maintain the quality of our products. Product quality issues, real or imagined, or allegations of product contamination, even if false or unfounded, could tarnish our image and may cause consumers to choose other products.
We have limited insurance coverage.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited insurance products and the cost of such insurance is high. We have determined that the risks of disruption or liability from our business, the loss or damage to our property, including our facilities, equipment and office furniture, the cost of insuring for these risks, and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us purchase. As a result, we only carry insurance on some company owned vehicles. Any uninsured occurrence of loss or damage to property, or litigation or business disruption may result in the incurrence of substantial costs and the diversion of resources, which could have an adverse effect on our operating results.
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We may be subject to product quality or liability claims, which may cause us to incur litigation expenses and to devote significant management time to defending such claims and, if determined adversely to us, could require us to pay significant damage awards.
Unlike the United States and many other countries, product liability claims and lawsuits in the PRC are rare. Furthermore, we cannot guaranty that product liability exposures and litigation will not become more commonplace in the PRC or that we will not face product liability exposure or actual liability as we expand our sales into international markets, like the United States, where product liability claims are more prevalent. In addition to the genetic traits and the quality of our products, the performance marketability of our fruits depends on climate, geographical areas, cultivation method, farmers’ degree of knowledge and other factors. At the same time, the viability of some farmland in China has deteriorated due to toxic and hazardous materials from farmers’ overuse of herbicides. These factors are beyond our control and can result in sub-optimal production yields. However, farmers generally attribute sub-optimal production yields to poor seed quality. We may be required from time to time to recall products. Product recalls could adversely affect our profitability and our brand image.
We may be subject to legal proceedings and claims from time to time relating to our seed quality. The defense of these proceedings and claims could be both costly and time-consuming and significantly divert the efforts and resources of our management personnel. An adverse determination in any such proceedings could subject us to significant liability. In addition, any such proceeding, even if ultimately determined in our favor, could damage our market reputation and prevent us from maintaining or increasing sales and market share. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase of our products.
While we have not experienced any credible product liability litigation to date, there is no guarantee that we will not experience such litigation in the future. In the event we do experience product liability claims or a product recall, our financial condition and business operations could be materially adversely affected.
We may experience major accidents in the course of our operations, which may cause significant property damage and personal injury.
We may experience major accidents in the course of our operations, which may cause significant property damage and personal injuries. Significant industry-related accidents and natural disasters may cause interruptions to various parts of our operations, or could result in property or environmental damage, increase in operating expenses or loss of revenue. The occurrence of such accidents and the resulting consequences may not be covered adequately, or at all, by the insurance policies we carry. In accordance with customary practice in China, we do not carry any business interruption insurance or third party liability insurance for personal injury or environmental damage arising from accidents on our property or relating to our operations other than our automobiles. Losses or payments incurred may have a material adverse effect on our operating performance if such losses or payments are not fully insured.
Risks Related to Our Corporate Governance and Controls
If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our Common Stock.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. As a public company, we have significant additional requirements for enhanced financial reporting and internal controls. However, as a result of the Share Exchange, we have a newly acquired business, which may not have been subject to the same control systems as public company must maintain. We will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. We expect that there will be a period of transition as we begin to integrate our new business and implement internal controls over financial reporting and disclosure controls and procedures necessary for a public company’s business.
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We cannot assure you that we will not, in the future, identify areas requiring improvement in our internal control over financial reporting, and disclosure controls and procedures. We cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate controls over our financial processes and reporting in the future as we continue our growth. If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our Common Stock.
We will incur increased costs as a result of acquiring a new operating business in the Share Exchange.
As a result of the Share Exchange, we now have an active operating business. We anticipate that we will incur significant legal, accounting and other expenses that we did not incur as a prior shell company. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC, has required changes in corporate governance practices of public companies. We expect these rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
Risks Relating to Regulation of our Business
Restrictions on currency exchange may limit our ability to utilize our revenues effectively.
The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive all of our revenues in RMB. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to the US parent company, or other subsidiaries outside of the PRC, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders
Under the PRC Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China, and such classification would likely result in unfavorable tax consequences to us and our non-PRC stockholders.
On March 16, 2007, the National People’s Congress or the NPC, approved and promulgated the PRC Enterprise Income Tax Law, which we refer to as the New EIT Law. The New EIT Law took effect on January 1, 2008. Under the New EIT Law, Foreign Investment Enterprises (FIEs) and domestic companies are subject to a uniform tax rate of 25%. The New EIT Law provides a five-year transition period starting from its effective date for those enterprises which were established before the promulgation date of the New EIT Law and which were entitled to a preferential lower tax rate under the then-effective tax laws or regulations.
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On December 26, 2007, the State Council issued a Notice on Implementing Transitional Measures for Enterprise Income Tax, or the Notice, providing that the enterprises that have been approved to enjoy a low tax rate prior to the promulgation of the New EIT Law will be eligible for a five-year transition period since January 1, 2008, during which time the tax rate will be increased step by step to the 25% unified tax rate set out in the New EIT Law. From January 1, 2008, for the enterprises whose applicable tax rate was 15% before the promulgation of the New EIT Law , the tax rate will be increased to 18% for year 2008, 20% for year 2009, 22% for year 2010, 24% for year 2011, 25% for year 2012. For the enterprises whose applicable tax rate was 24%, the tax rate will be changed to 25% from January 1, 2008.
Under the New EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. Because the New EIT Law and its implementing rules are new, no official interpretation or application of this new “resident enterprise” classification is available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.
If the PRC tax authorities determine that we are “resident enterprises” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares.
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 years ended September 30, 2013 and 2012, there was no income tax provision for the Company.
Dividends we receive from General Fruit may be subject to PRC withholding tax.
The New EIT Law provides that an income tax rate of 20% may be applicable to dividends payable to non-PRC investors that are “non-resident enterprises” and that do not have an establishment or place of business in the PRC, or which have such establishment or place of business in the PRC but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within the PRC. The income tax for non-resident enterprises shall be subject to withholding at the income source, with the payer acting as the obligatory withholder under the New EIT Law, and therefore such income taxes are generally called withholding tax in practice. The State Council of the PRC has reduced the withholding tax rate from 20% to 10% through the Implementation Rules of the New EIT Law. It is currently unclear in what circumstances a source will be considered as located within the PRC. We are an offshore holding company. Thus, if we are considered as a “non-resident enterprise” under the New EIT Law and the dividends paid to us by our subsidiary in the PRC are considered income sourced within the PRC, such dividends may be subject to a 10% withholding tax.
The new tax law provides only a framework of the enterprise tax provisions, leaving many details on the definitions of numerous terms as well as the interpretation and specific applications of various provisions unclear and unspecified. Any increase in our combined company’s tax rate in the future could have a material adverse effect on our financial conditions and results of operations.
Under PRC laws, General Fruit and General Preservation, are obligated to withhold and pay individual income tax on behalf of our employees who are subject to PRC individual income tax. If the PRC Subsidiary fails to withhold and/or pay such individual income tax in accordance with PRC laws, it may be subject to certain sanctions and other penalties and may become subject to liability under PRC laws.
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In addition, the State Administration of Taxation has issued several circulars concerning employee stock options. Under these circulars, our employees working in the PRC (which could include both PRC employees and expatriate employees subject to PRC individual income tax) who exercise stock options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee stock options with relevant tax authorities and withhold and pay individual income taxes for those employees who exercise their stock options. While tax authorities may advise us that our policy is compliant, they may change their policy, and we could be subject to sanctions.
We must comply with the Foreign Corrupt Practices Act.
We are required to comply with the United States Foreign Corrupt Practices Act, which prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some of our competitors, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in mainland China. If our competitors engage in these practices, they may receive preferential treatment from personnel of some companies, giving our competitors an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put us at a disadvantage. Although we inform our personnel that such practices are illegal, we cannot assure you that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties.
Risks Related to our Securities
Because we became a public company by means of a reverse merger, we may not be able to attract the attention of major brokerage firms.
Additional risks may exist since we became public through a “reverse merger.” Securities analysts of major brokerage firms may not provide coverage of our securities since there is little incentive to brokerage firms to recommend the purchase of our Common Stock. No assurance can be given that brokerage firms will want to conduct any secondary offerings on our behalf in the future.
If we become directly subject to the recent scrutiny involving U.S. Chinese companies, we may have to expend significant resources to investigate and/or defend the matter, which could harm our business operations, stock price and reputation.
Recently, many U.S. reverse merger public companies that have substantially all of their operations in China have been the subject of intense scrutiny by investors, financial commentators and regulatory agencies. Much of the scrutiny has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial reporting and, in many cases, allegations of fraud. As a result of the scrutiny, the publicly traded stock of many U.S. listed China-based companies that have been the subject of such scrutiny has sharply decreased in value. Many of these companies are now subject to shareholder lawsuits and/or SEC enforcement actions that are conducting internal and/or external investigations into the allegations. If we become the subject of any such scrutiny, whether any allegations are true or not, we may have to expend significant resources to investigate such allegations and/or defend our company. Such investigations or allegations will be costly and time-consuming and distract our management from our business plan and could result in our reputation being harmed and our stock price could decline as a result of such allegations, regardless of the truthfulness of the allegations.
Insiders have substantial control over us, and they could delay or prevent a change in our corporate control even if our other stockholders wanted it to occur.
Our executive officers, directors, and principal shareholders hold approximately [76.43]% of our outstanding Common Stock. Accordingly, these shareholders are able to control all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. This could delay or prevent an outside party from acquiring or merging with us even if our other shareholders wanted it to occur.
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We cannot assure you that the Common Stock will become liquid or that it will be listed on a securities exchange.
In addition, if we fail to meet the criteria set forth in SEC regulations, by law, various requirements would be imposed on broker-dealers who sell its securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling the Common Stock, which may further affect its liquidity.
There may not be sufficient liquidity in the market for our securities in order for investors to sell their securities.
Currently, we are eligible to be quoted on the OTC Bulletin Board, where an investor may find it difficult to obtain accurate quotations as to the market value of the Common Stock. There is only a limited public market that currently exists for our Common Stock and there can be no assurance that a trading market will develop further or be maintained in the future.
The market price of our Common Stock may be volatile.
The market price of our Common Stock will likely be highly volatile, as is the stock market in general, and the market for OTC Bulletin Board quoted stocks in particular. Some of the factors that may materially affect the market price of our Common Stock are beyond our control, such as changes in financial estimates by industry and securities analysts, conditions or trends in the industry in which we operate or sales of our Common Stock and overall general public sentiment toward U.S. reverse merger public companies that have substantially all of their operations in China. These factors may materially and adversely affect the market price of our Common Stock, regardless of our performance. In addition, the public stock markets have experienced extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our Common Stock.
We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our stock.
We have never paid any cash dividends on our Common Stock and do not anticipate paying any cash dividends on our Common Stock in the foreseeable future and any return on investment may be limited to the value of our Common Stock. We plan to retain any future earning to finance growth.
Risks Associated With Doing Business In China
Because Chinese laws will govern almost all of our business’ material agreements, we may not be able to enforce our rights within the PRC or elsewhere, which could result in a significant loss of business, business opportunities or capital.
We have entered into numerous contracts governed by PRC law, many of which are material to our business. As compared with contracts in the United States, contracts governed by PRC law tend to contain less detail and are not as comprehensive in defining contracting parties’ rights and obligations. As a result, contracts in China are more vulnerable to disputes and legal challenges. The Chinese legal system is similar to a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. Although legislation in the PRC over the past 25 years has significantly improved the protection afforded to various forms of foreign investment and contractual arrangements in the PRC, these laws, regulations and legal requirements are relatively new. Due to the limited volume of published judicial decisions, their non-binding nature, the short history since their enactments, the discrete understanding of the judges or government agencies of the same legal provision, inconsistent professional abilities of the judicators, and the inclination to protect local interest in the court rooms, interpretation and enforcement of PRC laws and regulations involve uncertainties, which could limit the legal protection available to us, and foreign investors. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business, business opportunities or capital and could have a material adverse impact on our business, prospects, financial condition, and results of operations. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in the PRC, regardless of outcome, may be protracted and result in substantial costs and diversion of resources and management attention.
