UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

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

 

For the quarterly period ended December 31, 2015

 

¨

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

 

For the transition period from ____________ to ____________

 

Commission File Number 001-34260

 

CHINA GREEN AGRICULTURE, INC.

(Exact name of registrant as specified in its charter)

 

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

 

	3rd floor, Borough A, Block A. No. 181, South Taibai
	Road,Xi’an, Shaanxi province, PRC 710065
	(Address of principal executive offices) (Zip Code)

 

	+86-29-88266368
	(Issuer's telephone number, including area code)

 

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

 

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 ¨

 

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

 

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company x
( Do not check if a smaller reporting company )

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 36,969,618 shares of common stock, $.001 par value, as of February 2, 2016.

 

 

TABLE OF CONTENTS

 

				Page
PART I		FINANCIAL INFORMATION		3
Item 1.		Financial Statements		3
		Consolidated Condensed Balance Sheets As of December 31, 2015 and June 30, 2015 (Unaudited)		3
		Consolidated Condensed Statements of Income and Comprehensive Income For the Three and Six Months Ended December 31, 2015 and 2014 (Unaudited)		4
		Consolidated Condensed Statements of Cash Flows For the Six Months Ended December 31, 2015 and 2014 (Unaudited)		5
		Notes to Consolidated Condensed Financial Statements As of December 31, 2015 (Unaudited)		6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		37
Item 4.		Controls and Procedures		38
PART II		OTHER INFORMATION		38
Item 6.		Exhibits		38
Signatures				39
Exhibits/Certifications				40

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CHINA GREEN AGRICULTURE INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

		December 31, 2015				June 30, 2015
ASSETS
Current Assets
Cash and cash equivalents		$	99,567,375			$	92,982,564
Accounts receivable, net			65,730,552				68,528,598
Amount due from related parties			150,396				-
Inventories			118,320,621				101,302,947
Prepaid expenses and other current assets			340,493				459,400
Advances to suppliers, net			47,334,873				40,910,837
Total Current Assets			331,444,310				304,184,346
Plant, Property and Equipment, Net			40,221,147				44,634,194
Other Receivables, Net of current portion			-				-
Deferred Asset, Net			30,096,510				51,527,209
Other Assets			135,128				185,480
Intangible Assets, Net			21,652,844				23,805,746
Goodwill			4,934,814				5,245,643
Total Assets		$	428,484,753			$	429,582,618
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable		$	2,371,069			$	2,372,130
Customer deposits			34,228,083				19,129,853
Accrued expenses and other payables			5,097,097				4,952,977
Amount due to related parties			2,198,219				2,068,102
Taxes payable			1,658,436				4,504,542
Short term loans			18,818,800				23,605,540
Total Current Liabilities			64,371,704				56,633,144
Commitment and Contingencies
Stockholders' Equity
Preferred Stock, $.001 par value,  20,000,000 shares authorized, zero shares issued and outstanding			-				-
Common stock, $.001 par value, 115,197,165 shares authorized,  36,936,088 and 35,905,198 shares issued and outstanding as of December 31, 2015 and June 30, 2015, respectively			36,936				35,905
Additional paid-in capital			125,738,089				123,360,384
Statutory reserve			26,145,838				25,030,688
Retained earnings			209,212,316				198,814,259
Accumulated other comprehensive income			2,979,870				25,708,238
Total Stockholders' Equity			364,113,049				372,949,474
Total Liabilities and Stockholders' Equity		$	428,484,753			$	429,582,618

 

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

 

 

CHINA GREEN AGRICULTURE INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

		Three Months Ended December 31,								Six Months Ended December 31,
		2015				2014				2015				2014
Sales
Jinong		$	31,302,561			$	31,192,693			$	66,010,365			$	65,656,858
Gufeng			23,579,674				21,778,807				41,814,506				37,764,881
Yuxing			2,083,765				1,079,674				3,325,400				1,931,225
Net sales			56,966,000				54,051,174				111,150,271				105,352,964
Cost of goods sold
Jinong			13,434,686				12,314,040				27,975,071				25,694,663
Gufeng			19,712,848				18,034,979				34,458,522				30,634,164
Yuxing			1,182,898				792,161				1,892,948				1,440,709
Cost of goods sold			34,330,432				31,141,180				64,326,541				57,769,536
Gross profit			22,635,568				22,909,994				46,823,730				47,583,428
Operating expenses
Selling expenses			5,285,103				1,981,065				7,628,858				2,716,702
Selling expenses - amortization of deferred asset			8,664,752				10,651,432				18,377,467				20,982,516
General and administrative expenses			2,905,982				3,193,979				5,659,624				6,313,611
Total operating expenses			16,855,837				15,826,476				31,665,949				30,012,829
Income from operations			5,779,731				7,083,518				15,157,781				17,570,599
Other income (expense)
Other income (expense)			729				4,749				(3,834	)			46,704
Interest income			74,270				38,969				152,932				68,354
Interest expense			(302,644	)			(359,915	)			(731,679	)			(815,659	)
Total other income (expense)			(227,645	)			(316,197	)			(582,581	)			(700,601	)
Income before income taxes			5,552,086				6,767,321				14,575,200				16,869,998
Provision for income taxes			1,284,551				1,551,884				3,061,993				3,555,479
Net income			4,267,535				5,215,437				11,513,207				13,314,519
Other comprehensive income (loss)
Foreign currency translation gain (loss)			(7,616,129	)			619,865				(22,728,368	)			626,154
Comprehensive income (loss)		$	(3,348,594	)		$	5,835,302			$	(11,215,161	)		$	13,940,673
Basic weighted average shares outstanding			36,933,002				33,281,464				36,436,026				32,829,357
Basic net earnings per share		$	0.12			$	0.16			$	0.32			$	0.41
Diluted weighted average shares outstanding			36,933,002				33,281,464				36,436,026				32,829,357
Diluted net earnings per share			0.12				0.16				0.32				0.41

 

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

 

 

CHINA GREEN AGRICULTURE INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Six Months Ended December 31,
		2015				2014
Cash flows from operating activities
Net income		$	11,513,207			$	13,314,519
Adjustments to reconcile net income to net cash provided by operating activities
Issuance of common stock and stock options for compensation			2,378,736				3,206,945
Depreciation and amortization			21,445,891				23,881,680
Loss on disposal of property, plant and equipment			345				25,240
Changes in operating assets
Accounts receivable			(1,295,393	)			17,868,983
Amount due from related parties			(154,303	)			-
Other current assets			88,817				(9,654	)
Inventories			(23,618,284	)			(71,309,766	)
Advances to suppliers			(9,078,019	)			23,947,858
Other assets			40,385				(77,842	)
Changes in operating liabilities
Accounts payable			130,081				(680,569	)
Customer deposits			16,653,368				24,018,709
Tax payables			(2,646,182	)			3,529,113
Accrued expenses and other payables			228,171				1,193,263
Amount due to related parties			-				-
Net cash provided by operating activities			15,686,820				38,908,479
Cash flows from investing activities
Purchase of plant, property, and equipment			(15,665	)			(383,373	)
Proceeds from other receivables			-				1,967,460
Deferred assets			-				(9,222,371	)
Net cash used in investing activities			(15,665	)			(7,638,284	)
Cash flows from financing activities
Proceeds from the sale of common stock			-				1,245,746
Proceeds from loans			4,424,000				8,130,000
Repayment of loans			(7,900,000	)			(8,536,500	)
Advance from related party			200,000				300,400
Net cash used in financing activities			(3,276,000	)			1,139,646
Effect of exchange rate change on cash and cash equivalents			(5,810,344	)			64,284
Net increase in cash and cash equivalents			6,584,811				32,474,125
Cash and cash equivalents, beginning balance			92,982,564				26,890,321
Cash and cash equivalents, ending balance		$	99,567,375			$	59,364,446
Supplement disclosure of cash flow information
Interest expense paid		$	731,679			$	815,659
Income taxes paid		$	2,763,253			$	26,366

 

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

 

 

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

 

China Green Agriculture, Inc. (the “Company”, “Parent Company” or “Green Nevada”), through its subsidiaries, is engaged in the research, development, production, distribution and sale of humic acid-based compound fertilizer, compound fertilizer, blended fertilizer, organic compound fertilizer, slow-release fertilizers, highly-concentrated water-soluble fertilizers and mixed organic-inorganic compound fertilizer and the development, production and distribution of agricultural products, such as top-grade fruits, vegetables, flowers and colored seedlings.

 

Unless the context indicates otherwise, as used in the notes to the financial statements of the Company, the following are the references herein of all the subsidiaries of the Company (i) Green Agriculture Holding Corporation (“Green New Jersey”), a wholly-owned subsidiary of Green Nevada incorporated in the State of New Jersey; (ii) Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd. (“Jinong”), a wholly-owned subsidiary of Green New Jersey organized under the laws of the PRC; (iii) Xi’an Hu County Yuxing Agriculture Technology Development Co., Ltd. (“Yuxing”), a Variable Interest Entity (“VIE”) in the PRC controlled by Jinong through contractual agreements; (iv) Beijing Gufeng Chemical Products Co., Ltd., a wholly-owned subsidiary of Jinong in the PRC (“Gufeng”), and (v) Beijing Tianjuyuan Fertilizer Co., Ltd., Gufeng’s wholly-owned subsidiary in the PRC (“Tianjuyuan”).

 

The Company’s corporate structure as of December 31, 2015 is set forth in the diagram below:

 

 

 

The unaudited consolidated financial statements were prepared by Company pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) were omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K. The results for the six months ended December 31, 2015, are not necessarily indicative of the results to be expected for the year ending June 30, 2016.

 

NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principle of consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Green New Jersey, Jinong, Gufeng, Tianjuyuan and VIE Yuxing. All significant inter-company accounts and transactions have been eliminated in consolidation.

  

Use of estimates

 

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

 

Cash and cash equivalents and concentration of cash

 

For statement of cash flows purposes, the Company considers all cash on hand and in banks, certificates of deposit with state owned banks in the People’s Republic of China (“PRC”) and banks in the United States, and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents. The Company maintains large sums of cash in two banks in China. The aggregate cash in such accounts and on hand as of December 31, 2015 and June 30, 2015 was $99,567,375 and $92,676,188, respectively. There is no insurance securing these deposits in China over $77,000 (RMB 500,000). In addition, the Company also had $107,189 and $306,376 in cash in two banks in the United States as of December 31, 2015 and June 30, 2015, respectively, with $500,000 secured by the U.S. Federal Deposit Insurance Corporation. Cash overdraft as of balance sheet date will be reflected as liabilities in the balance sheet. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.