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Our operations and assets in China are subject to significant political and economic uncertainties.
Changes in PRC laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition. Under its current leadership, the Chinese government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the Chinese government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
Currency fluctuations and restrictions on currency exchange may adversely affect our business, including limiting our ability to convert Chinese Renminbi into foreign currencies and, if Chinese Renminbi were to decline in value, reducing our revenue in U.S. dollar terms.
Our reporting currency is the U.S. dollar and our operations in China use their local currency as their functional currencies. Substantially all of our revenue and expenses are in Chinese Renminbi. We are subject to the effects of exchange rate fluctuations with respect to any of these currencies. For example, the value of the Renminbi depends to a large extent on Chinese government policies and China’s domestic and international economic and political developments, as well as supply and demand in the local market. Since 1994, the official exchange rate for the conversion of Renminbi to the U.S. dollar had generally been stable and the Renminbi had appreciated slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its policy of pegging the value of Chinese Renminbi to the U.S. dollar. Under the new policy, Chinese Renminbi may fluctuate within a narrow and managed band against a basket of certain foreign currencies. As a result of this policy change, Chinese Renminbi appreciated approximately 0.09% against the U.S. dollar in 2009 and 3.35% in 2008. It is possible that the Chinese government could adopt a more flexible currency policy, which could result in more significant fluctuation of Chinese Renminbi against the U.S. dollar. We can offer no assurance that Chinese Renminbi will be stable against the U.S. dollar or any other foreign currency.
The income statements of our operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased revenue, operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income. In addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a transaction gain or loss. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction may be limited and we may not be able to successfully hedge our exchange rate risks.
Although Chinese governmental policies were introduced in 1996 to allow the convertibility of Chinese Renminbi into foreign currency for current account items, conversion of Chinese Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange, or SAFE, which is under the authority of the People’s Bank of China. These approvals, however, do not guarantee the availability of foreign currency conversion. We cannot be sure that we will be able to obtain all required conversion approvals for our operations or that Chinese regulatory authorities will not impose greater restrictions on the convertibility of Chinese Renminbi in the future. Because a significant amount of our future revenue may be in the form of Chinese Renminbi, our inability to obtain the requisite approvals or any future restrictions on currency exchanges could limit our ability to utilize revenue generated in Chinese Renminbi to fund our business activities outside of China, or to repay foreign currency obligations, including our debt obligations, which would have a material adverse effect on our financial condition and results of operations
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The Chinese government exerts substantial influence over the manner in which we must conduct our business activities.
China only recently has permitted provincial and local economic autonomy and private economic activities, and, as a result, we are dependent on our relationship with the local government in the province in which we operate our business. Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.
The economic growth in China could decrease, which could slow our plans for development or otherwise constrain our ability to conduct business in China.
In March 2012, the Chinese government has lowered its economic growth estimate and adjusted estimated GDP growth target for 2012 downward to 7.5%. This is marks the first time that the GDP growth target had has been lower than 8% during the last 8 years. The Chinese economy has already exhibited a trend of slower growth. There is a possibility that China’s economy will slow further, which could result in decreased sales revenue and could have a material adverse impact on our operations.
Future inflation in China may inhibit our ability to conduct business in China.
In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. These factors have led to the adoption by Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us and our management.
We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, all of our directors and executive officers reside within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon our directors and senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. It would also be difficult for investors to bring an original lawsuit against us or our directors or executive officers before a Chinese court based on U.S. federal securities laws or otherwise. Moreover, China does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
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ITEM 2. DESCRIPTION OF PROPERTY
There is no private ownership of land in China. Land is usually owned by the state and the government grants land use rights for specified terms. General Preservation has obtained the following Land Use Right Certificates and Property Right Certificates which show our entitlement to the land and buildings used by the Company. In addition, General Fruit has entered into certain orchard and office leases.
| No. | Company | Certificate Number | Area (sq m) | Purpose | Property Location | Expiration Date | ||||||
| 1 | General Preservation | Property Right Certificate (Xingfangquanzheng Gaoxing Zi No. LJGF2049) |
1,688 | Dormitory | Mengshan Village, Gaoxing Town, Xingguo County | November 1, 2055 | ||||||
| 2 | General Preservation | Property Right Certificate (Xingfangquanzheng Gaoxing Zi No. LJGF2050) |
11,131 | Workshop | Mengshan Village, Gaoxing Town, Xingguo County | November 1, 2055 | ||||||
| 3 | General Preservation | Property Right Certificate (Xingfangquanzheng Gaoxing Zi No. LJGF2051) |
418 | Electricity Supply Room | Mengshan Village, Gaoxing Town, Xingguo County | November 1, 2055 | ||||||
| 4 | General Preservation | Property Right Certificate (Xingfangquanzheng Gaoxing Zi No. LJGF2052) |
2,241 | Office Building | Mengshan Village, Gaoxing Town, Xingguo County | November 1, 2055 | ||||||
| 5 | General Preservation | State-owned Land Use Right Certificate (Xingguoyong 2005 No. 2B2905-051) |
39,171 | Industry | Mengshan Village, Gaoxing Town, Xingguo County | November 1, 2055 | ||||||
| 6 | General Fruit | Lease from various people (6) | 2,343 mu | Orchards | Ningdu county | December 31, 2020 | ||||||
| General Fruit | Lease from various people (7) | 2,258.4 | Orchards | Ningdu county | December 31, 2022 | |||||||
| General Fruit | Lease from 1 person | 500 | Orchards | Yudu county | December 31, 2022 | |||||||
| 7 | General Fruit | Lease from various people (20) | 4,746 mu | Orchards | Xingguo county | December 31, 2020 | ||||||
| 8 | General Fruit | Orchard Land Operating Certificates (19) | approximately 4,420 mu | Orchards | Ningdu county | Various, from 2019 to 2064 | ||||||
| 9 | General Fruit | Orchard Land Operating Certificates (6) | approximately 5,608 mu | Orchards | Xingguo county | Various, from 2031 to 2034 |
We are not currently a party to any material legal or administrative proceedings and are not aware of any pending legal or administrative proceedings against us. We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Common Stock is quoted on the OTC Bulletin Board under the symbol “GELT”.
The following table represents the high and low per share bid information for our common stock for each quarterly period in fiscal 2012 and 2013. Such high and low bid information reflects inter-dealer quotes, without retail markup, markdown or commissions and may not represent actual transactions.
Year Ended September 30, 2013
| High | Low | |||||||
| Quarter ended September 30 | $ | 5.44 | 4.96 | |||||
| Quarter ended June 30 | 5.44 | 1.20 | ||||||
| Quarter ended March 31 | 1.20 | 1.20 | ||||||
| Quarter ended December 31 | 1.20 | 1.20 | ||||||
Year Ended September 30, 2012
| High | Low | |||||||
| Quarter ended September 30 | $ | 1.20 | 1.20 | |||||
| Quarter ended June 30 | 1.20 | 0.30 | ||||||
| Quarter ended March 31 | 0.30 | 0.30 | ||||||
| Quarter ended December 31 | 0.30 | 0.30 | ||||||
Holders of Common Stock
As of December 15, 2013, there were approximately 630 record holders of Common Stock. Since our inception, we have not paid any dividends on our Common Stock, and we do not anticipate that we will pay dividends in the foreseeable future.
Dividend Policy
We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our Common Stock for the foreseeable future.
Future cash dividends, if any, will be at the discretion of our Board of Directors and will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors as our Board of Directors may deem relevant. Dividends or other distributions will only be paid or made if we are able to pay our debts as they fall due in the ordinary course of business.
In addition, under PRC Company Law and relevant rules and regulations, our PRC subsidiaries may pay dividends only out of their retained earnings/net profit, if any, calculated according to PRC accounting standards, and only after accumulated losses from preceding years have been fully covered and the following appropriations have been made:
(a) appropriations to the statutory surplus reserve equivalent to 10% of its net profits less any accumulated losses, as determined under PRC GAAP; no further appropriations to the statutory surplus reserve are required once this reserve reaches an amount equal to 50% of its respective registered capital;
(b) appropriations to a discretionary surplus reserve as approved by the shareholders in shareholders' meeting.
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Securities Authorized for Issuance under Equity Compensation Plans
As of September 30, 2013, we did not have any equity compensation plans in effect, although our board of directors may approve from time to time the issuance of equity compensation to our employees as additional compensation outside of an equity compensation plan.
Sales of Unregistered Securities
In connection with the Exchange Agreement, on July 11, 2012, we issued an aggregate of 125,112,803 shares of Common Stock to the GRH Shareholders. We received in exchange from the GRH Shareholders 125,112,803 shares of GRH, representing 100% of the issued and outstanding shares of GRH, which exchange resulted in GRH becoming our wholly owned subsidiary. The issuance of such securities was exempt from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended, and Regulation D or Regulation S promulgated thereunder.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. 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 years ended September 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 annual report on Form 10-K(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. 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 U.S. Dollars 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 and Hong Kong Dollar were translated into U.S. Dollars at various pertinent dates and for pertinent periods.
COMPANY OVERVIEW
Geltology Inc. (“GELT”) was incorporated 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. GELT, through its direct operating subsidiaries General Fruit and General Preservation, 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.
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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 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 (“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.
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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 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, 2013, 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.
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 December and from January 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.
Accounts receivable
Accounts receivable are recorded net of allowance for doubtful accounts. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. Periodically, management assesses customer credit history and relationships as well as performs accounts receivable aging analysis. Based on the results, management determines whether certain balances are deemed uncollectible at the end of each period. Using its past collection experience, the Company reserves 0.3% of accounts receivable balances outstanding between six months and twelve months, 3% of accounts receivable outstanding for more than one year but less than two years, and 100% of accounts receivable balances outstanding for more than two years.
Inventories
Inventory is stated at the lower of cost or market. Cost is determined using the weighted-average cost method. Provisions are made for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable values, if any. Management continually evaluates the recoverability based on assumptions about customer demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves or write-downs may be required that could negatively impact our gross margin and operating results.
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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 |
Revenue recognition
The Company derives its revenue primarily from sale of navel oranges. Revenue is recognized in accordance with the provisions of ASC Topic 605, which provides that revenue is recognized when products are shipped, title and risk of loss are passed to the customers and collection is reasonably assured. Payments received before the above criteria are satisfied are recorded as advances from customers.
Impairment of Long-Lived Assets
Long-lived assets, including property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Intangible Assets
Intangible assets are amortized using the straight-line method over their estimated period of benefit. Evaluation of the recoverability of intangible assets is made to take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. No impairments of intangible assets have been identified during any of the periods presented. Land use rights with a finite useful life are amortized on a straight-line basis over its estimated useful life of 50 years.
Foreign Currency Translation and Transactions
The accompanying audited consolidated financial statements are presented in U.S. dollars (“USD”). Great China International’s functional currency is Hong Kong Dollar (“HKD”) and Nanchang Hanxin Agriculture Technology Co., Ltd, General Fruit and General Preservation’s functional currency is Chinese Yuan Renminbi (“RMB”). The audited consolidated financial statements are translated into USD in accordance with the Codification ASC 830, Foreign Currency Matters. All assets and liabilities were translated at the current exchange rate, at respective balance sheet dates, stockholders’ equity is translated at the historical rates and income statement items are translated at the average exchange rate for the reporting periods. The resulting translation adjustments are reported as other comprehensive income and accumulated other comprehensive income in stockholders’ equity in Accordance with the Codification ASC 220, Comprehensive Income.
Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. There were no material transaction gains or losses in the periods presented.
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Cash flow from the Company’s operations included in the statement of cash flows is calculated based upon the functional currency using the average translation rate. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with arithmetical changes in the corresponding balances on the consolidated balance sheets. No presentation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.
The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Company since it has not engaged in any significant transactions that are subject to the restrictions.