 

Deferred assets

 

Deferred assets represent amounts that the distributors owed to the Company in their marketing efforts and developing standard stores to expand the competitiveness and market shares of the Company’s products . The amount owed to the Company will be expensed over three years which is the term as stated in the cooperation agreement, as long as the distributors are actively selling the Company’s products. For the six months ended December 31, 2015 and 2014, the Company amortized $21,430,699 and $32,153,216, respectively, of the deferred assets. If a distributor breaches, defaults, or terminates the agreement with the Company within the three-year period, the outstanding unamortized portion of the amount owed will become payable to the Company immediately. The Company’s Chairman, Mr. Li, guaranteed to the Company of amounts remaining unpaid due from distributors. These deferred assets are subject to an annual impairment testing. The estimated amortization expense of the deferred assets for the twelve months ending December 31, 2016 and 2017 is $26,315,270 and $3,781,241, respectively.

 

The deferred assets consist of items inside the distributors’ stores such as furniture, racks, cabinets, and display units, and items outside or attached to the distributors’ stores such as signage and billboards. These types of assets would be capitalized as fixed assets if the Company actually owned the stores or utilized the assets for its own operations. These assets would also be capitalized as leasehold improvements if the Company leased these stores from the distributors. Therefore, the Company believes that under the U.S. Generally Accepted Accounting Principles (G.A.A.P), these types of assets purchases are properly capitalized. In addition, the Company believes that these assets are properly classified as deferred assets because if a distributor breaches, defaults, or terminates the agreement with the Company within a three-year period, a proportionate amount expended by the Company is to be repaid by the distributor. The Chairman of the Board of Directors of the Company guaranteed to the Company of amounts remaining unpaid due from distributors.

 

 

The assets inside the distributors’ stores are custom made to fit the layout of each individual store and the signage and billboards are also custom designed to fit the specific location. The assets were purchased by the Company directly from the manufacturers and installed in the distributors’ stores. The Company wants to maintain control over the quality of the items being purchased as well as making them uniform among all the distributor locations.

 

Earnings per share

 

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

 

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

 

		Three Months Ended December 31,
		2015				2014
Net Income for Basic Earnings Per Share		$	4,267,535			$	5,215,437
Basic Weighted Average Number of Shares			36,933,002				33,281,464
Net Income Per Share – Basic		$	0.12			$	0.16
Net Income for Diluted Earnings Per Share		$	4,267,535			$	5,215,437
Diluted Weighted Average Number of Shares			36,933,002				33,281,464
Net Income Per Share – Diluted		$	0.12			$	0.16

 

		Six Months Ended December 31,
		2015				2014
Net Income for Basic Earnings Per Share		$	11,513,207			$	13,314,519
Basic Weighted Average Number of Shares			36,436,026				32,829,357
Net Income Per Share – Basic		$	0.32			$	0.41
Net Income for Diluted Earnings Per Share		$	11,513,207			$	13,314,519
Diluted Weighted Average Number of Shares			36,436,026				32,829,357
Net Income Per Share – Diluted		$	0.32			$	0.41

 

Reclassification

 

Certain reclassifications have been made to the prior year consolidated financial statements to conform to the 2015 consolidated financial statement presentation. Such reclassifications did not affect total revenues, operating income or net income or cash flows as previously reported.

 

 

Recent accounting pronouncements

 

FASB Accounting Standards Update No. 2014-09

 

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

 

FASB Accounting Standards Update No. 2015-01

 

In January 2015, the FASB issued Accounting Standards Update No. 2015-01, Income Statement – Extraordinary and Unusual items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (ASU 2015-01).  The amendment eliminates from U.S. GAAP the concept of extraordinary items.  This guidance is effective for the Company in the first quarter of fiscal 2017. Early adoption is permitted and allows the Company to apply the amendment prospectively or retrospectively. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

FASB Accounting Standards Update No. 2015-02

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This amendment provides guidance on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). ASU 2015-02 is effective for periods beginning December 15, 2015. The adoption of ASU 2015-02 is not expected to have a material effect on the Company’s consolidated financial statements. Early adoption is permitted.

 

FASB Accounting Standards Update No. 2015-14

 

In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendment defers the effective date of ASU No. 2014-09 for all entities for one year. The guidance in ASU 2014-09 will now apply to public business entities, certain not-for-profit entities, and certain employee benefit plans from annual reporting periods beginning December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods after December 31, 2016, including interim reporting periods with that reporting period.

 

FASB Accounting Standards Update No. 2015-16

 

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805). ASU No. 2015-16 requires that an acquirer retrospectively adjust provisional amounts recognized in a business combination, during the measurement period. To simplify the accounting for adjustments made to provisional amounts, the amendments in the Update require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.  In addition an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The adoption of ASU 2015-016 is not expected to have a material effect on the Company’s consolidated financial statements.

 

 

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

 

NOTE 3 – INVENTORIES

 

Inventories consisted of the following:

 

		December 31,				June 30,
		2015				2015
Raw materials		$	79,023,607			$	48,294,614
Supplies and packing materials		$	601,112			$	529,398
Work in progress		$	435,906			$	348,670
Finished goods		$	38,259,995			$	52,130,265
Total		$	118,320,621			$	101,302,947

 

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following:

 

		December 31,				June 30,
		2015				2015
Building and improvements		$	41,645,549			$	43,699,066
Auto			618,465				900,562
Machinery and equipment			21,503,631				23,173,209
Agriculture assets			783,797				833,165
Total property, plant and equipment			64,551,441				68,606,002
Less: accumulated depreciation			(24,330,294	)			(23,971,808	)
Total		$	40,221,147			$	44,634,194

 

NOTE 5 - INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

		December 31,				June 30,
		2015				2015
Land use rights, net		$	10,746,369			$	11,554,776
Technology patent, net			118,067				251,008
Customer relationships, net			4,520,608				5,337,372
Trademarks			6,267,800				6,662,590
Total		$	21,652,844			$	23,805,746

 

LAND USE RIGHT

 

On September 25, 2009, Yuxing was granted a land use right for approximately 88 acres (353,000 square meters or 3.8 million square feet) by the People’s Government and Land & Resources Bureau of Hu County, Xi’an, Shaanxi Province. The fair value of the related intangible asset was determined to be the respective cost of RMB73,184,895 (or $11,270,474). The intangible asset is being amortized over the grant period of 50 years using the straight line method.

 

On August 13, 2003, Tianjuyuan was granted a certificate of Land Use Right for a parcel of land of approximately 11 acres (42,726 square meters or 459,898 square feet) at Ping Gu District, Beijing. The purchase cost was recorded at RMB1,045,950 (or $161,076). The intangible asset is being amortized over the grant period of 50 years using the straight line method.

 

 

On August 16, 2001, Jinong received a land use right as a contribution from a shareholder, which was granted by the People’s Government and Land & Resources Bureau of Yangling District, Shaanxi Province. The fair value of the related intangible asset at the time of the contribution was determined to be RMB7,285,099 (or $1,121,905). The intangible asset is being amortized over the grant period of 50 years.

 

The Land Use Rights consisted of the following:

 

		December 31,				June 30,
		2015				2015
Land use rights		$	12,553,455			$	13,344,160
Less: accumulated amortization			(1,807,086	)			(1,789,384	)
Total land use rights, net		$	10,746,369			$	11,554,776

 

TECHNOLOGY PATENT

 

On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The fair value on the acquired technology patent was estimated to be RMB 9,200,000 (or $1,416,800) and is amortized over the remaining useful life of six years using the straight line method.

 

The technology know-how consisted of the following:

 

		December 31,				June 30,
		2015				2015
Technology know-how		$	2,321,561			$	2,467,789
Less: accumulated amortization			(2,203,494	)			(2,216,781	)
Total technology know-how, net		$	118,067			$	251,008

 

CUSTOMER RELATIONSHIP

 

On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The fair value on the acquired customer relationships was estimated to be RMB65,000,000 (or $10,010,000) and is amortized over the remaining useful life of ten years.

 

		December 31,				June 30,
		2015				2015
Customer relationships		$	10,010,000			$	10,640,500
Less: accumulated amortization			(5,489,392	)			(5,303,128	)
Total customer relationships, net		$	4,520,608			$	5,337,372

 

TRADEMARKS

 

On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The preliminary fair value on the acquired trademarks was estimated to be RMB40,700,000 (or $6,398,040) and is subject to an annual impairment test.

 

AMORTIZATION EXPENSE

 

Estimated amortization expenses of intangible assets for the next five twelve months periods ended December 31, 2015, are as follows:

 

 

AMORTIZATION TABLE

Year Ends		Expense ($)
December 31, 2016			1,370,136
December 31, 2017			1,252,069
December 31, 2018			1,252,069
December 31, 2019			1,252,069
December 31, 2020			751,569

NOTE 6 - ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables consisted of the following:

 

		December 31,				June 30,
		2015				2015
Payroll payable		$	7,552			$	18,451
Welfare payable			158,103				168,061
Accrued expenses			3,884,299				3,554,733
Other payables			918,299				1,098,705
Other levy payable			128,844				113,027
Total		$	5,097,097			$	4,952,977

 

NOTE 7 - RELATED PARTY TRANSACTIONS AND BALANCES

 

As of December 31, 2015 and June 30, 2015, the amount due from related parties was $150,396 and $0, respectively.  As of December 31, 2015, $150,396 were due from the Company’s affiliate, 900LH.com Food Co., Ltd. ("900LH.com", previously announced as Xi'an Gem Grain Co., Ltd) to Yuxing, representing a balance that 900LH.com would pay to Yuxing according to the Sales Agreement (as defined below) between Yuxing and 900LH.com.

 

At the end of September 2015, Yuxing entered into a sales agreement with 900LH.com pursuant to which Yuxing is to supply various vegetables to 900LH.com for its incoming seasonal sales at the holidays and year ends (the “Sales Agreement”). The contingent contracted value of the Sales Agreement is RMB 4,500,000 (approximately $693,000). As of December 31, 2015, the contract had been fulfilled with an exceeded sales amount of $732,947. 900LH.com had paid Yuxing a total of $582,551 with an amount due of $150,396 as of December 31, 2015.

 

As of December 31, 2015 and June 30, 2015, the amount due to related parties was $2,198,219 and $2,068,102, respectively.  As of December 31, 2015 and June 30, 2015, $1,116,743 and $1,184,643, respectively were amounts that Gufeng borrowed from a related party, Xi’an Techteam Science & Technology Industry (Group) Co. Ltd., a company controlled by Mr. Tao Li, Chairman and CEO of the Company, representing unsecured, non-interest bearing loans that are due on demand.  These loans are not subject to written agreements.

 

On June 29, 2014, Jinong signed an office lease with Xi’an Kingtone Information Technology Co., Ltd. (“Kingtone Information”), where Mr. Tao Li, Chairman and CEO of the Company, serves as its Chairman. Pursuant to the lease, Jinong rented 612 square meters (approximately 6,588 square feet) of office space from Kingtone Information. The lease provided for a two-year term effective as of July 1, 2014 with monthly rent of RMB24,480 (approximately $3,770).

 

NOTE 8- LOAN PAYABLES

 

As of December 31, 2015, the short-term loan payables consisted of ten loans which mature on dates ranging from January 21, 2015 through August 2, 2016 with interest rates ranging from 5.20% to 6.96%. The loans No. 1 and 5 below are collateralized by Tianjuyan’s land use right and building ownership right. The loan No.3 is collateralized by deposit. The loan No. 2 is collateralized by Jinong’s land use right and Jinong’s credit. The loans No. 4, 6 and 7 are guaranteed by Jinong’s credit. The loan No.8 are guaranteed by a bonding company in Zhongguancun Beijing, and counter guaranteed by Jinong’s credit.

 

No.				Payee		Loan period per agreement		Interest Rate				December 31, 2015
	1			Agriculture Bank of China-Pinggu Branch		Jan 21, 2015 - Jan 20, 2016			6.16	%		$	1,232,000
	2			Bank of Tianjin- Beijing Branch		Feb 3, 2015 - Jan 27, 2016			6.16	%			6,160,000
	3			Bank of Tianjin- Beijing Branch		Feb 11, 2015 - Feb 10, 2016			5.60	%			4,342,800
	4			China Merchants Bank- Chaoyangmen Branch		Mar 16, 2015 - Mar 15, 2016			6.96	%			770,000
	5			Agriculture Bank of China-Pinggu Branch		May 12, 2015 - Apr 29, 2016			5.89	%			2,002,000
	6			Bank of Beijing- Pinggu Branch		Aug 11, 2015- Aug 2, 2016			5.82	%			1,540,000
	7			China Merchants Bank- Cahoyangmen Branch		Sep 9, 2015- Mar 8, 2016			5.20	%			1,540,000
	8			Beijing International Trust Co., Ltd		Nov 17, 2015- Feb 13, 2016			5.22	%			1,232,000
				Total								$	18,818,800

 

 

As of June 30, 2015, the short-term loan payables consisted of ten loans which mature on dates ranging from August 6, 2014 through April 29, 2016 with interest rates ranging from 5.60% to 7.80%. The loans No. 6 and 10 were collateralized by Tianjuyuan’s land use right and building ownership right. The loan No. 8 was collateralized by Gufeng’s deposit. The loan No.7 was collateralized by Jinong’s land use right and Jinong’s credit. The loans No. 2 and 9 were guaranteed by Jinong’s credit. The loans No. 3, 4 and 5 were guaranteed by a bonding company in Zhongguancun Beijing, and counter guaranteed by Jinong’s credit. The loan No. 1 was guaranteed by Jinong and Tianjuyuan’s deposit.

 

No.				Payee		Loan period per agreement		Interest Rate				June 30, 2015
	1			Beijing Bank – Pinggu Branch		Aug 6, 2014 – Aug 5, 2015			6.72	%		$	1,637,000
	2			China Merchants Bank – Chaoyang Branch		Aug 27, 2014 – Aug 26, 2015			7.80	%			1,637,000
	3			Beijing International Trust Co., Ltd		Sep 24, 2014 – Sep 23, 2015			7.80	%			1,637,000
	4			Beijing International Trust Co., Ltd		Oct 28, 2014 – Oct 27, 2015			7.80	%			1,637,000
	5			Beijing International Trust Co., Ltd		Dec 26, 2014 – Dec 15, 2015			7.28	%			1,637,000
	6			Agriculture Bank of China-Pinggu Branch		Jan 21, 2015 – Jan 20, 2016			6.16	%			1,309,600
	7			Tianjin Bank – Beijing Branch		Feb 3, 2015 – Jan 27, 2016			6.16	%			6,548,000
	8			Tianjin Bank – Beijing Branch		Feb 11, 2015 – Feb 10, 2016			5.60	%			4,616,340
	9			China Merchants Bank – Chaoyang Branch		Mar 16, 2015 – Mar 15, 2016			6.96	%			818,500
	10			Agriculture Bank of China-Pinggu Branch		May 12, 2015 – Apr 29, 2016			5.89	%			2,128,100
				Total								$	23,605,540

 

The interest expense from short-term loans were $731,679 and $815,659 for the six months ended December 31, 2015 and 2014, respectively.

  

NOTE 9 – TAXES PAYABLE

 

Enterprise Income Tax

 

Effective January 1, 2008, the Enterprise Income Tax (“EIT”) law of the PRC replaced the tax laws for Domestic Enterprises (“DEs”) and Foreign Invested Enterprises (“FIEs”). The EIT rate of 25% replaced the 33% rate that was applicable to both DEs and FIEs. The two year tax exemption and three year 50% tax reduction tax holiday for production-oriented FIEs was eliminated. Since January 1, 2008, Jinong became subject to income tax in China at a rate of 15% as a high-tech company, as a result of the expiration of its tax exemption on December 31, 2007. Accordingly, it made provision for income taxes for the six months ended December 31, 2015 and 2014 of $1,805,667 and $2,462,055, respectively, which is mainly due to the operating income from Jinong. Gufeng is subject to 25% EIT rate and thus it made provision for income taxes of $1,256,325 and $1,093,424 for the six months ended December 31, 2015 and 2014, respectively.

 

 

Value-Added Tax

 

All of the Company’s fertilizer products that are produced and sold in the PRC were subject to a Chinese Value-Added Tax (VAT) of 13% of the gross sales price. On April 29, 2008, the PRC State of Administration of Taxation (SAT) released Notice #56, “ Exemption of VAT for Organic Fertilizer Products ”, which allows certain fertilizer products to be exempt from VAT beginning June 1, 2008. The Company submitted the application for exemption in May 2009, which was granted effective September 1, 2009, continuing through December 31, 2015. On August 10, 2015 and August 28, 2015, the SAT released Notice #90. “ Reinstatement of VAT for Fertilizer Products ”, and Notice #97, “ Supplementary Reinstatement of VAT for Fertilizer Products ”, which restore the VAT of 13% of the gross sales price on certain fertilizer products starting from September 1, 2015, but granted tax payers a reduced rate of 3% from September 1, 2015 through June 30, 2016.

 

Income Taxes and Related Payables

 

Taxes payable consisted of the following:

 

		December 31,				June 30,
		2015				2015
VAT provision		$	7,046			$	27,251
Income tax payable			994,928				3,778,339
Other levies			656,461				698,952
Total		$	1,658,436			$	4,504,542

 

Tax Rate Reconciliation

 

Our effective tax rates were approximately 26.7% and 21.1% for the six months ended December 31, 2015 and 2014, respectively. Substantially all of the Company’s income before income taxes and related tax expense are from PRC sources. Actual income tax benefit reported in the consolidated statements of income and comprehensive income differ from the amounts computed by applying the US statutory income tax rate of 34% to income before income taxes for the six months ended December 31, 2015 and 2014, for the following reasons:

 

December 31, 2015

 

		China								United States
		15% - 25%								34%								Total
Pretax income (loss)		$	14,575,200							$	(3,107,045	)						$	11,468,155
Expected income tax expense (benefit)			3,643,800				25	%			(1,056,395	)			34.0	%			2,587,405
High-tech income benefits on Jinong			(1,145,841	)			(7.86	)%			-				-				(1,145,841	)
Losses from subsidiaries in which no benefit is recognized			564,034				3.87	%			-				-				564,034
Change in valuation allowance on deferred tax asset from US tax benefit			-				-				1,056,395				(34.0	)%			1,056,395
Actual tax expense		$	3,061,993				21	%		$	-				-	%		$	3,061,993				26.7	%

  

 

December 31, 2014

 

		China								United States
		15% - 25%								34%								Total
Pretax income (loss)		$	20,896,514							$	(4,026,516	)						$	16,869,998
Expected income tax expense (benefit)			5,224,129				25.0	%			(1,369,015	)			34.0	%			3,855,114
High-tech income benefits on Jinong			(1,565,331	)			(7.5	)%			-				-				(1,565,331	)
Losses from subsidiaries in which no benefit is recognized			(103,319	)			(0.5	)%			-				-				(103,319	)
Change in valuation allowance on deferred tax asset from US tax benefit			-				-				1,369,015				(34.0	)%			1,369,015
Actual tax expense		$	3,555,479				17.0	%		$	-				-	%		$	3,555,479				21.1	%

 

NOTE 10 – STOCKHOLDERS’ EQUITY

 

Common Stock

 

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

 

On September 30, 2014, the Company granted an aggregate of 1,750,000 shares of restricted stock under the 2009 Equity Incentive Plan (the “2009 Plan”) to certain executive officers, directors and employees, among which (i) 240,000 shares of restricted stock to Mr. Tao Li, the CEO; (ii) 100,000 shares of restricted stock to Mr. Ken Ren, the CFO, (iii) 40,000 shares of restricted stock to Mr. Yizhao Zhang, 30,000 shares of restricted stock to Ms. Yiru Shi, and 20,000 shares of restricted stock to Mr. Lianfu Liu, each an independent director of the Company; and (iv) 1,320,000 shares of restricted stock to key employees. The stock grants are subject to time-based vesting schedules, vesting in various installments until March 31, 2015 for the CFO and the three independent directors, until June 30, 2015 for the CEO and until December 31, 2016 for the employees. The value of the restricted stock awards was $3,675,000 and is based on the fair value of the Company’s common stock on the grant date. This amount is being amortized to compensation expense over the vesting periods for the various awards.

 

On September 28, 2015, the Company granted an aggregate of 1,000,000 shares of restricted stock under the 2009 Plan to certain key employees. The stock grants are subject to time-based vesting schedules, vesting in various installments until June 30, 2016. The value of the restricted stock awards was $1,660,000 and is based on the fair value of the Company’s common stock on the grant date. This amount is being amortized to compensation expense over the vesting periods for the various awards.

 

The following table sets forth changes in compensation-related restricted stock awards during six months ended December 31, 2015:

 

										Grant Date
		Number of				Fair Value of				Fair Value
		Shares				Shares				Per share
Outstanding (unvested) at June 30, 2015			1,708,000			$	1,797,992
Granted			1,000,000				1,660,000			$	1.66
Forfeited			-				-
Vested			(1,312,000	)			(1,732,236	)
Outstanding (unvested) at December 31, 2015			1,396,000			$	1,725,756

 

 

As of December 31, 2015, the unamortized expense related to the grant of restricted shares of common stock of $1,725,756 will be amortized into expense through December 31, 2016. The fair value of the restricted common stock awards was based on the closing price of the Company’s common stock on the grant date. The fair value of the common stock awarded is amortized over the various vesting terms of each grant.