The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the consolidated financial statements were as follows:
| September 30, | ||||||||
| 2013 | 2012 | |||||||
| Year end RMB:USD exchange rate | 0.1630 | 0.1583 | ||||||
| Average Yearly RMB:USD exchange rate | 0.1605 | 0.1582 | ||||||
| Year end HKD:USD exchange rate | 0.1290 | 0.1290 | ||||||
| Average Yearly HKD:USD exchange rate | 0.1289 | 0.1288 | ||||||
Results of Operations for the Year Ended September 30, 2013 Compared to the Year Ended September 30, 2012
Revenues
For the year ended September 30, 2013, we had revenues of $17,490,837, as compared to those of $16,834,304 for the year ended September 30, 2012, an increase of approximately $656,533 or 3.90%. The increase in revenues was primarily attributable to (1) an increase in the unit price of our products due to increased domestic market demand; (2) the quantity of navel orange exported overseas decreased from 1.5 million KG in 2012 to 0.3 million KG in 2013. The average unit price of our products sold in domestic market is higher than that sold overseas.
Our sales volume decreased by approximately 1.40% for the year ended September 30, 2013, while the average unit sales price increased by approximately 5.20%, as shown below:
| Sales | Sale Price | |||||||||||
| Volume | Per KG | Total Sales | ||||||||||
| Years ended | (in KG) | (in US$)* | Revenue | |||||||||
| 30-Sep-13 | 21,531,320 | 0.81 | 17,490,837 | |||||||||
| 30-Sep-12 | 21,837,460 | 0.77 | 16,834,304 | |||||||||
| Variance | 306,140 | 0.04 | 656,533 | |||||||||
| % Variance | 1.40 | % | 5.20 | % | 3.90 | % | ||||||
Cost of Sale.
Cost of sales decreased by $510,430, or 6.32%, from $8,076,376 for the year ended September 30, 2012 to $7,565,946 for the year ended September 30, 2013. The decrease was primarily attributable to (1)an increase in the product output of 2.5 kg orange per tree due to better maintenance and cultivation in the past two years; (2) an extra tax levied on navel oranges sold overseas, which increased the cost of sale in fiscal 2012; (3) the quantity of navel oranges outsourced decreased by 5%. The cost of navel oranges cultivated from our orchards is lower than that outsourced.
Gross profit and gross margin
Our gross profit was $9,924,891 for the year ended September 30, 2013 as compared to $8,757,928 for the year ended September 30, 2012, representing a gross margin of 56.7% and 52.0%, respectively. The increase in our gross profit margin for the year ended September 30, 2013 was mainly attributable to the reasons discussed above. The higher gross margin was primarily due to (1) the synergy between the complete chain of the production process from planting, preserving to packaging; (2) lower amortization of the land use rights due to low acquisition cost.
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Selling expenses
Selling expenses were $886,595 and $1,116,455 for the year ended September 30, 2013 and 2012, respectively, decreased by $229,860 or 20.6%, mainly due to reduction in advertising and other expenses.
Selling expenses consisted of the following:
| For the Years Ended September 30, | Increase/decrease | |||||||||||||||
| 2013 | 2012 | $ | % | |||||||||||||
| Shipping and handling | 803,970 | 791,295 | 12,675 | 1.6 | % | |||||||||||
| Compensations and related benefits | 32,505 | 18,904 | 13,061 | 71.9 | % | |||||||||||
| Advertising and promotion | 30,904 | 251,173 | (220,270 | ) | -87.7 | % | ||||||||||
| Others | 19,216 | 55,083 | (35,867 | ) | -65.1 | % | ||||||||||
| Total | 886,595 | 1,116,455 | (229,860 | ) | -20.6 | % | ||||||||||
| Selling expenses as % of revenue | 5.07 | % | 6.62 | % | -1.55 | % | -23.4 | % | ||||||||
Shipping and handling expenses increased by $12,675 or 1.6%, as a result of the increase in gas price.
Compensation and related benefits increased by $13,061, or 71.9%, in the year ended September 30, 2013 compared to the year ended September 30, 2012, due to the implementation of automated planting starting in October 2012.
Advertising and promotion expense decreased by $220,270 or 87.7%, as a result of the down-sizing of our marketing campaign in the year ended September 30, 2013.
Other expense mainly includes customer entertainment, vehicle maintenance and miscellaneous office expenses.
General and administrative expenses
General and administrative expenses amounted to $891,893 for the year ended September 30, 2013, as compared to $914,214 for the same period in 2012, an increase of $22,321 or 2.4%. General and administrative expenses consisted of the following:
| For the Year Ended September 30, | Increase/decrease | |||||||||||||||
| 2013 | 2012 | $ | % | |||||||||||||
| Compensation and related benefits | 222,926 | 231,531 | (8,605 | ) | -3.7 | % | ||||||||||
| Depreciation | 117,915 | 69,237 | 47,978 | 68.6 | % | |||||||||||
| Professional service | 331,204 | 365,449 | (34,245 | ) | -9.4 | % | ||||||||||
| Office expenses | 16,719 | 28,976 | (12,257 | ) | -42.3 | % | ||||||||||
| Meal and entertainment | 40,691 | 53,136 | (12,445 | ) | -23.4 | % | ||||||||||
| Other | 162,437 | 165,184 | (2,746 | ) | -1.7 | % | ||||||||||
| Total | 891,893 | 914,214 | (22,321 | ) | -2.4 | % | ||||||||||
| G&A expense as of revenues | 5.09 | % | 5.43 | % | -0.14 | % | -2.55 | % | ||||||||
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Compensation and related benefits decreased by $8,605 or 3.7%, mainly because in October 2012, we laid off certain staff in our purchasing department and certain related supporting staff.
Depreciation expense increased by $47,978, or 68.6%, in the year ended September 30, 2013, as compared to the same period in 2012. The increase was primarily due to the adjustment in depreciation expenses in 2012 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 $34,245 due to more audit and legal fees incurred for the reverse merger transaction in the prior fiscal year.
Office expense decreased by $12,257, or 42.3%, in the year ended September 30, 2013, as compared to the same period in 2012. The decrease is primarily due to the cut down office expense in its subsidiaries since October 2012.
Meal and entertainment decreased by 12,445, or 23.4%, in the year ended September 30, 2013, as compared to the same period in 2012. The decrease is primarily because the Company reduced its marketing expenses in 2013 as the company built its brand name through the marketing campaigns during fiscal 2012 and the Company decided to cut back marketing expenses in 2013.
Other general and administrative expenses mainly include 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 year ended September 30, 2013, income from operations was $8,146,403, as compared to $6,727,259 for the year ended September 30, 2012, an increase of $1,419,144 or 21.1%, mainly due to increase in the unit price of our products and decrease in our cost of sales during year ended September 2013 compared the same period in 2012.
Other income (expenses)
For the year ended September 30, 2013, other income amounted to $26,055 as compared to other expense of $180,379 for the same period in 2012. For the years ended September 30, 2013 and 2012, other income (expense) mainly included: (i) interest expense, which decreased by $7,067 or 2.3% period over period due to a decrease in the average balance and the interest rate of our bank loans, the interest rate decreased to 6% from 6.56%, and (ii) certain government subsidies, which increased by $165,041 or 148.1% compared the same period in fiscal 2012. In the year ended September 30, 2013, we received government subsidies of approximately $276,442, as compared to $111,401 for the year ended September 30, 2012.
Income tax expense
For the years ended September 30, 2013, 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 year ended September 30, 2013 was $8,172, 458. For the year ended September 30, 2012, we had net income of $6,546, 880.
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 $932,630 for the year ended September 30, 2013 as compared to $271,853 for the same period in 2012. This non-cash gain had the effect of increasing our reported comprehensive income.
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Comprehensive income
For the years ended September 30, 2013 and 2012, comprehensive income of $9,105,088 and $6,818.733 were derived from the sum of our net income of $8,172,458 and 6,546,880 plus foreign currency translation gain of $932,630 and $271,853, respectively.
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 short-term bank loans and operations, which it believes will be sufficient to sustain current level operations for at least the next twelve months.
As of September 30, 2013, our balance of cash and cash equivalents was $2,408,520. As of September 30, 2012, our balance of cash and cash equivalents was $ 351,045, an increase of 2,057,475 or 586.1%, mainly due to net cash provided by financing activities.
The following summarizes the key components of the Company’s cash flows for the years ended September 30, 2013 and 2012:
| For the Years Ended September 30, | Increase/decrease | |||||||||||||||
| 2013 | 2012 | $ | % | |||||||||||||
| Net cash provided by(used in) operating activities | 110,240 | (2,353,939 | ) | 2,464,179 | 104.7 | % | ||||||||||
| Net cash used in investing activities | (99,352 | ) | (360,307 | ) | 260,955 | 72.43 | % | |||||||||
| Net cash provided by financing activities | 2,079,292 | 2,288,368 | (209,077 | ) | -9.14 | % | ||||||||||
| Effect of foreign currency translation | (32,705 | ) | (4,164 | ) | (28,541 | ) | -685 | % | ||||||||
| Net increase(decrease) in cash and cash equivalents | 2,057,475 | (430,042 | ) | 2,487,516 | 578.4 | % | ||||||||||
In summary, our cash flows were:
Net cash provided by operating activities increased in the year ended September 30, 2013 by $2,464,179 to $110,240, from net cash used in operating activities of $2,353,939 for the year ended September 30, 2012. These changes were mainly brought about by the following changes: an increase in net income of $1,625,578, a decrease in cash used in prepaid leases of $3,547,677, a decrease in cash provided by customer deposits of $2,804,560 and a decrease in cash tied in inventory of $471,291.
Net cash used in investing activity decreased by $260,955, from $360,307 to $99,352, in the year ended September 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 $209,077 to $2,079,292 in the year ended September 30, 2013 compared to $2,288,368 provided by financing activities at the same period ended in 2012. This was due to the repayment of short-term bank loans of $4,220,361.
Working capital increased by $2, 987,976 to $2, 380,778 as of September 30, 2013 from working capital deficit of $607,198 as of September 30, 2012. In order to stay cost competitive in the long-run, we leased 165,278 additional orange trees within fiscal 2013. Based on the lease rate of approximately $55.96(RMB350) per tree in 2013, the total spending is estimated to be no more than $9,248,956 (RMB47,004,857).
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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 $5,542,000 (RMB34, 0000, 000) from Agricultural Development Bank of China, which was paid off during October and November 2013.
On November 28 and December 4, 2013, the Company entered into two short-term bank loans with Agricultural Development Bank of China for $2,064,000(RMB16,000,000) and $2,322,000 (RMB18,000,000). Pursuant to the Loan Agreements, the principle will be repaid on September 27, 2014 and October 3, 2014. The interest was calculated using an annual fixed interest rate of 6.00% and paid monthly. The loan was secured by the Company’s real property and equipment and guaranteed by the CEO. The purpose of such bank loans is for the working capital.
Although we will continue to invest in our business, with expected positive operating cash flow fueled by our profit, we believe our operating cash and short-term bank loans were 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated audited financial statements and notes of General Agriculture Corporation (formerly Geltology Inc.) and subsidiaries as of September 30, 2013 and 2012 are thereto attached as Annex at the end of this Form 10-K Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
On October 10, 2013, we dismissed our independent registered public accounting firm Patrizio & Zhao, LLC. The decision to dismiss Patrizio & Zhao, LLC was adopted by the Board of Directors based on the fact that on September 30, 2013, Patrizio & Zhao , LLC was denied the ability to practice before the Securities and Exchange Commission, pursuant to Rule 102 (e)(i)(ii) of the Commission’s Rules of Practice and Section 4C of the Exchange Act.
None of the reports of Patrizio & Zhao, LLC, on the Company's financial statements for either of the past two years or subsequent interim period contained an adverse opinion or disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles.
There were no disagreements between the Company and Patrizio & Zhao, LLC, for the two most recent fiscal years and any subsequent interim period through October 10, 2013 (date of dismissal) on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of Patrizio & Zhao, LLC, would have caused them to make reference to the subject matter of the disagreement in connection with its report. Further, Patrizio & Zhao, LLC has not advised the Company that: 1) internal controls necessary to develop reliable financial statements did not exist; or 2) information has come to the attention of Patrizio & Zhao, LLC which made it unwilling to rely upon management's representations, or made it unwilling to be associated with the financial statements prepared by management; or 3) the scope of the audit should be expanded significantly, or information has come to the attention of Patrizio & Zhao, LLC that they have concluded will, or if further investigated, might materially impact the fairness or reliability of a previously issued audit report or the underlying financial statements, or the financial statements issued or to be issued covering the fiscal year ended September 30, 2013.