 

On November 6, 2015, the Company issued 7,675 shares of common stock for consulting services valued at $14,000. As of December 31, 2015, the Company issued 30,890 shares of common stock for professional fees valued at $59,734. The shares were valued at the market price per corresponding services agreements.

 

Dividend

  

On October 1, 2014, the Company's Board of Directors declared a cash dividend of $0.10 per share to the Company's stockholders of common stock. The dividend payable represented a total payment to the stockholders of $3,296,156. The cash dividend of $2,161,904 was paid on January 30, 2015 to stockholders of record as of the close of business on the record date of October 31, 2014. Certain stockholders, including the Company’s Chairman, Mr. Li, elected to waive the dividend payment due to them and directed the Company to retain the funds for working capital purposes.

 

Preferred Stock

 

Under the Company’s Articles of Incorporation, the Board has the authority, without further action by stockholders, to designate up to 20,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges, qualifications and restrictions granted to or imposed upon the preferred stock, including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preference and sinking fund terms, any or all of which may be greater than the rights of the common stock. If the Company sells preferred stock under its registration statement on Form S-3, it will fix the rights, preferences, privileges, qualifications and restrictions of the preferred stock of each series in the certificate of designation relating to that series and will file the certificate of designation that describes the terms of the series of preferred stock the Company offers before the issuance of the related series of preferred stock.

 

As of December 31, 2015, the Company had 20,000,000 shares of preferred stock authorized, with a par value of $.001 per share, of which no shares are issued or outstanding.

 

NOTE 11 –CONCENTRATIONS AND LITIGATION

 

Market Concentration

 

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

 

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

  

 Vendor and Customer Concentration

 

There were two vendors from which the Company purchased 29.8% and 16.4% of its raw materials for the six months ended December 31, 2015. Total purchase from these two vendors amounted to $40,065,118 as of December 31, 2015.

 

 

There were three vendors from which the Company purchased 19.4%, 13.6% and 10.4% of its raw materials for the six months ended December 31, 2014. Total purchase from these three venders amounted to $45,141,568 as of December 31, 2014. 

 

One customer was accounted for 26.6% of the Company’s sales for the six months ended December 31, 2015. One customer was accounted for 15.6% of the Company’s sales for the six months ended December 31, 2014.

 

Litigation

 

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

 

NOTE 12 – SEGMENT REPORTING

 

As of December 31, 2015, the Company was organized into three main business segments based on location and product: Jinong (fertilizer production), Gufeng (fertilizer production), and Yuxing (agricultural products production). Each of the three operating segments referenced above has separate and distinct general ledgers. The chief operating decision maker (“CODM”) receives financial information, including revenue, gross margin, operating income and net income produced from the various general ledger systems to make decisions about allocating resources and assessing performance; however, the principal measure of segment profitability or loss used by the CODM is net income by segment.

 

 

		Three months ended December 31,								Six months ended December 31,
		2015				2014				2015				2014
Revenues from unaffiliated customers:
Jinong		$	31,302,561			$	31,192,693			$	66,010,365			$	65,656,858
Gufeng			23,579,674				21,778,807				41,814,506				37,764,881
Yuxing			2,083,765				1,079,674				3,325,400				1,931,225
Consolidated		$	56,966,000			$	54,051,174			$	111,150,271			$	105,352,964
Operating income :
Jinong		$	3,698,620			$	6,125,611			$	11,654,274			$	16,059,375
Gufeng			3,052,879				2,731,233				5,662,832				5,127,211
Yuxing			511,213				147,578				917,510				410,571
Reconciling item (1)			0				0				0				-
Reconciling item (2)			297,606				(271,754	)			(219,754	)			(956,688	)
Reconciling item (2)—stock compensation			(1,780,587	)			(1,649,150	)			(2,857,081	)			(3,069,870	)
Consolidated		$	5,779,731			$	7,083,518			$	15,157,781			$	17,570,599
Net income:
Jinong		$	3,187,514			$	5,215,522			$	10,000,365			$	13,647,488
Gufeng			2,049,897				1,764,886				3,670,264				3,175,597
Yuxing			513,099				155,911				919,384				517,950
Reconciling item (1)			5				22				29				42
Reconciling item (2)			(1,477,980	)			(1,920,904	)			(3,076,835	)			(4,026,558	)
Consolidated		$	4,272,535			$	5,215,437			$	11,513,207			$	13,314,519
Depreciation and Amortization:
Jinong		$	9,358,107			$	10,919,835			$	19,292,089			$	21,488,404
Gufeng			728,466				863,195				1,474,061				1,699,710
Yuxing			336,433				349,456				679,741				693,566
Consolidated		$	10,423,006			$	12,132,486			$	21,445,891			$	23,881,680
Interest expense:
Gufeng			302,644				359,915				731,679				815,659
Consolidated		$	302,644			$	359,915			$	731,679			$	815,659
Capital Expenditure:
Jinong		$	6,643			$	4,968,047			$	6,643			$	9,222,517
Gufeng			0				13,034				1,770				13,034
Yuxing			6,449				370,193				7,252				370,193
Consolidated		$	13,092			$	5,351,274			$	15,665			$	9,605,744

 

		As of December 31,				As of June 30,
		2015				2015
Identifiable assets:
Jinong		$	209,144,782			$	219,259,401
Gufeng			173,218,844				165,267,975
Yuxing			46,013,868				44,745,889
Reconciling item (1)			110,138				312,198
Reconciling item (2)			(2,879	)			(2,845	)
Consolidated		$	428,484,753			$	348,728,342

 

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

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

 

 

NOTE 13 - COMMITMENTS AND CONTINGENCIES

 

On June 29, 2014, Jinong signed an office lease with Kingtone Information.  Pursuant to the lease, Jinong rented 612 square meters (approximately 6,588 square feet) of office space from Kingtone Information. The lease provided for a two-year term effective as of July 1, 2014 with monthly rent of $3,770 (RMB 24,480).

 

In February 2004, Tianjuyuan signed a fifty-year lease with the village committee of Dong Gao Village and Zhen Nan Zhang Dai Village in the Beijing Ping Gu District, at a monthly rent of $480 (RMB 3,117).

 

Accordingly, the Company recorded an aggregate of $28,261 and $14,808 as rent expenses for the six months ended December 31, 2015 and 2014, respectively. Rent expenses for the next five years months ended December 31, are as follows:

 

Years ending December 31,
2016		$	28,261
2017			5,642
2018			5,642
2019			5,642
2020			5,642

 

NOTE 14 VARIABLE INTEREST ENTITIES

 

In accordance with accounting standards regarding consolidation of variable interest entities, VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which a company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

 

Green Nevada through one of its subsidiaries, Jinong, entered into a series of agreements (the “VIE Agreements”) with Yuxing for it to qualify as a VIE, effective June 16, 2013.

 

The Company has concluded, based on the contractual arrangements, that Yuxing is a VIE and that the Company’s wholly-owned subsidiary, Jinong, absorbs a majority of the risk of loss from the activities of Yuxing, thereby enabling the Company, through Jinong, to receive a majority of Yuxing expected residual returns.

 

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

 

 

The following financial statement amounts and balances of the VIE were included in the accompanying consolidated financial statements as of December 31, 2015 and June 30, 2015:

 

		December 31				June 30,
		2015				2015
ASSETS
Current Assets
Cash and cash equivalents		$	180,970			$	79,867
Accounts receivable, net			192,716				72,748
Inventories			18,365,531				18,138,137
Other current assets			29,739				48,845
Advances to suppliers			3,116,861				61,739
Total Current Assets			21,885,817				18,401,336
Plant, Property and Equipment, Net			14,220,333				15,692,975
Construction In Progress			64,838				68,921
Intangible Assets, Net			9,842,881				10,582,657
Total Assets		$	46,013,869			$	44,745,889
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable		$	273,112			$	159,730
Accrued expenses and other payables			30,091				222,871
Amount due to related parties			43,991,316				43,488,198
Total Current Liabilities			44,294,519				43,870,799
Stockholders' equity			1,719,350				875,090
Total Liabilities and Stockholders' Equity		$	46,013,869			$	44,745,889

  

		Three months ended December 31,								Six months ended December 31,
		2015				2014				2015				2014
Revenue		$	2,083,765			$	1,079,674			$	3,325,400			$	1,931,225
Expenses			1,570,665				923,763				2,406,015				1,413,275
Net income (loss)		$	513,100			$	155,911			$	919,385			$	517,950

 

 

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

 

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

 

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

 

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

 

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

 

Overview

 

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

 

The fertilizer business conducted by Jinong and Gufeng generated approximately 97.0% and 98.2% of our total revenues for the six months ended December 31, 2015 and 2014, respectively. Yuxing serves as a research and development base for our fertilizer products.  

 

Fertilizer Products

 

As of December 31, 2015, we had developed and produced a total of 461 different fertilizer products in use, of which 129 were developed and produced by Jinong and 332 by Gufeng.

 

 

Below is a table that shows the metric tons of fertilizer sold by Jinong and Gufeng and the revenue per ton for the periods indicated:

 

		Three Months Ended December 31,								Change from 2014 to 2015
		2015				2014				Amount				%
		(metric tons)
Jinong			9,539				12,484				(2,945	)			(23.6	)%
Gufeng			62,775				56,031				6,744				12.0	%
			72,314				68,515				3,799

 

		Three Months Ended December 31,
		2015				2014
		(revenue per ton)
Jinong		$	3,374			$	2,499
Gufeng			367				385

 

		Six Months Ended December 31,								Change from 2014 to 2015
		2015				2014				Amount				%
		(metric tons)
Jinong			19,603				27,102				(7,499	)			(27.7	)%
Gufeng			108,397				94,132				14,265				15.2	%
			128,000				121,234				6,766

 

		Six Months Ended December 31,
		2015				2014
		(revenue per ton)
Jinong		$	3,406			$	2,423
Gufeng			384				401

 

For the three months ended December 31, 2015, we sold approximately 72,314 metric tons of fertilizer products, as compared to 68,515 metric tons for the three months ended December 31, 2014. For the three months ended December 31, 2015, Jinong sold approximately 9,539 metric tons of fertilizer products, a decrease of 2,945 metric tons, or 23.6%, as compared to 12,484 metric tons for the three months ended December 31, 2014. The decrease was due to Jinong’s implementation of its sales strategy that focuses on producing high-margin liquid fertilizer during the last three months.  For the three months ended December 31, 2015, Gufeng sold approximately 62,775 metric tons of fertilizer products, as compared to 56,031 metric tons for the three months ended December 31, 2014. The increase was mainly attributable to Gufeng’s expanding of its marketing strategy.