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On November 6, 2013, the Board of Directors of the Company approved the engagement of YSL & Associates LLC as its principal accountant to audit the Company's financial statements. During the years ended September 30, 2012 and 2013 and the interim period through November 6, 2013, neither the Company nor anyone on its behalf consulted YSL & Associates LLC regarding (i) the application of accounting principles to a specific completed or contemplated transaction, (ii) the type of audit opinion that might be rendered on the Company's financial statements, or (iii) any matter regarding the Company that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and related instructions to Item 304 of Regulation S-K) or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K).
On April 3, 2014, subsequent to the filing of the original Report, we dismissed YSL & Associates LLC. The decision to dismiss YSL & Associates LLC was adopted by the Board of Directors. None of the reports of YSL & Associates LLC on the Company’s financial statements for either of the past two years or subsequent interim period contained an adverse opinion or disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles.
There were no disagreements between the Company and YSL & Associates LLC for the two most recent fiscal years and any subsequent interim period through April 3, 2014 (date of dismissal) on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of YSL & Associates LLC, would have caused them to make reference to the subject matter of the disagreement in connection with its report. Further, YSL & Associates LLC has not advised the Company that: 1) internal controls necessary to develop reliable financial statements did not exist; or 2) information has come to the attention of YSL & Associates LLC which made it unwilling to rely upon management; or 3) the scope of the audit should have been expanded significantly, or information has come to the attention of YSL & Associates LLC that they have concluded will, or if further investigated, might materially impact the fairness or reliability of a previously issued audit report or the underlying financial statements, or the financial statements issued or to be issued covering the fiscal year ended September 30, 2013.
On April 3, 2014, the Board of Directors of the Company approved the engagement of Friedman LLP as its principal accountant to audit the Company’s financial statements. During the years ended September 30, 2012 and 2013 and the interim period through April 3, 2014, neither the Company nor anyone on its behalf consulted Friedman LLP regarding (i) the application of accounting principles to a specific completed or contemplated transaction, (ii) the type of audit opinion that might be rendered on the Company’s financial statements or (iii) any matter regarding the Company that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and related instructions to Item 304 of Regulation S-K) or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K).
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures” is defined in Rule 13a-14(c) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the required time periods and are accumulated and communicated to the company’s management as appropriate to allow timely decisions regarding required disclosure. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2013, and have concluded that as of that date, our disclosure controls and procedures were not effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act, subject to certain material weaknesses in our internal control over financial reporting discussed immediately below under the caption “Management’s Report on Internal Control over Financial Reporting”.
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Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected in a timely manner. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework.” Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of September 30, 2013.
Changes in Internal Control Over Financial Reporting
There were no significant changes in our internal controls over financial reporting identified in connection with this evaluation that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our Company’s internal controls over financial reporting.
Attestation Report of the Registered Public Accounting Firm
This Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. As a smaller reporting company, management’s report is not subject to attestation by our registered public accounting firm.
None.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Set forth below is information regarding our current directors, executive officers and director nominee.
| Name | Age | Position | ||
| Xingping Hou | 51 | Director, Chairman, Chief Executive Officer and President | ||
| Yanhong (Amy) Xue | 41 | Chief Financial Officer | ||
| Shaokang Zeng | 34 | Director, Secretary and Treasurer | ||
| Liwei Jia | 35 | Independent Director | ||
| Wei Lu | 38 | Independent Director | ||
| Hongcai Li | 40 | Independent Director |
Xingping Hou, 51, has been the Company’s Chairman of the Board, Chief Executive Officer and President since July 2012. Mr. Hou has served as the Executive Director, Manager of General Fruit since March 2003 and as the Executive Director, Manager of General Preservation since July 2003. Mr. Hou has also served as the Chairman of the Board for each of General Red Industry Group Co., Ltd. and Shaanxi General Red Agricultural Development Co., Ltd. since May 2010 and October 2010, respectively. He has also served as the Chairman of the Board and President of General Red International, Inc. since November 2007. Since May 2011, Mr. Hou has served as the Chief Executive Officer, President and Chairman of General Red Holding, Inc. Mr. Hou has also served as a director of Hua Mei Investments Limited and Han Glory International Limited since April 2011. Mr. Hou graduated from the PLA Nanchang Army Institute. Mr. Hou brings historical and operational expertise and experience to the Board. Mr. Hou also brings many years of food industry experience to the Board. Mr. Hou devotes as much time as necessary to the business of the Company and currently holds no other directorships in any other reporting company.
Amy Xue, 41, is the Chief Financial Officer of the Company. She has extensive experience in U.S. GAAP financial reporting and public accounting, and she has performed audit and accounting services for a number of listed companies in a variety of industries. From October 2010 to June 2013, she was the partner of Wall Street CPA Services, LLC, an accounting firm in New York City that provided financial advisory and accounting services to listed and unlisted companies. From September 2007 to October 2010, Ms. Xue was a senior manager of Acquavella, Chiarelli, Shuster, Berkower & Co., LLP, a public accounting firm in New Jersey with an office in New York that provided audit services to listed and unlisted companies. Ms. Xue holds a M.S. in Accounting from Binghamton University and a B.S. in Law from Peking University in Beijing, China. She is a U.S. Certified Public Accountant in New York and a member of the American Institute of Certified Public Accountants (AICPA).
Shaokang Zeng, 34, is the Company’s Director, Secretary and Treasurer. Mr. Zeng has served as the Finance Department Manager of General Fruit since December 2006. Mr. Zeng graduated from the People’s University of China where he studied accounting and received an MBA from Beijing University of Chemical Technology, College of Business Administration. Mr. Zeng brings financial and strategic experience to the Company’s Board of Directors. Mr. Zeng devotes as much time as necessary to the business of the Company and currently holds no other directorships in any other reporting company.
Liwei Jia, 35, is the independent director. He graduated with a Bachelor’s Degree in Economics from Beijing Industry and Commerce University in June 2001. Mr. Jia is a Chinese Certified Public Accountant and an International Certified Internal Auditor. From July 2001 to December 2003, Mr. Jia was the project manager at Zhongrui Hengxin Accounting Firm. From January 2004 to December 2011, Mr. Jia was the Senior Audit Manager at PricewaterhouseCoopers Zhong Tian LLP and participated in the financial audit and internal control audits of a number of large Chinese public companies. From November 2011 to April 2012, Mr. Jia was the Executive Director of Funds and Assets Management of Beijing Shangyin Zhisheng Investments and Funds Management Co., Ltd. From December 2012 to the present, Mr. Jia is the managing director of Zhongfu Runde Investments Co., Ltd.
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Wei Lu, 38, is the independent director. He graduated with a Master of Business Administration from University of Southern California, Marshall Business School in May 2003. From September 2003 to April 2007, Mr. Lu was the director of Fidelity Capital Investment Partners, providing advisory services for Chinese companies’ oversea listings. From May 2007 to December 2009, Mr. Lu was the managing director of World Capital Market Inc, providing consulting service for Chinese companies’ mergers & acquisitions. From January 2010 to May 2011, Mr. Lu was the Chief Financial Officer of Chongqing Maotian Group, assisting with the external financial audit, road shows and reorganization. From May 2011 to the present, Mr. Lu is a partner of Newmargin Capital, providing services for private equity and corporate finance.
Hongcai Li, 40, is the independent director. He earned a Bachelor’s degree in Economics from Chongqing Institute of Industrial Management. Mr Li is a certified intermediate level accountant. From July 1998 to March 2001, Mr Li served as the accounting manager of Chognqing Chaohua Technology Co., Ltd. From April 2001 to November 2006, Mr Li served as the Department Manager of Guomei Electronics Co Ltd. From December 2006 to March 2011, Mr Li was the Vice President of Accounting of Tianyin Pharmaceutical Co, Inc, a NYSE MKT listed company and handled the preparation of financial statements and accounting reporting. From April 2011 to the present, Mr Li served as the chief financial officer of Sichuan Qiangjiang Stone Company and Sichuan Huide Financing and Guaranty Company.
Independent Directors
Liwei Jia, Wei Lu and Hongcai Li are independent directors pursuant to the required standards set forth in Rule 10A-3(b) of the Securities Exchange Act of 1934, as amended, based on an evaluation of the relationships between the Company and each of them.
Liwei Jia, Lu and Li to serve on the Company’s Audit Committee. The Board has determined that each of the members of the Audit Committee is independent pursuant to the required standards set forth in Rule 10A-3(b) of the Securities Exchange Act of 1934, as amended, based on an evaluation of the relationships between the Company and each of the members. Mr. Jia will serve as Chairman of the Audit Committee. Each of Mssrs. Jia and Li were designated by the Board as an “audit committee financial expert” as defined by Item 407(d)(5) of Regulation S-K under the Securities Act of 1933, as amended, based on the Board’s evaluation of his knowledge of accounting, qualifications and experience and has appropriate experience or background which results in his financial sophistication in accordance with the additional audit committee requirements of Rule 5605(c)(2)(A) of the NASDAQ Listing Rules.
Wei Lu and Hongcai Li serve on each of the Company’s Compensation Committee and Nominating and Governance Committee. Mr. Li will serve as Chairman of the Compensation Committee and Mr. Lu will serve as Chairman of the Nominating and Governance Committee.
Family Relationships
There are no family relationships between any of our directors or executive officers.
Involvement in Certain Legal Proceedings
There have been no events under any bankruptcy act, no criminal proceedings and no judgments, injunctions, orders or decrees material to the evaluation of the ability and integrity of any director, executive officer, promoter or control person of our Company during the past ten years.
Code of Ethics
We adopted a Code of Business Conduct and Ethics on August 5, 2012. The Code of Ethics, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K, constitutes our Code of Ethics for our principal executive officer, our principal financial and accounting officer and our other senior financial officers. The Code of Ethics is intended to promote honest and ethical conduct, full and accurate reporting, and compliance with laws as well as other matters. A printed copy of the Code of Ethics may be obtained free of charge by writing to.
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Committees of the Board of Directors
Our board of directors has an audit committee, a compensation committee and a nominating and governance committee. Each of the committees of the board of directors has the composition and responsibilities described below.
Audit Committee
Liwei Jia, Hongcai Li and Wei Lu are members of our audit committee. Liwei Jia is the Chairman of the Audit Committee. Each of Liwei Jia and Wei Lu were designated by the Board as an “audit committee financial expert” as defined by Item 407(d)(5) of Regulation S-K under the Securities Act of 1933, as amended, based on the Board’s evaluation of his knowledge of accounting, qualifications and experience and has appropriate experience or background which results in his financial sophistication in accordance with the additional audit committee requirements of Rule 5605(c)(2)(A) of the NASDAQ Listing Rules.
Our Audit Committee is responsible, in accordance with the Audit Committee charter, recommending our independent auditors, and overseeing our audit activities and certain financial matters to protect against improper and unsound practices and to furnish adequate protection to all assets and records.
Our Audit Committee pre-approves all audit and non-audit services provided by our independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to particular service or category of services and is generally subject to a specific budget. The Audit Committee has delegated pre-approval authority to its Chairman when expedition of services is necessary. The independent auditors and management are required to periodically report to the full Audit Committee regarding the extent of services provided by the independent auditor in accordance with this pre-approval, and the fees for the services performed to date.
Compensation Committee
Hongcai Li and Wei Lu are members of our Compensation Committee and Hongcai Li is the chairman of the Compensation Committee. All members of our Compensation Committee are independent under the current definition promulgated by NYSE Amex and NASDAQ. In accordance with the Compensation Committee’s Charter, the Compensation Committee is responsible for overseeing and, and as appropriate, making recommendations to the Board regarding the annual salaries and other compensation of our executive officers and general employees and other polices, providing assistance and recommendations with respect to our compensation policies and practices.
Nominating and Governance Committee
Liwei Jia and Wei Lu are currently the members of our Nominating and Governance Committee and Wei Lu is the chairman of Nominating and Governance Committee. All members of our Nominating and Governance Committee will be qualified as independent under the current definition promulgated by NYSE Amex and NASDAQ. In accordance with the Nominating and Governance Committee’s Charter, our Nominating and Governance Committee is responsible to identify and nominate members for election to the board of directors; develop and recommend to the board of directors a set of corporate governance principles applicable to our company; and oversee the evaluation of the board of directors and management.
Security Holder Recommendations for Board Nominees
There have been no changes to the procedures by which our stockholders may recommend nominees to the Board of Directors.
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Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers, directors and holders of more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Based solely on our review of the copies of these reports and on information provided by the reporting persons, we believe that during the fiscal year ended Septeber 30, 2013, all filing requirements for reporting persons were met except that Wei Lu has not filed his Form 3 and Amy Xue, Hongcai Li and Liwei Jia filed their Form 3 late after they became the officers and the directors of the Company.
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth certain summary information concerning all plan and non-plan compensation awarded to, earned by, or paid to the named executive officers and directors by any person for all services rendered in all capacities to the Company in the past two fiscal years:
| Name of Executive Officer and/or Director | Position | Fiscal Years | Salary | Bonus and Other Compensation | Securities Underlying Stock Options | |||||||||||||
| Xingping Hou | President/CEO/CFO/Director | 2013 | $ | 20,000 | $ | - | $ | - | ||||||||||
| 2012 | $ | - | $ | - | $ | - | ||||||||||||
| Amy Xue | Chief Financial Officer | 2013 | $ | 65,000 | $ | - | $ | - | ||||||||||
| 2012 | $ | - | $ | - | $ | - | ||||||||||||
| Shaokang Zeng | Secretary, Treasurer, Director | 2013 | $ | 15,000 | $ | - | $ | - | ||||||||||
| 2012 | $ | - | $ | - | $ | - | ||||||||||||
Employment Agreements
On January 31, 2013, the Company entered into agreements with Xingping Hou and Shaokang Zeng, and Yongjun Zeng, in connection with their service as directors of the Company. Pursuant to the agreements, Xingping Hou will be entitled to receive annual compensation of $20,000, Shaokang Zeng will be entitled to receive annual compensation of $15,000, and Yongjun Zeng will be entitled to receive annual compensation of $10,000 for their services. The Company will reimburse each director for reasonable expenses incurred in connection with his performance of duties as a director of the Company, including travel expenses. The Company also agrees to include each director as an insured under its directors and officers insurance policy and indemnify him for any expenses incurred in connection with his performance of duties as a director of the Company. The employment agreement with Yongjun Zeng was terminated on September 5, 2013 when Yongjun Zeng resigned from the position of board director.
On July 1, 2013, Yanhong Xue (also known as “Amy Xue”, hereinafter referred to as “Amy Xue”) was appointed the Chief Financial Officer by the board of directors of the Company and entered into an employment agreement dated July 1, 2013 with Amy Xue (the “Employment Agreement”).
Under the Employment Agreement, Amy Xue is employed by the Company for a term of 36 months commencing on July 1, 2013. The Company may terminate the Employment Agreement upon an aggregate thirty (30) business days' prior written notice and opportunity to cure. Amy Xue may terminate this Agreement immediately if (a) Company fails to make when due any payments to her under the Employment Agreement; (b) if she determines, in her sole discretion, that Company has failed to provide complete and accurate information necessary for her to perform the services required by the Employment Agreement, or that Company is acting or has acted in a manner that damages or could potentially damage her reputation in the business community, or (c) if Company (i) becomes insolvent; (ii) fails to pay its debts or perform its obligations in the ordinary course of business as they mature; (iii) is declared insolvent or admits in writing its insolvency or inability to pay its debts or perform its obligations as they mature; (iv) becomes the subject of any voluntary or involuntary proceeding in bankruptcy, liquidation, dissolution, receivership, attachment or composition or general assignment for the benefit of creditors, provided that, in the case of an involuntary proceeding, the proceeding is not dismissed with prejudice within sixty (60) days after the institution thereof; or (v) if Company becomes the subject of a Federal, State, SEC or NASD investigation into its business practices, accounting or officers and directors.
| 39 |
The thirty-six (36) month term of the Employment Agreement shall be deemed automatically renewed unless the Company gives notice to Amy Xue of an intention to terminate at the expiration of the original term. The notice must be in writing, received by Amy Xue at least thirty (30) days prior to the end of the term, and specifically address the automatic renewal provision of the Employment Agreement.
The Company agrees to pay Amy Xue a monthly salary of RMB 33,580 for the first year and a monthly salary increased by 10% for the second year and thereafter. In the event that Amy Xue, in her capacity as CFO, introduces any funding source to Company and Company successfully obtains funding from such source, Company shall pay Amy Xue a bonus equal to 5% of the total amount of funding obtained from such source at the closing date(s) of such funding transaction(s). Any compensation payment over-due fifteen (15) days will accrue interests at 1.5% compounded (one and a half percent) every thirty days.
Director Compensation
Xingping Hou is entitled to receive annual compensation of $20,000 and Shaokang Zeng is entitled to receive annual compensation of $15,000 for their service as directors.
Liwei Jia, Hongcai Li and Wei Lu receive $1,297 (8,000 RMB Yuan) per month as set forth in the Company’s Compensation Committee Charter
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding beneficial ownership of our Common Stock as of December 15, 2013 (after giving effect to the Share Exchange and the related issuances) by (i) each person (or group of affiliated persons) who is known by us to own more than five percent of the outstanding shares of our Common Stock, (ii) each director, executive officer and director nominee, and (iii) all of our directors, executive officers and director nominees as a group. On July 12, 2013, the Company effected the 1 for 8 reverse split of the Company’s common stock. As of December 15, 2013, we had 15,918,940 shares of Common Stock issued and outstanding.
Beneficial ownership is determined in accordance with SEC rules and generally includes voting or investment power with respect to securities. Unless otherwise noted, the principal address of each of the stockholders, directors and officers listed below is Room 801, Plaza B, Yonghe Building, No.28 AnDingMen East Street, Dongcheng District, Beijing, China
| Name & Address of Beneficial Owner | Amount & Nature of Beneficial Ownership (1) | Percent of Class (2) | ||||||
| Xingping Hou (3) | 9,997,841 | 62.80 | % | |||||
| Shaokang Zeng | - | - | ||||||
| Amy Xue | - | - | ||||||
| Liwei Jia | - | - | ||||||
| Wei Lu | - | - | ||||||
| Hongeai Li | - | - | ||||||
| Across Asia Investments Limited (4) | 1,082,500 | 6.80 | % | |||||
| Ever Shining Investments Limited (5) | 1,083,750 | 6.81 | % | |||||
| Hua Mei Investments Limited (6) | 9,997,841 | 62.80 | % | |||||
| Zhihao Sabio Zhang (3) | 9,997,841 | |||||||
| All officers and directors as a group (5 persons) | 9,997,841 | 62.80 | % | |||||
| All 5% and more stockholders | 12,164,091 | 76.41 | % | |||||
| (1) | Pursuant to Rule 13d-3 under the Exchange Act, a person has beneficial ownership of any securities as to which such person, directly or indirectly, through any contract, arrangement, undertaking, relationship or otherwise has or shares voting power and/or investment power or as to which such person has the right to acquire such voting and/or or investment power within 60 days. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of the shares. |
| 40 |
| (2) | Based on 15,918,940 shares of Common Stock outstanding as of December 15, 2013. |
| (3) | Xingping Hou is the sole director of Hua Mei Investments Limited, and Zhihao Sabio Zhang owns all of the outstanding shares of Hua Mei Investments Limited. Pursuant to a call option agreement dated July 1, 2012, Mr. Hou has the right to purchase all of the shares in Hua Mei Investments Limited held by Mr. Zhang. Such option vests in three annual installments over a period of three years, of which 34% becomes exercisable on July 1, 2013, 33% becomes exercisable on July 1, 2014, and the remaining 33% becomes exercisable on July 1, 2015. The option expires on July 1, 2017. |
| (4) | Shiqiu Xiao controls Across Asia Investment Limited. |
| (5) | Chunquan Luo controls Ever Shining Investment Limited. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships And Related Party Transactions
Other than as disclosed below, there were no transactions with related parties during the Transition Period or the fiscal years ended September 30, 2013 and 2012.
As of September 30, 2013 and September 30, 2012, the Company had outstanding debts from a related party, Hua Mei, of $718,261 and $391,994, respectively.
These debts are non-interest bearing and payable on demand. The proceeds of these debts were utilized as working capital. Hua Mei and the Company have 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.
Independent Directors
Liwei Jia, Wei Lu and Hongcai Li are independent directors pursuant to the required standards set forth in Rule 10A-3(b) of the Securities Exchange Act of 1934, as amended, based on an evaluation of the relationships between the Company and each of them.
Changes in Control
There are no arrangements known to us, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in control of the Company.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
On April 3, 2014 we dismissed YSL & Associates as the Company’s principal accountant and engaged Friedman LLP. The following table sets forth the aggregate fees billed to us for the years ended September 31, 2013 and 2012, by YSL & Associates LLC and Patrizio & Zhao, LLC, our former independent auditors.
| September 30, 2012 | September 30, 2013 | |||||||
| Audit Fees (1) | $ | 170,000 | $ | 190,000 | ||||
| Audit Related Fees(2) | - | - | ||||||
| Tax Fees(3) | 5,000 | 5,000 | ||||||
| 41 |
| (1) |
Audit Fees consist of fees billed for professional services rendered for the audit of our consolidated annual financial statements for the years ended September 30, 2013 and 2012 and each interim consolidated financial statements in fiscal year 2013 and 2012.
· The aggregate fees billed from professional services rendered by Patrizio & Zhao for the audit of our transition period of financial statements and review of interim financial information for the nine months ended September 30, 2012 was $10,000. The aggregate fees billed from professional services rendered by Patrizio & Zhao for review of interim financial information for the year ended September 30, 2013 was $30,000
· The aggregate fees billed from professional services rendered by YSL & Associates LLC and Friedman LLP for the audit of our annual financial statements for the year ended December 31, 2012 were $60,000 and 10,000, respectively.
· The aggregate fees billed from professional services rendered by YSL & Associates LLC and Friedman LLP for the audit of our annual financial statements for the year ended September 30, 2013 were $60,000 and 10,000, respectively.
|
| (2) | Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported under “Audit Fees.” This category includes audit-related services related to acquisitions by the Company. |
| (3) | Tax Fees consist of fees billed for professional services rendered for tax compliance, tax advice and tax planning (domestic and international). These services include assistance regarding federal, state and international tax compliance and international tax planning. The fees billed for professional services rendered for tax service of year ended September 30, 2012 and 2013 were $5,000 and $5,000, respectively. |
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
The following consolidated financial statements of the Company are included in Part II, Item 8 of this Report:
Schedules are omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule or because the information required is given in the consolidated financial statements or the notes thereto.