 

For the six months ended December 31, 2015, we sold approximately 128,000 metric tons of fertilizer products, as compared to 121,234 metric tons for the six months ended December 31, 2014. For the six months ended December 31, 2015, Jinong sold approximately 19,603 metric tons of fertilizer products, a decrease of 7,499 metric tons, or 27.7%, as compared to 27,102 metric tons for the six months ended December 31, 2014. The decrease was due to Jinong’s implementation of its sales strategy that focuses on producing high-margin liquid fertilizer during the last six months. For the six months ended December 31, 2015, Gufeng sold approximately 108,397 metric tons of fertilizer products, as compared to 94,132 metric tons for the six months ended December 31, 2014. The increase was mainly attributable to Gufeng’s expanding of its marketing strategy.

 

 

Our sales of fertilizer products to five provinces accounted for approximately 62.8% of our fertilizer revenue for the three months ended December 31, 2015. Specifically, the provinces and their respective percentage contributed to our fertilizer revenues were: Beijing (27.8%), Shaanxi (13.4%), Heilongjiang (9.2%), Anhui (7.4%), and Yunnan (5.0%).

 

As of December 31, 2015, we had a total of 1,334 distributors covering 27 provinces, four autonomous regions and three central government-controlled municipalities in China. Jinong had 1,044 distributors in China. Jinong’s sales are not dependent on any single distributor or any group of distributors. Jinong’s top five distributors accounted for 3.2% of its fertilizer revenues for the three months ended December 31, 2015. Gufeng had 290 distributors, including some large state-owned enterprises. Gufeng’s top five distributors accounted for 98.3% of its revenues for the three months ended December 31, 2015. One customer, Sino-agri Group, accounted for 28.3% of the Company’s sales for the three months ended December 31, 2015.

 

Agricultural Products

 

Through Yuxing, we develop, produce and sell high-quality flowers, green vegetables and fruits to local marketplaces and various horticulture and planting companies. We also use certain of Yuxing’s greenhouse facilities to conduct research and development activities for our fertilizer products. The three PRC provinces that accounted for 87.9% of our agricultural products revenue for the three months ended December 31, 2015 were Shaanxi (82.2%), Sichuan (3.7%), and Qinghai (1.9%).

 

Recent Developments

 

New products and distributors

 

During the three months ended December 31, 2015, Jinong launched two new fertilizer products. Jinong’s new products generated approximately $6,591, or 0.02% of Jinong’s fertilizer revenue for the three months ended December 31, 2015. Jinong added seven new distributors for the three months ended December 31, 2015. Jinong’s new distributors accounted for approximately $414,059, or 1.3% of Jinong’s fertilizer revenue for the three months ended December 31, 2015.

 

During the three months ended December 31, 2015, Gufeng did not launch any new fertilizer products. However, Gufeng added two new distributors during the three months ended December 31, 2015, which accounted for approximately $472,805, or 2.1%, of Gufeng’s fertilizer revenue.

 

Business development

 

Cooperation with Sino-agri Group

 

In October 2014, the Company's wholly-owned subsidiaries organized under the laws of the PRC, Gufeng and Jinong, both entered into a strategic cooperation agreement with Sino-agri Mining Resource Exploration Co., Ltd. ("Sino-agri"), a key subsidiary of Sino-agri Group.

 

Sino-agri Group is a nationwide large-scale enterprise group that integrates production, circulation and service as well as specializes in the agricultural means of production, such as chemical fertilizers, pesticides, seeds, agricultural machinery & implements, etc. It is an enterprise with the corresponding level of the All-China Federation of Supply and Marketing Cooperatives and an exclusively-invested enterprise of China CO-OP Group (http://www.chinacoop.coop/English/About%20China%20co-ops), which have the total assets of RMB30 billion, sales revenue of more than RMB72 billion, and the sales volume of more than 25 million tons for the agricultural materials. (For more information, please visit: http://english.sino-agri.com/show.php?id=10).

 

The objective of the strategic cooperation agreement between Sino-argi and Gufeng is for Sino-argi and Gufeng to work together with sales goals in three years. Specifically, pursuant to the agreement, Sino-agri sold 150,000 metric tons of compound fertilizers produced by Gufeng ("Gufeng Fertilizers") during the calendar year 2015, and will sell 300,000-metric-ton Gufeng fertilizers during 2016 and 500,000-metric-ton Gufeng Fertilizers in 2017 to promote Gufeng's flagship products.

 

 

To accomplish the sales goals of the agreement, Sino-agri and Gufeng are committed to strengthen the production and marketing of Gufeng Fertilizers comprehensively. Specifically, Gufeng will team up with Sino-agri to secure raw materials supplies by leveraging Sino-agri's global access to related raw materials. With that, Gufeng shall deliver Sino-agri customized Gufeng’s Fertilizers upon the orders from Sino-agri's heterogeneous customers. In the next three-year period, Gufeng will be able to tap needed financial credit facilities from Sino-agri to fill the Sino-agri orders. In addition to Gufeng’s Fertilizers, Gufeng is committed to offer product support for Sino-agri's clients which includes, but not limit to, soil testing, fertilizer comparison and testing, as well as fertilizer solutions. In parallel, Sino-agri will give priority to purchase Gufeng Fertilizer to replenish its compound fertilizer inventory.

 

The objective of the strategic cooperation agreement between Sino-argi and Jinong is to require both parties to achieve the following sales goals in the next three years: Sino-agri Group sells 10,000 metric tons high-concentrated fertilizer produced by Jinong in the calendar year of 2015; 20,000 metric tons in 2016 and 50,000 metric tons in 2017. The mission under the agreement is to establish a long-term strategic partnership that is mutually beneficial to both parties. To take advantage of Sino-agri Group's state-owned advantage in fertilizer distribution both domestic and overseas, Jinong will work with Sino-agri Group to improve Jinong's supply chain management in the procurement of raw material, and the sale of concentrated fertilizer products. Specifically, Sino-agri Group will provide quality raw materials and favorite lead time to Jinong. In return, Jinong will deliver to Sino-agri quality concentrated fertilizer at fair market price. In addition, Sino-agri Group shall offer large support of working capital and investment to Jinong if Jinong needs liquidity and capital investment to expand production. In the meantime, Jinong concentrates on differentiating the market demand for Sino-agri and will customize corresponding product development and production process respectively.

 

We are very excited for having entered this partnership with Sino-agri, and the result was satisfactory. Sino-agri has purchased a total of $29,306,030 fertilizer products during the six months ended December 31, 2015, which accounted for 27.2% of the total sales of fertilizer products from Company. We believe our partnership with Sino-agri will be extraordinary. These agreements are win-win showcases between us and the large state-owned enterprise in China.

 

Cooperation with 900LH.com

 

The Company’s affiliate, 900LH.com Food Co., Ltd. ("900LH.com", previously announced as Xi'an Gem Grain Co., Ltd) has entered into an agreement to jointly build an “Agricultural Comprehensive Development Base Project” (the “Project”) with the Shiquan County Government in China on January 16, 2015. The total investment on the Project is expected to be three billion RMB (about 480 million USD).  900LH.com is a subsidiary of Xi'an Techteam Investment Holding (Group) Co., Ltd, ("Techteam Investment"). Techteam Investment is a holding company owned and controlled by Mr. Tao Li, Chairman and CEO of the Company. 900LH.com focuses on the production and sales of high-end organic agricultural products. It has contracted with more than 200 planting and breeding bases globally and prefers to utilize and promote the Company's fertilizers. The scope of the Project includes the development of Panlong Valley farm of 900LH.com, where the Company showcases its products. Panlong Valley is located at Shiquan County, Shaanxi Province, 150 miles southwest of Xi'an.

 

During the first phase of the foregoing project, 900LH.com focused on building an ecological farm base. The base included leisure farming, sightseeing, and sales of agriculture products. The total investment of the first phase would be one billion RMB (160 million USD approximately) including the cost of relocating local residents. In the second phase, the ecological farm will develop into a modern agriculture farm. The modern farm’s operation will include but not limit to, planting, breeding, agricultural products processing, and tourism. The investment of the second phase would be two billion RMB (320 million USD approximately).

 

The Company and 900LH.com have entered into an agreement that the Company’s fertilizers will be exclusively supplied to all plants and agricultural products in the Project and 900LH.com will promote the Company’s fertilizers to all its affiliated farms. In the Project, 900LH.com, the Company, and the government in Shaanxi Province collaborate closely.

 

 

A New Business Model

 

The Company has made progress on its proprietary online sales platform of agriculture basic materials. The link to the online sales platform is www.900nong.com (“900nong”). The business model of 900nong is to provide a platform for the distributors of the Company to set up online shops and to promote the Company's products as well as other kinds of products, such as pesticides and seeds they distribute for various manufacturers. 900nong began operating in March 2015.

 

Results of Operations

 

Three months ended December 31, 2015 Compared to the Three months ended December 31, 2014.

 

		For the Three Months Ended December 31,
		2015				2014				change $				change %
Sales
Jinong		$	31,302,561			$	31,192,693			$	109,868				0.4	%
Gufeng			23,579,674				21,778,807				1,800,867				8.3	%
Yuxing			2,083,765				1,079,674				1,004,091				93.0	%
Net sales			56,966,000				54,051,174				2,914,826				5.4	%
Cost of goods sold											-
Jinong			13,434,686				12,314,040				1,120,646				9.1	%
Gufeng			19,712,848				18,034,979				1,677,869				9.3	%
Yuxing			1,182,898				792,161				390,737				49.3	%
Cost of goods sold			34,330,432				31,141,180				3,189,252				10.2	%
Gross profit			22,635,568				22,909,994				(274,426	)			-1.2	%
Operating expenses											-
Selling expenses			5,285,103				1,981,065				3,304,038				166.8	%
Selling expenses - amortization of deferred assets			8,664,752				10,651,432				(1,986,680	)			-18.7	%
General and administrative expenses			2,905,982				3,193,979				(287,997	)			-9.0	%
Total operating expenses			16,855,837				15,826,476				1,029,361				6.5	%
Income from operations			5,779,731				7,083,518				(1,303,787	)			-18.4	%
Other income (expense)											-
Other income (expense)			729				4,749				(4,020	)			-84.6	%
Interest income			74,270				38,969				35,301				90.6	%
Interest expense			(302,644	)			(359,915	)			57,271				-15.9	%
Total other income (expense)			(227,645	)			(316,197	)			88,552				-28.0	%
Income before income taxes			5,552,086				6,767,321				(1,215,235	)			-18.0	%
Provision for income taxes			1,284,551				1,551,884				(267,333	)			-17.2	%
Net income			4,267,535				5,215,437				(947,902	)			-18.2	%
Other comprehensive income											-
Foreign currency translation gain			(7,616,129	)			619,865				(8,235,994	)			-1328.7	%
Comprehensive income		$	(3,348,594	)		$	5,835,302			$	(9,183,896	)			-157.4	%
											-
Basic weighted average shares outstanding			36,933,002				33,281,464				3,651,538				11.0	%
Basic net earnings per share		$	0.12			$	0.16			$	(0.04	)			-26.3	%
Diluted weighted average shares outstanding			36,933,002				33,281,464				3,651,538				11.0	%
Diluted net earnings per share		$	0.12			$	0.16			$	(0.04	)			-26.3	%

 

 

Net Sales

 

Total net sales for the three months ended December 31, 2015 were $56,966,000, an increase of $2,914,826, or 5.4%, from $54,051,174 for the three months ended December 31, 2014. This increase was due to an increase in net sales from all three business segments.