(b) Exhibits
EXHIBIT INDEX
| Exhibit No. | Description | |
| 3.1 | Articles of Incorporation, as amended (6) | |
| 3.2 | Amended and Restated By-laws (9) | |
| 10.1 | Agreement dated September 25, 2012 by and between Hua Mei Investments Limited and Greater China Investment Limited (1) | |
| 10.2 | Form of Navel Orange Trees Leasing Agreement (3) | |
| 10.3 | Employment Agreement dated as of July 1, 2013 by and between the Company and Amy Xue (4) | |
| 10.4 | Director Agreement dated as of January 31, 2013, by and between the Company and Xingping Hou (2) | |
| 10.5 | Director Agreement dated as of January 31, 2013, by and between the Company and Shaokang Zeng (2) | |
| 10.6 | Director Agreement dated as of January 31, 2013, by and between the Company and Yongjun Zeng (2) | |
| 10.7 | Company Manager Employment Contract dated January 31, 2013, by and between Xingguo General Fruit Industry Development Co., Ltd. and Xingping Hou (2) |
| 42 |
| 10.8 | Labor Contract dated January 31, 2013, by and between Xingguo General Fruit Industry Development Co., Ltd. And Shaokang Zeng (2) | |
| 10.9 | Call Option Agreement dated July 1, 2012 by and between Zhang Zhihao and Xingping Hou (7) | |
| 10.10 | Form of Orange Purchase Contract (8) | |
| 10.11 | Property Use Certificates dated August 30, 2007 (translation)(8) | |
| 10.12 | Office Lease Contracted dated March 1, 2011 between General Fruit and Shiyong Xu (translation)(8) | |
| 10.13 | Office Lease Contract dated February 10, 2012 between General Fruit and Taixang Want (translation)(8) | |
| 14 | Code of Ethics (5) | |
| 21 | Subsidiaries | |
| 31.1 | Certification of the Chief Executive Officer (Principal Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of the Chief Financial Officer (Principal Financial and Accounting Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted 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 |
| (1) | Incorporated by reference to our Transitional Report on Form 10-KT for the transition period from January 1, 2012 to September 30, 2012, filed with the SEC on December 28, 2012. |
| (2) | Incorporated by reference to our Current Report on Form 8-K dated January 31, 2013, filed with the SEC on February 1, 2013. |
| (3) | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, filed with the SEC on May 15, 2013. |
| (4) | Incorporated by reference to our Current Report on Form 8-K dated July 1, 2013, filed with the SEC on July 8, 2013. |
| (5) | Incorporated by reference to our Current Report on Form 8-K dated September 5, 2013, filed with the SEC on September 6, 2013. |
| (6) | Incorporated by reference to our Quarterly Report on From 10-Q for the quarter ended June 30, 2013, filed with the SEC on August 14, 2013. |
| (7) | Incorporated by reference to Amendment No. 2 to our Current Report on Form 8-K dated July 11, 2012, filed with the SEC on August 29, 2012. |
| (8) | Incorporated by reference to our Current Report on Form 8-K dated July 11, 2012, filed with the SEC on July 17, 2012. |
| (9) | Incorporated by reference to our Current Report on Form 8-K dated July 6, 2012, filed with the SEC on July 12, 2012. |
FINANCIAL STATEMENTS
Consolidated audited financial statements and notes of General Agriculture Corporation (formerly Geltology Inc.) and subsidiaries as of September 30, 2013 and 2012 are attached hereto as Annex at the end of this Form 10-K Annual Report.
| 43 |
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.
| Dated: June 4, 2014 | General Agriculture Corporation | |
| By: | /s/ Xingping Hou | |
| Xingping Hou | ||
| Chief Executive Officer | ||
| Dated: June 4, 2014 | ||
| By: | /s/ Amy Xue | |
| Amy Xue | ||
| Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Name | Title | Date | ||
| /s/ Xingping Hou | ||||
| Xingping Hou | Director, Chairman, Chief Executive Officer and President (Principal Executive Officer) | June 4, 2014 | ||
| /s/ Amy Xue | ||||
| Amy Xue | Chief Financial Officer (Principal Financial and Accounting Officer) | June 4, 2014 | ||
| /s/ Shaokang Zeng | ||||
| Shaokang Zeng | Director, Secretary | June 4, 2014 | ||
| /s/ Liwei Jia | ||||
| Liwei Jia | Director | June 4, 2014 | ||
| /s/ Wei Lu | ||||
| Wei Lu | Director | June 4, 2014 | ||
| /s/ Hongcai Li | ||||
| Hongcai Li | Director | June 4, 2014 |
| 44 |
EXHIBIT INDEX
| Exhibit No. | Description | |
| 3.1 | Articles of Incorporation, as amended (6) | |
| 3.2 | Amended and Restated By-laws (9) | |
| 10.1 | Agreement dated September 25, 2012 by and between Hua Mei Investments Limited and Greater China Investment Limited (1) | |
| 10.2 | Form of Navel Orange Trees Leasing Agreement (3) | |
| 10.3 | Employment Agreement dated as of July 1, 2013 by and between the Company and Amy Xue (4) | |
| 10.4 | Director Agreement dated as of January 31, 2013, by and between the Company and Xingping Hou (2) | |
| 10.5 | Director Agreement dated as of January 31, 2013, by and between the Company and Shaokang Zeng (2) | |
| 10.6 | Director Agreement dated as of January 31, 2013, by and between the Company and Yongjun Zeng (2) | |
| 10.7 | Company Manager Employment Contract dated January 31, 2013, by and between Xingguo General Fruit Industry Development Co., Ltd. and Xingping Hou (2) | |
| 10.8 | Labor Contract dated January 31, 2013, by and between Xingguo General Fruit Industry Development Co., Ltd. And Shaokang Zeng (2) | |
| 10.9 | Call Option Agreement dated July 1, 2012 by and between Zhang Zhihao and Xingping Hou (7) | |
| 10.10 | Form of Orange Purchase Contract (8) | |
| 10.11 | Property Use Certificates dated August 30, 2007 (translation)(8) | |
| 10.12 | Office Lease Contracted dated March 1, 2011 between General Fruit and Shiyong Xu (translation)(8) | |
| 10.13 | Office Lease Contract dated February 10, 2012 between General Fruit and Taixang Want (translation)(8) | |
| 14 | Code of Ethics (5) | |
| 21 | Subsidiaries | |
| 31.1 | Certification of the Chief Executive Officer (Principal Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of the Chief Financial Officer (Principal Financial and Accounting Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted 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 |
| (1) | Incorporated by reference to our Transitional Report on Form 10-KT for the transition period from January 1, 2012 to September 30, 2012, filed with the SEC on December 28, 2012. |
| (2) | Incorporated by reference to our Current Report on Form 8-K dated January 31, 2013, filed with the SEC on February 1, 2013. |
| (3) | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, filed with the SEC on May 15, 2013. |
| (4) | Incorporated by reference to our Current Report on Form 8-K dated July 1, 2013, filed with the SEC on July 8, 2013. |
| (5) | Incorporated by reference to our Current Report on Form 8-K dated September 5, 2013, filed with the SEC on September 6, 2013. |
| (6) | Incorporated by reference to our Quarterly Report on From 10-Q for the quarter ended June 30, 2013, filed with the SEC on August 14, 2013. |
| (7) | Incorporated by reference to Amendment No. 2 to our Current Report on Form 8-K dated July 11, 2012, filed with the SEC on August 29, 2012. |
| (8) | Incorporated by reference to our Current Report on Form 8-K dated July 11, 2012, filed with the SEC on July 17, 2012. |
| (9) | Incorporated by reference to our Current Report on Form 8-K dated July 6, 2012, filed with the SEC on July 12, 2012. |
GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES
(FORMERLY GELTOLOGY INC.)
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND 2012
GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES
(FORMERLY GELTOLOGY INC.)
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of General Agriculture Corporation
We have audited the accompanying consolidated balance sheets of General Agriculture Corporation and subsidiaries (the “Company”) as of September 30, 2013 and 2012, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the two-year period ended September 30, 2013 and 2012. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the two-year period ended September 30, 2013 and 2012 in conformity with accounting principles generally accepted in the United States of America.
/s/ Friedman LLP
New York, NY
June 4, 2014
| F-1 |
GENERAL AGRICULTURE CORP.
(FORMERLY GELTOLOGY INC.)
| September 30, 2013 | September 30, 2012 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 2,408,520 | $ | 351,045 | ||||
| Restricted cash | - | 277,025 | ||||||
| Inventory | 4,074,166 | 3,540,386 | ||||||
| Advance payments | 24,438 | 36,147 | ||||||
| Prepaid lease- current, net | 2,372,480 | 1,559,648 | ||||||
| Other current assets | 15,625 | 20,679 | ||||||
| Total Current Assets | 8,895,229 | 5,784,930 | ||||||
| Property and equipment, net | 15,108,031 | 15,676,017 | ||||||
| Other Assets | ||||||||
| Intangibles assets, net | 158,020 | 157,096 | ||||||
| Prepaid leases – non current, net | 18,000,267 | 11,316,093 | ||||||
| Total Other Assets | 18,158,287 | 11,473,189 | ||||||
| TOTAL ASSETS | $ | 42,161,547 | $ | 32,934,136 | ||||
| Liabilities | ||||||||
| Current Liabilities | ||||||||
| Short-term bank loans | 5,542,000 | 4,163,290 | ||||||
| Accounts payable and accrued expenses | 208,325 | 398,095 | ||||||
| Due to related parties | 718,261 | 391,994 | ||||||
| Customer deposits | - | 1,393,040 | ||||||
| Other current liabilities | 45,865 | 45,709 | ||||||
| Total Current Liabilities | 6,514,451 | 6,392,128 | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity | ||||||||
| Common stock $0.001 par value, 200,000,000 share authorized 15,918,940 shares issued and outstanding at September 30, 2013 and 2012 | 1,592 | 1,592 | ||||||
| Additional paid-in capital | 4,909,572 | 4,909,572 | ||||||
| Statutory reserves | 2,508,735 | 1,653,723 | ||||||
| Retained earnings | 25,678,005 | 18,360,559 | ||||||
| Accumulated other comprehensive income | 2,549,192 | 1,616,562 | ||||||
| Total stockholders’ equity | 35,647,096 | 26,542,008 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 42,161,547 | $ | 32,934,136 | ||||
See accompanying notes to the consolidated financial statements
| F-2 |
GENERAL AGRICULTURE CORP.
(FORMERLY GELTOLOGY INC.)
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
| For the Years Ended September 30 | ||||||||
| 2013 | 2012 | |||||||
| Sales | $ | 17,490,837 | $ | 16,834,304 | ||||
| Cost of sales | 7,565,946 | 8,076,376 | ||||||
| Gross profit | 9,924,891 | 8,757,928 | ||||||
| Operating expenses | ||||||||
| Selling expenses | 886,595 | 1,116,455 | ||||||
| General and administrative expenses | 891,893 | 914,214 | ||||||
| Total operating expenses | 1,778,488 | 2,030,669 | ||||||
| Income from operations | 8,146,403 | 6,727,259 | ||||||
| Other income (expenses): | ||||||||
| Government subsidy | 276,442 | 111,401 | ||||||
| Interest income | 10,414 | 19,842 | ||||||
| Interest expense | (302,411 | ) | (309,478 | ) | ||||
| Other income(expense), net | 41,610 | (2,144 | ) | |||||
| Total other income(expenses) | 26,055 | (180,379 | ) | |||||
| Income before provision for income taxes | 8,172,458 | 6,546,880 | ||||||
| Provision for income taxes | - | - | ||||||
| Net income | 8,172,458 | 6,546,880 | ||||||
| Other comprehensive income | ||||||||
| Foreign currency translation adjustment | 932,630 | 271,853 | ||||||
| Total comprehensive income | $ | 9,105,088 | $ | 6,818,733 | ||||
| Earnings per share: | ||||||||
| Basic and dulited | $ | 0.51 | $ | 0.41 | ||||
| Weighted average number of common stock outstanding | ||||||||
| Basic and diluted | 15,918,694 | 15,918,694 | ||||||
See accompanying notes to the consolidated financial statements
| F-3 |
GENERAL AGRICULTURE CORP.