 

For the three months ended December 31, 2015, Jinong’s net sales increased $109,868, or 0.4%, to $31,302,561 from $31,192,693 for the three months ended December 31, 2014. This slight increase was mainly attributable to Jinong’s higher priced liquid fertilizer sold despite the decrease in Jinong’s sales volume during the three months ended December 31, 2015.

 

For the three months ended December 31, 2015, Gufeng’s net sales were $23,579,674, an increase of $1,800,867 or 8.3% from $21,778,807 for the three months ended December 31, 2014. The increase was mainly attributable to Gufeng’s expanded marketing promotion strategy.

 

For the three months ended December 31, 2015, Yuxing’s net sales were $2,083,765, an increase of $1,004,091 or 93.0%, from $1,079,674 during the three months ended December 31, 2014. The increase was mainly attributable to the increase in market demand and the higher prices on Yuxing’s top-grade flowers.

 

Cost of Goods Sold

 

Total cost of goods sold for the three months ended December 31, 2015 was $34,330,432, an increase of $3,189,252, or 10.2%, from $31,141,180 for the three months ended December 31, 2014. This increase was mainly due to the 5.4% increase in net sales and an increased in cost of raw materials.

 

Cost of goods sold by Jinong for the three months ended December 31, 2015 was $13,434,686, an increase of $1,120,646, or 9.1%, from $12,314,040 for the three months ended December 31, 2014. The increase in cost of goods was primarily attributable to the higher raw materials cost.

 

Cost of goods sold by Gufeng for the three months ended December 31, 2015 was $19,712,848, an increase of $1,677,869, or 9.3%, from $18,034,979 for the three months ended December 31, 2014. This increase was primarily attributable to an increase in the cost of raw materials and an increase in the sales of fertilizer products.

 

 

For the three months ended December 31, 2015, cost of goods sold by Yuxing was $1,182,898, an increase of $390,737, or 49.3%, from $792,161 for the three months ended December 31, 2014. This increase was mainly due to the increase in Yuxing’s net sales.

 

Gross Profit

 

Total gross profit for the three months ended December 31, 2015 decreased by $274,426 to $22,635,568, as compared to $22,909,994 for the three months ended December 31, 2014. Gross profit margin was 39.7% and 42.4% for the three months ended December 31, 2015 and 2014, respectively.

 

Gross profit generated by Jinong decreased by $1,010,778, or 5.4%, to $17,867,875 for the three months ended December 31, 2015 from $18,878,653 for the three months ended December 31, 2014. Gross profit margin from Jinong’s sales was approximately 57.1% and 60.5% for the three months ended December 31, 2015 and 2014, respectively. The decrease in gross profit margin was mainly due to the higher raw material cost and packaging cost.

 

For the three months ended December 31, 2015, gross profit generated by Gufeng was $3,866,826, an increase of $122,998, or 3.3%, from $3,743,828 for the three months ended December 31, 2014. Gross profit margin from Gufeng’s sales was approximately 16.4% and 17.2% for the three months ended December 31, 2015 and 2014, respectively. The decrease in gross profit percentage was mainly due to the increased weight for lower-margin products sales in Gufeng’s total sales answering to market demand.

 

For the three months ended December 31, 2015, gross profit generated by Yuxing was $900,867, an increase of $613,354, or 213.3% from $287,513 for the three months ended December 31, 2014.  The gross profit margin was approximately 43.2% and 26.6% for the three months ended December 31, 2015 and 2014, respectively. The increase in gross profit margin was mainly due to the higher priced top grade flowers that Yuxing sold during the three months ended December 31, 2015.

 

Selling Expenses

 

Our selling expenses consisted primarily of salaries of sales personnel, advertising and promotion expenses, freight-out costs and related compensation. Selling expenses were $5,285,103, or 9.3%, of net sales for the three months ended December 31, 2015, as compared to $1,981,065 or 3.7% of net sales for the three months ended December 31, 2014, an increase of $3,304,038, or 166.8%. The selling expenses of Yuxing were $135,466 or 6.5% of Yuxing’s net sales for the three months ended December 31, 2015, as compared to $13,935, or 1.3% of Yuxing’s net sales for the three months ended December 31, 2014. The selling expenses of Gufeng were $110,972 or 0.5% of Gufeng’s net sales for the three months ended December 31, 2015, as compared to $228,488, or 1.0% of Gufeng’s net sales for the three months ended December 31, 2014. The selling expenses of Jinong for the three months ended December 31, 2015 were $5,038,665 or 16.1% of Jinong’s net sales, as compared to selling expenses of $1,738,642, or 5.6% of Jinong’s net sales for the three months ended December 31, 2014. The increase in Jinong’s selling expenses was due to Jinong’s expanded marketing efforts and the increase in shipping costs.

 

Selling Expenses – amortization of deferred assets

 

Our selling expenses - amortization of our deferred assets were $8,664,752, or 15.2%, of net sales for the three months ended December 31, 2015, as compared to $10,651,432 or 18.7% of net sales for the three months ended December 31, 2014, a decrease of $1,986,680, or 18.7%. This decrease was due to the fact that some of the deferred assets were fully amortized and therefore no amortization was recorded on the fully amortized assets during the three months ended December 31, 2015.

 

 

General and Administrative Expenses

 

General and administrative expenses consisted primarily of related salaries, rental expenses, business development, depreciation and travel expenses incurred by our general and administrative departments and legal and professional expenses including expenses incurred and accrued for certain litigations. General and administrative expenses were $2,905,982, or 5.1% of net sales for the three months ended December 31, 2015, as compared to $3,193,979, or 5.9%, of net sales for the three months ended December 31, 2014, a decrease of $257,758, or 8.1%. The decrease in general and administrative expenses was mainly due to the related expenses in the stock compensation awarded to the employees which amounted to $1,242,508 for the three months ended December 31, 2015 as compared to $1,786,225 for the three months ended December 31, 2014.

 

Total Other Expenses

 

Total other expenses consisted of income from subsidies received from the PRC government, interest income, interest expenses and bank charges. The total other expense for the three months ended December 31, 2015 was $227,645, as compared to $316,197 for the three months ended December 31, 2014, a decrease of $88,552, or 28.0%. The decrease in total other expense was partly resulted from an increase in interest income by $35,301 or 90.6%, to $74,270 during the three months ended December 31, 2015 as compared to $38,969 during the three months ended December 31, 2014, due to the increased deposit in the banks. There was also a $729 other income during the three months ended December 31, 2015, as compared to other income $4,749 during the three months ended December 31, 2014. Interest expense decreased by $57,271 or 15.9%, to $302,644 during the three months ended December 31, 2015 as compared to $359,915 during the three months ended December 31, 2014, due to a lesser amount of short-term loans.

 

Income Taxes

 

Jinong is subject to a preferred tax rate of 15% as a result of its business being classified as a High-Tech project under the PRC Enterprise Income Tax Law (“EIT”) that became effective on January 1, 2008. Jinong incurred income tax expenses of $584,959 for the three months ended December 31, 2015, as compared to $945,468 for the three months ended December 31, 2014, a decrease of $360,509, or 38.1%. The decrease was mainly due to Jinong’s lower net income resulting from the increased selling expenses offset by its higher sales.

 

Gufeng, subject to a tax rate of 25%, incurred income tax expenses of $699,591 for the three months ended December 31, 2015, as compared to $606,416 for the three months ended December 31, 2014, an increase of $93,175, or 15.4%, which was primarily due to Gufeng’s increased net income.

 

Yuxing has no income tax for the three months ended December 31, 2015 as a result of being exempted from paying income tax due to the fact its products fall into the tax exemption list set out in the EIT.

 

Net Income

 

Net income for the three months ended December 31, 2015 was $4,267,535, a decrease of $947,902, or 18.2%, compared to $5,215,437 for the three months ended December 31, 2014. The decrease was attributable to the higher coast of good sold and increase in selling expenses offset by an increase in net sales and selling expenses. Net income as a percentage of total net sales was approximately 7.5% and 9.6% for the three months ended December 31, 2015 and 2014, respectively.

 

 

Six months ended December 31, 2015 Compared to the Six months ended December 31, 2014.

 

		For the Six Months Ended December 31,
		2015				2014				change $				change %
Sales
Jinong		$	66,010,365			$	65,656,858			$	353,507				0.5	%
Gufeng			41,814,506				37,764,881				4,049,625				10.7	%
Yuxing			3,325,400				1,931,225				1,394,175				72.2	%
Net sales			111,150,271				105,352,964				5,797,307				5.5	%
Cost of goods sold											-
Jinong			27,975,071				25,694,663				2,280,408				8.9	%
Gufeng			34,458,522				30,634,164				3,824,358				12.5	%
Yuxing			1,892,948				1,440,709				452,239				31.4	%
Cost of goods sold			64,326,541				57,769,536				6,557,005				11.4	%
Gross profit			46,823,730				47,583,428				(759,698	)			-1.6	%
Operating expenses											-
Selling expenses			7,628,858				2,716,702				4,912,156				180.8	%
Selling expenses - amortization of deferred assets			18,377,467				20,982,516				(2,605,049	)			-12.4	%
General and administrative expenses			5,659,624				6,313,611				(653,987	)			-10.4	%
Total operating expenses			31,665,949				30,012,829				1,653,120				5.5	%
Income from operations			15,157,781				17,570,599				(2,412,818	)			-13.7	%
Other income (expense)											-
Other income (expense)			(3,834	)			46,704				(50,538	)			-108.2	%
Interest income			152,932				68,354				84,578				123.7	%
Interest expense			(731,679	)			(815,659	)			83,980				-10.3	%
Total other income (expense)			(582,581	)			(700,601	)			118,020				-16.8	%
Income before income taxes			14,575,200				16,869,998				(2,294,798	)			-13.6	%
Provision for income taxes			3,061,993				3,555,479				(493,486	)			-13.9	%
Net income			11,513,207				13,314,519				(1,801,312	)			-13.5	%
Other comprehensive income											-
Foreign currency translation gain			(22,728,368	)			626,154				(23,354,522	)			-3729.8	%
Comprehensive income		$	(11,215,161	)		$	13,940,673			$	(25,155,834	)			-180.4	%
											-
Basic weighted average shares outstanding			36,436,026				32,829,357				3,606,669				11.0	%
Basic net earnings per share		$	0.32			$	0.41			$	(0.09	)			-22.1	%
Diluted weighted average shares outstanding			36,436,026				32,829,357				3,606,669				11.0	%
Diluted net earnings per share		$	0.32			$	0.41			$	(0.09	)			-22.1	%

 

 

Net Sales

 

Total net sales for the six months ended December 31, 2015 were $111,150,271, an increase of $5,797,307, or 5.5%, from $105,352,964 for the six months ended December 31, 2014. This increase was due to an increase in net sales from all three business segments.

 

For the six months ended December 31, 2015, Jinong’s net sales increased of $353,507, or 0.5%, to $66,010,365 from $65,656,858 for the six months ended December 31, 2014. This slightly increase was mainly attributable to Jinong’s higher priced liquid fertilizer sold despite the decrease in Jinong’s sales volume during the six months ended December 31, 2015.

 

For the six months ended December 31, 2015, Gufeng’s net sales were $41,814,506, an increase of $4,049,625 or 10.7% from $37,764,881 for the six months ended December 31, 2014. The increase was mainly attributable to Gufeng’s expanded marketing promotion strategy.

 

For the six months ended December 31, 2015, Yuxing’s net sales were $3,325,400, an increase of $1,394,175 or 72.2%, from $1,931,225 during the six months ended December 31, 2014. The increase was mainly attributable to the increase in market demand and higher prices on Yuxing’s top-grade flowers.

 

Cost of Goods Sold

 

Total cost of goods sold for the six months ended December 31, 2015 was $64,326,541, an increase of $6,557,005, or 11.4%, from $57,769,536 for the six months ended December 31, 2014. This increase was mainly due to the 5.6% increase in net sales and an increase in the cost of raw materials.

 

Cost of goods sold by Jinong for the six months ended December 31, 2015 was $27,975,071, an increase of $2,280,408, or 8.9%, from $25,694,663 for the six months ended December 31, 2014. The increase was primarily attributable to its higher raw material cost.

 

Cost of goods sold by Gufeng for the six months ended December 31, 2015 was $34,458,522, an increase of $3,824,358, or 12.5%, from $30,634,164 for the six months ended December 31, 2014. This increase was primarily attributable to an increase in the cost of raw materials and an increase in the sales of fertilizer products.

 

For the six months ended December 31, 2015, cost of goods sold by Yuxing was $1,892,948, an increase of $452,239, or 31.4%, from $1,440,709 for the six months ended December 31, 2014. This increase was mainly due to the increase in Yuxing’s net sales.

 

Gross Profit

 

Total gross profit for the six months ended December 31, 2015 decreased by $759,698 to $46,823,730, as compared to $47,583,428 for the six months ended December 31, 2014. Gross profit margin was 42.1% and 45.2% for the six months ended December 31, 2015 and 2014, respectively.

 

Gross profit generated by Jinong decreased by $1,926,901, or 4.8%, to $38,035,294 for the six months ended December 31, 2015 from $39,962,195 for the six months ended December 31, 2014. Gross profit margin from Jinong’s sales was approximately 57.6% and 60.9% for the six months ended December 31, 2015 and 2014, respectively. The decrease in gross profit margin was mainly due to higher raw material cost and higher packaging cost.

 

 

For the six months ended December 31, 2015, gross profit generated by Gufeng was $7,355,984, an increase of $225,267, or 3.2%, from $7,130,717 for the six months ended December 31, 2014. Gross profit margin from Gufeng’s sales was approximately 17.6% and 18.9% for the six months ended December 31, 2015 and 2014, respectively. The decrease in gross profit percentage was mainly due to the increased weight for lower-margin products sales in Gufeng’s total sales answering to market demand.

 

For the six months ended December 31, 2015, gross profit generated by Yuxing was $1,432,452, an increase of $941,936, or 31.7% from $490,516 for the six months ended December 31, 2014.  The gross profit margin was approximately 43.1% and 25.4% for the six months ended December 31, 2015 and 2014, respectively.

 

The increase in gross profit margin was mainly due to the higher priced top grade flowers that Yuxing sold during the six months ended December 31, 2015.

 

Selling Expenses

 

Our selling expenses consisted primarily of salaries of sales personnel, advertising and promotion expenses, freight-out costs and related compensation. Selling expenses were $7,628,858, or 6.9%, of net sales for the six months ended December 31, 2015, as compared to $2,716,702 or 2.6% of net sales for the six months ended December 31, 2014, an increase of $4,912,156, or 180.8%. The selling expenses of Yuxing were $143,171 or 4.3% of Yuxing’s net sales for the six months ended December 31, 2015, as compared to $21,073, or 1.1% of Yuxing’s net sales for the six months ended December 31, 2014.The selling expenses of Gufeng were $263,657 or 0.6% of Gufeng’s net sales for the six months ended December 31, 2015, as compared to $414,466, or 1.1% of Gufeng’s net sales for the six months ended December 31, 2014. The selling expenses of Jinong for the six months ended December 31, 2015 were $7,222,030 or 10.9% of Jinong’s net sales, as compared to selling expenses of $2,281,163, or 3.5% of Jinong’s net sales for the six months ended December 31, 2014. The increase in Jinong’s selling expenses was due to Jinong’s expanded marketing efforts and the increase in shipping costs.

 

Selling Expenses – amortization of deferred assets

 

Our selling expenses - amortization of our deferred assets were $18,377,467, or 16.5%, of net sales for the six months ended December 31, 2015, as compared to $20,982,516 or 19.9% of net sales for the six months ended December 31, 2014, a decrease of $2,605,049, or 12.4%. This decrease was due to the fact that some of the deferred assets were fully amortized and therefore no amortization was recorded on the fully amortized assets during the six months ended December 31, 2015.

 

General and Administrative Expenses

 

General and administrative expenses consisted primarily of related salaries, rental expenses, business development, depreciation and travel expenses incurred by our general and administrative departments and legal and professional expenses including expenses incurred and accrued for certain litigations. General and administrative expenses were $5,659,624, or 5.1% of net sales for the six months ended December 31, 2015, as compared to $6,313,611, or 6.0%, of net sales for the six months ended December 31, 2014, a decrease of $653,987, or 10.4%. The decrease in general and administrative expenses was mainly due to the related expenses in the stock compensation awarded to the employees which amounted to $2,319,002 for the six months ended December 31, 2015 as compared to $3,206,945 for the six months ended December 31, 2014.

 

Total Other Expenses

 

Total other expenses consisted of income from subsidies received from the PRC government, interest income, interest expenses and bank charges. The total other expense for the six months ended December 31, 2015 was $582,581, as compared to $700,601 for the six months ended December 31, 2014, a decrease of $118,020, or 16.8%. The decrease in total other expense was partly resulted from an increase in interest income by $84,578 or 123.7%, to $152,932 during the six months ended December 31, 2015 as compared to $68,354 during the six months ended December 31, 2014, due to the increased deposit in the banks. There was also a $3,834 other expense during the six months ended December 31, 2015, as compared to other income $46,704 during the six months ended December 31, 2014. Interest expense decreased by $83,980 or 10.3%, to $731,679 during the six months ended December 31, 2015 as compared to $815,659 during the six months ended December 31, 2014, due to a lesser amount of short-term loans.

 

 

Income Taxes

 

Jinong is subject to a preferred tax rate of 15% as a result of its business being classified as a High-Tech project under the PRC Enterprise Income Tax Law (“EIT”) that became effective on January 1, 2008. Jinong incurred income tax expenses of $1,805,667 for the six months ended December 31, 2015, as compared to $2,462,055 for the six months ended December 31, 2014, a decrease of $656,388, or 26.7%. The decrease was mainly due to Jinong’s lower net income resulting from the increased selling expenses offset by its higher sales.

 

Gufeng, subject to a tax rate of 25%, incurred income tax expenses of $1,256,325 for the six months ended December 31, 2015, as compared to $1,093,424 for the six months ended December 31, 2014, an increase of $162,901, or 14.9%, which was primarily due to Gufeng’s increased net income.

 

Yuxing has no income tax for the six months ended December 31, 2015 as a result of being exempted from paying income tax due to its products fall into the tax exemption list set out in the EIT.

 

Net Income

 

Net income for the six months ended December 31, 2015 was $11,513,207, a decrease of $1,801,312, or 13.5%, compared to $13,314,519 for the six months ended December 31, 2014. The decrease was attributable to the higher cost of goods sold and increase in selling expenses offset by an increase in our net sales. Net income as a percentage of total net sales was approximately 10.4% and 12.6 % for the six months ended December 31, 2015 and 2014, respectively.

 

Discussion of Segment Profitability Measures

 

As of December 31, 2015, we were engaged in the following businesses: the production and sale of fertilizers through Jinong and Gufeng and the production and sale of high-quality agricultural products by Yuxing. For financial reporting purpose, our operations were organized into three main business segments based on locations and products: Jinong (fertilizer production), Gufeng (fertilizer production) and Yuxing (agricultural products production). Each of the segments has its own annual budget with regard to development, production and sales. 

 

Each of the three operating segments referenced above has separate and distinct general ledgers. The chief operating decision maker (“CODM”) makes decisions with respect to resources allocation and performance assessment upon receiving financial information, including revenue, gross margin, operating income and net income produced from the various general ledger systems; however, net income by segment is the principal benchmark to measure profit or loss adopted by the CODM.

 

For Jinong, the net income decreased by $3,647,122 or 26.7% to $10,000,366 for the six months ended December 31, 2015 from $13,647,488 for the six months ended December 31, 2014. The decrease was principally due to higher selling expenses.

 

For Gufeng, the net income increased by $494,668 or 15.6% to $3,670,265 for the six months ended December 31, 2015 from $3,175,597 for the six months ended December 31, 2014. The increase was principally due to the increase in net sales.