(FORMERLY GELTOLOGY INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EUQITY
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||
| Common | Stock | Paid in | Statutory | Retained | Comprehensive | Stockholders’ | ||||||||||||||||||||||
| Shares | Value | Capital | Reserve | Earnings | Income | Equity | ||||||||||||||||||||||
| Balance at September 30, 2011 | 15,639,722 | $ | 1,564 | $ | 4,601,880 | $ | 967,821 | $ | 12,499,581 | $ | 1,344,709 | $ | 19,415,555 | |||||||||||||||
| Effect of reverse merger | 279,218 | 28 | (28 | ) | - | - | - | - | ||||||||||||||||||||
| Conversion of shareholder payable to additional paid in capital | - | - | 307,720 | - | - | - | 307,720 | |||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net income | - | - | - | - | 6,546,880 | - | 6,546,880 | |||||||||||||||||||||
| Foreign currency translation gain | - | - | - | - | - | 271,853 | 271,853 | |||||||||||||||||||||
| Statutory reserve | - | - | - | 685,902 | (685,902 | ) | - | - | ||||||||||||||||||||
| Balance at September 30, 2012 | 15,918,940 | 1,592 | 4,909,572 | 1,653,723 | 18,360,559 | 1,616,562 | 26,542,008 | |||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net income | 8,172,458 | 8,172,458 | ||||||||||||||||||||||||||
| Foreign currency translation gain | 932,630 | 932,630 | ||||||||||||||||||||||||||
| Statutory reserve | 855,012 | (855,012 | ) | - | ||||||||||||||||||||||||
| Balance at September 30, 2013 | 15,918,940 | $ | 1,592 | $ | 4,909,572 | $ | 2,508,735 | $ | 25,678,005 | $ | 2,549,192 | $ | 35,647,096 | |||||||||||||||
See accompany notes to the consolidated financial statements
| F-4 |
GENERAL AGRICULTURE CORP.
(FORMERLY GELTOLOGY INC.)
CONSOLIDATED STATEMENTS OF CASH FLOW
| For the Years Ended September 30, | ||||||||
| 2013 | 2012 | |||||||
| Cash flows from operating activities: | ||||||||
| Net Income | $ | 8,172,458 | $ | 6,546,880 | ||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
| Prepaid lease amortized in current year | 2,277,696 | 1,559,755 | ||||||
| Depreciation and amortization | 1,120,409 | 1,080,450 | ||||||
| Changes in current assets and current liabilities: | ||||||||
| Accounts receivable | - | 1,585 | ||||||
| Inventory | (422,011 | ) | 49,280 | |||||
| Advance payments | 12,584 | 176,355 | ||||||
| Prepaid leases | (9,281,984 | ) | (12,829,661 | ) | ||||
| Other current assets | 3,976 | 15,408 | ||||||
| Accounts payable and accrued expenses | (356,021 | ) | 159,769 | |||||
| Customer deposits | (1,412,136 | ) | 1,392,424 | |||||
| Other current liabilities | (4,731 | ) | (506,184 | ) | ||||
| Net cash provided by (used in) operating activities | 110,240 | (2,353,939 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Acquisition of property and equipment | (83,170 | ) | (227,283 | ) | ||||
| Addition to construction in progress | (16,182 | ) | (133,024 | ) | ||||
| Net cash used in investing activities | (99,352 | ) | (360,307 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Restricted cash | 280,823 | (134,496 | ) | |||||
| Proceeds from short-term bank loans | 5,455,980 | 4,161,449 | ||||||
| Repayment of short-term bank loans | (4,220,361 | ) | (1,218,371 | ) | ||||
| Repayment of long-term bank loans | - | (791,150 | ) | |||||
| Proceeds from related parties, net | 562,850 | 270,936 | ||||||
| Net cash provided by financing activities | 2,079,292 | 2,288,368 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (32,704 | ) | (4,164 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | 2,057,475 | (430,042 | ) | |||||
| Cash and cash equivalents – beginning of year | 351,045 | 781,087 | ||||||
| Cash and cash equivalents – ending of year | $ | 2,408,520 | $ | 351,045 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 302,411 | $ | 309,478 | ||||
| Supplemental schedule of non-cash activities | ||||||||
| Conversion of shareholder payable to additional paid in capital | $ | - | $ | 307,243 | ||||
See accompany notes to the consolidated financial statements
| F-5 |
GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)
Notes to Consolidated Financial Statements
Note 1 – Organization and Nature of Business
General Agriculture Corporation (“Gelt”), formerly Geltology Inc., 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 of 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 refer to as, 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 the 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 recorded as a reverse merger whereby GRH was considered to be the accounting acquirer. Although GELT 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.
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 People’s Republic of China (“PRC”).
On February 5, 2010, the WFOE purchased all the 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, the 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 the WFOE accompanied by a recapitalization.
| F-6 |
GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)
Notes to Consolidated Financial Statements
Note 1 – Organization and Nature of Business (continued)
General Fruit was formed in Xingguo County, Jiangxi Province, under the corporate laws of PRC on March 5, 2003. The primary business of General Fruits is to grow and sell navel oranges. On July 14, 2008, after a series of equity transfer agreements, General Fruits 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 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 have been retroactively adjusted to reflect this reverse split.
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 States 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.
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 on September 30, 2012.
| F-7 |
GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)
Notes to Consolidated Financial Statements
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.
Foreign Currency Translation and Transactions
The accompanying consolidated financial statements are presented in U.S. dollars (“USD”). Greater China International’s functional currency is the Hong Kong Dollar (“HKD”) and Nanchang Hanxin Agriculture Technology Co., Ltd, General Fruit and General Preservation’s functional currency is Chinese Yuan Renminbi (“RMB”). All assets and liabilities were translated at the current exchange rate, at respective balance sheets dates, stockholders’ equity is translated at the historical rates and income statement items are translated at the average exchange rate for the reporting periods. The resulting translation adjustments are reported as a component of stockholders’ equity as “Accumulated Other Comprehensive Income” in accordance with the Codification ASC 220, “Comprehensive Income”. Due to the fact that cash flows are translated based on the average exchange rates, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. There were no material transaction gains or losses in the periods presented.
The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the consolidated financial statements were as follows:
| September 30, | ||||||||
| 2013 | 2012 | |||||||
| Year end RMB:USD exchange rate | 0.1630 | 0.1583 | ||||||
| Average Yearly RMB:USD exchange rate | 0.1605 | 0.1582 | ||||||
| Year end HKD:USD exchange rate | 0.1290 | 0.1290 | ||||||
| Average Yearly HKD:USD exchange rate | 0.1289 | 0.1288 | ||||||
Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP 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 financial statements and the reported amounts of revenues and expenses during the reporting periods presented. Actual results could differ from these estimates. Significant items subject to such estimates and assumptions include the recoverability of the carrying amounts of recorded assets and liabilities, estimated useful life of property and equipment, inventory obsolescence and the allowance for doubtful accounts.
Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s financial statements.
| F-8 |
GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)
Notes to Consolidated Financial Statements
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and short-term cash investments that are highly liquid in nature and have original maturities of three months or less.
Restricted Cash
Restricted cash is related to deposits required by the bank for our bank loans. The balance of total restricted cash was $277,025 as of September 30, 2012.
Accounts Receivable
Accounts receivable are recorded net of allowance for doubtful accounts. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. Periodically, management assesses customer credit history and relationships as well as performs accounts receivable aging analysis. Based on the results, management determines whether certain balances are deemed uncollectible at the end of each period. Using its past collection experience, the Company reserves 0.3% of accounts receivable balances outstanding between six months and twelve months, 3% of accounts receivable outstanding for more than one year but less than two years, and 100% of accounts receivable balances outstanding for more than two years.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using the weighted-average cost method. Provisions are made for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable values, if any. Management continually evaluates the recoverability based on assumptions about customer demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves or write-downs may be required that could negatively impact our gross margin and operating results. As of September 30, 2013 and 2012, no provisions were deemed necessary as no obsolete and slow-moving inventory were observed.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated based on the straight-line method over the estimated useful lives of the assets as follows:
| Estimated Useful Life | |
| Electronic equipment | 5 years |
| Vehicles | 10 years |
| Machinery and equipment | 5 to 15 years |
| Buildings and improvements | 5 to 20 years |
| Navel orange orchards | 11 to 30 years |
| F-9 |
GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)
Notes to Consolidated Financial Statements
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Construction in progress primarily represents the construction costs of buildings, machinery, equipment and agricultural improvements made to orchards. Costs incurred are capitalized and transferred to property and equipment upon completion, at which time depreciation commences.
Navel orange orchards consist of orchards the Company planted and acquired from local farmers. The planting cost includes costs related to land leveling, saplings, fertilizer, labor and facilities on orchard lands. The planting cost was recorded as property cost. In 2008 and 2011, the Company directly acquired certain navel orange trees from local farmers and recorded the purchase cost as property cost.
Cost of repairs and maintenance is expensed as incurred. Gain or loss on disposal of property and equipment, if any, is recognized in the statements of operations and comprehensive income.
Impairment of Long-Lived Assets
Long-lived assets, including property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. As of September 30, 2013 and 2012, there was no impairment of long-lived assets.
Intangible Assets
Intangible assets are amortized using the straight-line method over their estimated period of benefit. Evaluation of the recoverability of intangible assets is made to take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. No impairments of intangible assets have been identified during any of the periods presented. Land use rights with a finite useful life are amortized on a straight-line basis over its estimated useful life of 50 years.
Revenue Recognition
The Company derives its revenue primarily from sale of navel oranges. Revenue is recognized in accordance with the provisions of ASC Topic 605, which provides that revenue is recognized when products are shipped, title and risk of loss is passed to the customers and collection is reasonably assured. Payments received before the above criteria are satisfied are recorded as advances from customers.
Income Tax
The Company has adopted the provisions of ASC subtopic 740-10 (“ASC 740-10”), “Income taxes”, which clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognizing, measurement classification, interest and penalties, disclosure and transition.
| F-10 |
GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)
Notes to Consolidated Financial Statements
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company applies the provisions of ASC 740-10, Accounting For Uncertainty In Income Taxes, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in its combined financial statements. ASC 740-10 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. ASC 740-10 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements.
All of the Company’s income is generated in the PRC, and accordingly, its income tax provision is calculated based on the applicable tax rates and existing legislation, interpretation and practices in respect thereof.
Comprehensive Income
Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net income and foreign currency translation adjustments.
Advertising Expense
The Company expenses all advertising expenses as incurred. Advertising expenses included in selling expenses were $30,904 and $251,173 for the years ended September 30, 2013 and 2012, respectively.
Shipping and Handling
All shipping and handling costs are expensed as incurred and included in selling expenses. Total shipping and handling expenses were $803,970 and $791,295 for the years ended September 30, 2013 and 2012, respectively.
Statutory Reserves
Pursuant to the applicable laws in the PRC, the Company makes appropriations to two non-distributable reserve funds, the statutory surplus reserve and the statutory public welfare reserve. The appropriations are based on after-tax net earnings as determined in accordance with the PRC generally accepted accounting principles, after offsetting any prior years’ losses. Appropriation to the statutory surplus reserve is based on an amount at least equal to 10% of after-tax net earnings until the reserve is equal to 50% of the entity's registered capital. Appropriation to the statutory public welfare fund is based on 5% to 10% of after-tax net earnings and is not mandatory. The statutory public welfare reserve is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable, except in the event of liquidation.
The Company does not make appropriations to the discretionary surplus reserve fund. As of September 30, 2013 and 2012, the Company had appropriated $2,508,735 and $1,653,723 of statutory surplus reserve funds, respectively.
| F-11 |
GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)
Notes to Consolidated Financial Statements
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Value-added-tax
The Company is subject to a value added tax (“VAT”) of 13% for selling navel oranges that were bought from other farmers. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT paid on purchases made with the relevant supporting invoices (input VAT). Under the commercial practice of the PRC, the Company pays VAT based on tax invoices issued. The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event that the PRC tax authorities dispute the date on which revenue is recognized for tax purposes, the PRC tax office has the right to assess a penalty based on the amount of the taxes which are determined to be late or deficient, and will be expensed in the period if and when a determination is made by the tax authorities that a penalty is due. The Company reports revenues net of PRC’s value added tax for all the periods presented in the consolidated statements of operations.
Operating leases
Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over the shorter of the lease term or estimated useful life.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are cash and accounts receivable arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.
As of September 30, 2013 and 2012, the Company’s cash was with banks in the PRC and Hong Kong, where there is currently no rule or regulation mandated on obligatory insurance of bank accounts.
For the year ended September 30, 2013, two customers accounted for 10% and 10% of the Company’s sales. For the year ended September 30, 2012, no customer accounted for more than 10% of the Company’s sales.
For the year ended September 30, 2013, four vendors provided 20.30%, 16.27%, 10.40% and 10.12% of the Company’s total purchases, respectively. For the year ended September 30, 2012, three vendors provided 23.31%, 18.87% and 13.04% of the Company’s total purchases, respectively.
Fair Value
The Company has categorized its assets and liabilities at fair value based upon the fair value hierarchy specified by FASB ASC 820.
| F-12 |
GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)
Notes to Consolidated Financial Statements
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The levels of fair value hierarchy are as follows:
| i. | Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. |
| ii. | Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals. |
| iii. | Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity. |
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. As of September 30, 2013 and 2012, the carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, accounts payable and other payables approximate their fair values because of the short maturity of these instruments and market rates of interest available to the Company.
Earnings Per share
The Company reports earnings per share in accordance with the provisions of ASC 260.10, "Earnings Per Share”. ASC 260.10 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 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 using the treasury method. As of September 30, 2013 and 2012, there are no potentially dilutive securities outstanding.
Recent accounting pronouncements
In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarified that the scope of ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, would apply to derivatives including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or are subject to a master netting arrangement or similar agreement. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. Retrospective presentation for all comparative periods presented is required. The adoption of ASU 2013-01 is not expected to have material impact on the Company’s consolidated financial statements.
| F-13 |
GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)
Notes to Consolidated Financial Statements
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In February 2013, the Financial Accounting Standards Board issued ASU 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, it requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012 for public entities. Early adoption is permitted. The Company does not expect that the adoption of ASU 2013-02 will have a material impact on its consolidated financial statements.
In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. The new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The adoption of ASU 2014-08 is not expected to have a material impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606. This update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. Additionally, this update supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (for example, assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this update. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 for public companies and 2017 for non-public companies. Management is evaluating the effect, if any, on the Company’s financial statements.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
Note 3 – Inventory
Inventory by major categories are summarized as follows:
| September 30, 2013 | September 30, 2012 | |||||||
| Raw materials | $ | 84,171 | $ | 144,430 | ||||
| Work in process | 3,989,995 | 3,395,956 | ||||||
| Total | $ | 4,074,166 | $ | 3,540,386 | ||||
Work in process consists of depreciation, amortization of prepaid lease of navel orange orchards, rental, salary, and 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 4 – ADVANCE PAYMENTS
As of September 30, 2013 and 2012, the Company had $24,438 and $36,147 of advance payments that related to payments for packaging materials, gas and equipment.
| F-14 |
GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)
Notes to Consolidated Financial Statements
Note 5 – Property and Equipment
Property and equipment consist of the following:
| September 30, 2013 | September 30, 2012 | |||||||
| Office equipment | $ | 117,670 | $ | 109,553 | ||||
| Vehicles | 325,566 | 316,179 | ||||||
| Machinery and equipment | 2,064,525 | 2,004,996 | ||||||
| Buildings and improvements | 7,755,617 | 7,454,667 | ||||||
| Navel orange orchards | 10,623,019 | 10,316,711 | ||||||
| Subtotal | 20,886,397 | 20,202,106 | ||||||
| Less: Accumulated depreciation | 6,084,046 | 4,806,991 | ||||||
| 14,802,351 | 15,395,115 | |||||||
| Add: Construction in progress | 305,680 | 280,902 | ||||||
| Total | $ | 15,108,031 | $ | 15,676,017 | ||||
Depreciation expense was $1,116,727 and $1,076,820 for the years ended September 30, 2013 and 2012, respectively.
Note 6 – Intangible Assets
Intangible assets consist of the following:
| September 30, 2013 | September 30, 2012 | |||||||
| Land use rights | $ | 185,614 | $ | 181,156 | ||||
| Less: Accumulated amortization | 27,594 | 24,060 | ||||||
| Total | $ | 158,020 | $ | 157,096 | ||||
Amortization expense was $3,682 and $3,630 for the years ended September 30, 2013 and 2012, respectively.
Note 7 – Prepaid Leases
Prepaid leases consist of the following:
| September 30, 2013 | September 30, 2012 | |||||||
| Current | $ | 2,372,480 | $ | 1,559,648 | ||||
| Non current | 18,000,267 | 11,316,093 | ||||||
| Total | $ | 20,372,746 | $ | 12,875,741 | ||||
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.
| F-15 |
GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)
Notes to Consolidated Financial Statements
Note 7 – Prepaid Leases (Continued)
On December 30, 2012 and January 1, 2013, General Fruit entered into additional 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 ASC 840-20 and the aggregate lease amounts will be expensed each year on a straight-line basis over the lease terms. Lease expenses were approximately $2,277,696 and $1,559,755 for the years ended September 30, 2013 and 2012 respectively.
Lease expense attributable to future periods is as follows:
| Twelve months ended September 30: | ||||
| 2014 | $ | 2,335,655 | ||
| 2015 | 2,335,655 | |||
| 2016 | 2,335,655 | |||
| 2017 | 2,335,655 | |||
| 2018 | 2,335,655 | |||
| Thereafter | 8,694,471 | |||
| $ | 20,372,746 |
Note 8 – CUSTOMER DEPOSITS
Based on the sales contract, the Company’s sales distributors are required to make security deposits. As of September 30, 2013 and 2012, the Company had customer deposits of $0 and $1,393,040, respectively.
Note 9 – Short-Term Bank Loans
Short-term bank loans consist of the following:
| September 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 payable monthly. The loan was secured by the Company’s real property and equipment and guaranteed by Xingping Hou, CEO of the Company and Youhua Yu, wife of Xingping Hou. | $ | - | $ | 4,163,290 | ||||
| F-16 |
GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)
Notes to Consolidated Financial Statements
Note 9 – Short-Term Bank Loans (Continued)
| September 30, | September 30, | |||||||
| 2013 | 2012 | |||||||
| On November 30, 2012 and December 21, 2012, the Company obtained loans from Agricultural Development Bank of China, the principal of which would be repaid on November 19, 2013. The interest was calculated using an annual fixed interest rate of 6.00% and payable monthly. The loan was secured by the Company’s real property, inventory and equipment and guaranteed by Xingping Hou, CEO of the Company and Youhua Yu, wife of Xingping Hou. The principal was paid off in October and November 2013. | $ | 5,542,000 | $ | - | ||||
| Total | $ | 5,542,000 | $ | 4,163,290 | ||||
Note 10 – Due to Related Party
As of September 30, 2013 and 2012, the Company had outstanding debts from a related party, Hua Mei Investments Limited (“Hua Mei”), of $718,261 and $391,994, respectively. These debts are non-interest bearing and payable on demand. The proceeds of these debts were utilized as working capital.
Note 11 – Income Taxes
General Agriculture Corporation and General Red Holding Inc. (collectively referred to as the “US entities”) are each subject to US tax and file US federal income tax returns. The US entities are Delaware corporations and conduct all of their businesses through their Chinese subsidiaries. No provision for US federal income taxes were made for the years ended September 30, 2013 and 2012 as the US entities incurred losses.
Han Glory International is not subject to tax on income or capital gains under the laws of the British Virgin Islands. Greater China International did not earn any income that was derived in Hong Kong for the years ended September 30, 2013 and 2012, and therefore was not subject to Hong Kong Profit tax.
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 a 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 years ended September 30, 2013 and 2012, there was no income tax provision for the Company.
The US holding company had net operating losses (“NOL”) amounting to approximately $343,000 and $265,000 during the year ended September 30, 2013 and 2012, respectively. Net operating losses are carried forward and if not utilized, will expire in 20 years after its generation. Management believes that it is more likely than not that the benefit from the NOL carryforwards will not be realized. In recognition of this risk, we have provided an offsetting valuation allowance of the deferred tax asset, relating to these NOL carryforwards. Management will review this valuation allowance periodically and make adjustments as warranted.
| F-17 |
GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)
Notes to Consolidated Financial Statements
Note 11 – Income Taxes (Continued)
The movement of the deferred income taxes for US holding company is as follows:
| September 30, 2013 | September 30, 2012 | |||||||
| Beginning balance-Net operating loss | $ | 265,000 | $ | - | ||||
| Addition: Net operating losses | 342,725 | 265,000 | ||||||
| Ending balance-Net operating loss | 607,725 | 265,000 | ||||||
| Effective tax rate | 34 | % | 34 | % | ||||
| Deferred tax assets | 206,627 | 90,100 | ||||||
| Valuation allowance | (206,627 | ) | (90,100 | ) | ||||
| Ending balance | - | - | ||||||
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate as of the:
| For the Years Ended September 30, | ||||||||
| 2013 | 2012 | |||||||
| U.S. Statutory rate | 34 | % | 34 | % | ||||
| Foreign income not recognized in the U.S. | -34 | % | -34 | % | ||||
| PRC statutory income tax rate | 25 | % | 25 | % | ||||
| Tax exemption | -25 | % | -25 | % | ||||
| Effective income tax rate | - | - | ||||||
Note 12 – StockHOLDERs’ EQUITY
On July 11, 2012, the Company entered into a Share Exchange Agreement with General Red Holding, Inc., another Delaware company (“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.
During the years 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.
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
For the years ended September 30, 2013 and 2012, statutory reserve activity was as follows:
| Balance – September 30, 2011 | $ | 967,821 | ||
| Addition to statutory reserve | 685,902 | |||
| Balance – September 30, 2012 | 1,653,723 | |||
| Addition to statutory reserve | 855,012 | |||
| Balance – September 30, 2013 | $ | 2,508,735 |
Note 14 – Government Subsidy Income
The Company periodically receives government subsidies in cash from local governments, including bank loan interest rebates and eco-irrigation subsidies. The amounts granted varies each year. For the years ended September 30, 2013 and 2012, the government subsidies received was $276,442 and $111,401, respectively.
| F-18 |
GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)
Notes to Consolidated Financial Statements
Note 15 – Subsequent Event
The Company has evaluated subsequent events for purposes of recognition or disclosure through the date these financial statements were issued.
On November 28 and December 4, 2013, the Company entered into two short-term bank loan agreements with Agricultural Development Bank of China for $2,064,000(RMB 16,000,000) and $2,322,000 (RMB 18,000,000). Pursuant to the Loan Agreements, the principle will be repaid on September 27, 2014 and October 3, 2014. The interest was calculated using an annual fixed interest rate of 6.00% and will be paid monthly. The loan was secured by the Company’s real property, navel orange orchards and equipment, and guaranteed by Xingping Hou, CEO of the Company. The loan was also guaranteed by Ganzhou Guoruitai Guarantee Co., Ltd., an unrelated party, with a maximum exposure limit of $1,956,000 (RMB 12,000,000). On November 20 and December 4, 2013, Xingping Hou, CEO of the Company and Jiangjunhong Industrial Group Co. Ltd., a Chinese Corporation owned by Xingping Hou, jointly entered into cross-guarantee agreements with Ganzhou Guoruitai Guarantee Co, Ltd. Pursuant to the cross-guarantee agreements, the Company paid $48,900 (RMB300,000) to the guarantor as guarantee fee for the above bank loans. The term of these guarantees are for two years. On the date of loan expiration, should the Company fail to make their debt payment, Jiangjunhong Industrial Group Co., Ltd. and Xingping Hou will be obligated to perform under the cross guarantees by primarily making the required payments, including late fees and penalties. In addition, on December 3, 2013, the Company paid Ganzhou Guoruitai Guarantee Co, Ltd $391,200(RMB 2,400,000) as security deposit for the guarantee. The purpose of such bank loans are for working capital.
On December 31, 2013, General Fruit entered into a lease contract with an orchard company, pursuant to which General Fruit was authorized to operate the orchard for 10 years starting January 1, 2014. The lease terms are effective from January 1, 2014 through December 31, 2023. The aggregate lease payments are approximately RMB 24,840,000 ($4,063,824) pursuant to the contract terms. The Company paid off the entire lease amount using cash generated from operations in December 2013.
On March 26, 2014, General Fruit entered into a lease contract with Jinglin Agriculture Development Ltd. in Xingguo County. Pursuant to the contract, General Fruit was authorized to operate the orchard for 10 years starting January 1, 2014. The lease terms are effective from January 1, 2014 through December 31, 2023. The aggregate lease payments are approximately RMB 27,360,000 ($4,440,528). The Company paid off the entire lease amount using cash generated from operations in March 2014.
| F-19 |