 

For Yuxing, the net income increased by $401,435 or 77.5% to $919,385 for the six months ended December 31, 2015 from $517,950 for the six months ended December 31, 2014. The increase was mainly due to the higher net sales and Yuxing’s more cost-efficient measures taken for the six months ended December 31, 2015, compare to the same period a year before.

 

 

Liquidity and Capital Resources

 

Our principal sources of liquidity include cash from operations, borrowings from local commercial banks and net proceeds of offerings of our securities consummated in July 2009 and November/December 2009 (collectively the “Public Offerings”).

 

As of December 31, 2015, cash and cash equivalents were $99,567,375, an increase of $40,202,929, or 67.7%, from $59,364,446 as of June 30, 2015.

 

We intend to use our working capital to acquire new businesses, upgrade production lines and complete Yuxing’s new greenhouse facilities for agriculture products located on 88 acres of land in Hu County, 18 kilometers southeast of Xi’an city. Our liquidity needs have generally consisted of working capital necessary to finance receivables, raw material and finished goods inventory. We believe that we have sufficient cash on hand and positive projected cash flow from operations to support our business growth for the next twelve months to the extent we do not have further significant acquisitions or expansions. However, if events or circumstances occur and we do not meet our operating plan as expected, we may be required to seek additional capital and/or to reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives. Notwithstanding the foregoing, we may seek additional financing as necessary for expansion purposes and when we believe market conditions are most advantageous, which may include additional debt and/or equity financings. There can be no assurance that any additional financing will be available on acceptable terms, if at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.

 

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

 

		Six Months Ended December 31,
		2015				2014
Net cash provided by operating activities		$	15,686,820			$	38,908,479
Net cash used in investing activities			(15,665	)			(7,638,284	)
Net cash provided by (used in) financing activities			(3,276,000	)			1,139,646
Effect of exchange rate change on cash and cash equivalents			(5,810,344	)			64,284
Net increase (decrease) in cash and cash equivalents			6,584,811				32,474,125
Cash and cash equivalents, beginning balance			92,982,564				26,890,321
Cash and cash equivalents, ending balance		$	99,567,375			$	59,364,446

 

Operating Activities

 

Net cash provided by operating activities was $15,686,820 for the six months ended December 31, 2015, an increase of $23,221,659 compared to $38,908,479 for the six months ended December 31, 2014. The decrease was mainly attributable to the decrease in net income, account receivable and advances to suppliers, and a decrease in taxes payable, offset by a decrease in inventories and customer deposits during the six months ended December 31, 2015 as compared to the same period in 2014.

 

Investing Activities

 

Net cash used in investing activities for the six months ended December 31, 2015 was $15,665, a decrease of $7,622,619, or 99.8% from $7,638,284 for the six months ended December 31, 2014. During the six months ended December 31, 2014, Jinong assisted its distributors in marketing to expand its competitive product advantage and market share by advancing them $9,222,371 as compared to $0 during the six months ended December 31, 2015. In addition, during the six months ended December 31, 2014, we received $1,967,460 from the payment on other receivables compared to $0 during the six months ended December 31, 2015.

 

 

Financing Activities

 

Net cash used in financing activities for the six months ended December 31, 2015 was $3,276,000, a decrease of $4,415,646 or 387.5% from cash provided by financing activities of $1,139,646 for the six months ended December 31, 2014. During the six months ended December 31, 2015, we received $4,424,000 from the proceeds from loans and repaid loans of $7,900,000 compared to $8,130,000 of proceeds and $8,536,500 repayments during the six months ended December 31, 2014.  In addition, during the six months ended December 31, 2014, we received proceeds of $1,245,746 from the sale of our common stock while we did not have any proceeds from such an item during the six months ended December 31, 2015.

 

As of December 31, 2015 and June 30, 2015, our loans payable were as follows:

 

		December 31, 2015				June 30, 2015
Short term loans payable:		$	18,818,800			$	23,640,310
Total		$	18,818,800			$	23,640,310

 

Accounts Receivable

 

We had accounts receivable of $65,730,552 as of December 31, 2015, as compared to $68,528,598 as of June 30, 2015, a decrease of $2,798,046 or 4.1%, which is mainly attributable to Gufeng. As of December 31, 2015, Gufeng had account receivable of $149,642, a decrease of $745,938, or 83.3%, comparing to $895,580 as of June 30, 2015. The decrease is mainly due to a number of large clients paid up their account payable to Gufeng during the last six months.

 

Allowance for doubtful accounts in account receivable for the six months ended December 31, 2015 was $312,746, a decrease of $4,823 or 1.6% from $307,923 as of June 30, 2015. And the allowance for doubtful accounts as a percentage of accounts receivable was 0.47% as of December 31, 2015 and 0.45% as of June 30, 2015. The decrease is not significant.

 

Deferred assets

 

We had deferred assets of $30,096,510 as of December 31, 2015, as compared to $51,527,209 as of June 30, 2015. We have been assisting our distributors in certain marketing efforts and developing standard stores to enhance our competitive advantages and market shares since December 31, 2014. Based on the distributor agreements, the amount owed by the distributors in certain marketing efforts and store development will be expensed over three years as long as the distributors are actively selling our products. If a distributor defaults, breaches, or terminates the agreement with us earlier than the realization of contractual terms, the unamortized portion of the amount owed by the distributor has to be refunded to us immediately. The Company’s Chairman and CEO, Mr. Li, provided credit backup to guarantee toward potential losses to the Company of any amounts due from distributors in this matter.

 

Inventories

 

We had an inventory of $118,320,621 as of December 31, 2015, as compared to $101,302,947 as of June 30, 2015, an increase of $17,017,674, or 16.8%. The increase is in the inventory level was seasonal, which is mainly due to Gufeng’s $129,195,214 inventory as of December 31, 2015. Such increase was largely attributable to the preparatory replenishment of raw material at a lower price for the expected large production of fertilizer in the incoming winter to meet the anticipated large orders, as well as the accumulation of finished fertilizer products in expecting a huge demand in the near future. The increase was primarily attributable to Gufeng’s inventory. As of December 31, 2015, Gufeng’s inventory was $98,907,369 as a result of the acquisition of raw materials at lower prices for the production and accumulation of finished fertilizer products in expecting a huge demand in the near future. These products are expected to be sold and shipped during the coming year.

 

 

Advances to Suppliers

 

We had advances to suppliers of $47,334,873 as of December 31, 2015 as compared to $40,910,837 as of June 30, 2015, representing an increase of $6,424,036 or 15.7%.due to the large acquisition of raw material during the last six months. To ensure our ability to deliver compound fertilizer to the distributor timely prior to the planting season, we need to have sufficient raw material in stock to stabilize the production. To build up the inventory, we typically make advance payment to the suppliers to secure the supply of raw material of basic fertilizer. Our inventory level may fluctuate from time to time, depending how fast the raw material gets consumed and replenished during the production process, and how fast the finished goods get sold. The replenishment of raw material relies on the management’s estimate of numerous factors, including but not limited to, the raw material’s future price, and spot price along with their volatility, as well as the seasonal demand and future price of finished fertilizer products. Such estimate may not be accurate, and the purchase decision of raw materials based on the estimate can cause excessive inventories in slow sales and insufficient inventories in peak times.

 

Accounts Payable

 

We had accounts payable of $2,371,069 as of December 31, 2015 as compared to $2,372,130 as of June 30, 2015. The decrease was insignificant.

 

Unearned Revenue (Customer Deposits)

 

We had unearned revenue of $34,228,083 as of December 31, 2015 as compared to $19,129,853 as of June 30, 2015, representing an increase of $15,098,230, or 78.9%.  The increase was mainly attributable to Gufeng’s $33,623,531 in customer deposits as of December 31, 2015, compared to $18,811,820 as of June 30, 2015. We expect to deliver products to our customers during the next three months at which time we expect to recognize the revenue.

 

We do not have any off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

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

 

Use of estimates

 

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

 

Revenue recognition

 

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

 

 

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

 

Cash and cash equivalents

 

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

 

Accounts receivable

 

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

 

Deferred assets

 

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

 

Segment reporting

 

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

 

As of December 31, 2015, we were organized into three main business segments: Jinong (fertilizer production), Gufeng (fertilizer production) and Yuxing (agricultural products production).

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Disclosures About Market Risk

 

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

 

Currency Fluctuations and Foreign Currency Risk

 

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

 

Our reporting currency is U.S. dollar. Except for U.S. holding companies, all of our consolidated revenues, consolidated costs and expenses, and our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. dollars and RMB. If RMB depreciates against U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. Assets and liabilities are translated at the exchange rates as of the balance sheet dates, revenues and expenses are translated at the average exchange rates, and shareholders’ equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of shareholders’ equity. As of December 31, 2015, our accumulated other comprehensive income was $3.0 million. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk. The value of RMB against U.S. dollar and other currencies is affected by, among other things, changes in the PRC’s political and economic conditions. In 2015, China’s currency dropped by a cumulative 5% against the U.S. dollar. The effect on trade can be substantial. Moreover, it is possible that, in the future, PRC authorities may lift restrictions on fluctuations in RMB exchange rate and lessen intervention in the foreign exchange market.

 

Interest Rate Risk

 

We deposit surplus funds with Chinese banks earning daily interest. We do not invest in any instruments for trading purposes. All of our outstanding debt instruments carry fixed rates of interests. The amount of short-term debt outstanding as of December 31, 2015 and June 30, 2015 was $18.8 million and $23.6 million, respectively. We are exposed to interest rate risk primarily with respect to our short-term bank loans. Although the interest rates, which are based on the banks’ prime rates with respect to our short-term loans, are fixed for the terms of the loans, the terms are typically three to twelve months for short-term bank loans and interest rates are subject to change upon renewal. There were no material changes in interest rates for short-term bank loans renewed during the three months ended December 31, 2015. The original loan term on average is one year, and the remaining average life of the short term-loans is approximately five months.

 

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

 

Credit Risk

 

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

 

Inflation Risk

 

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

 

 

Item 4. Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures

 

At the conclusion of the period ended December 31, 2015 we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, our CEO and CFO concluded that as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective and adequately designed to ensure that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that such information was accumulated and communicated to our management, including our CEO and CFO, in a manner that allowed for timely decisions regarding required disclosure.

 

(b) Changes in internal controls

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 6. Exhibits

 

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

 

 

SIGNATURES

 

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

 

	CHINA GREEN AGRICULTURE, INC.
Date: February 5, 2016	By:	/s/ Tao Li
	Name:	Tao Li
	Title:	President and Chief Executive Officer
		(principal executive officer)
Date: February 5, 2016	By:	/s/ Ken Ren
	Name:	Ken Ren
	Title:	Chief Financial Officer
		(principal financial officer and principal accounting officer)

 

 

EXHIBIT INDEX

 

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