UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q/A

 

(Amendment No. 2)

 

(Mark One)

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

 

For the quarterly period ended December 31, 2017

 

☐ 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 ☒ 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 ☒ No ☐

 

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

 

	Large accelerated filer	☐	Accelerated filer	☐
	Non-accelerated filer	☐  (Do not check if a smaller reporting company)	Smaller reporting company	☒
			Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

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: 38,551,265 shares of common stock, $0.001 par value, as of February 9, 2018.

 

 

 

Explanatory Note

 

This Amendment No. 2 to the Quarterly Report on Form 10-Q/A is filed as an amendment to the Quarterly Report on Form 10-Q for the quarter ended December 31, 2017 filed by China Green Agriculture, Inc. (the "Company") on February 13, 2018. The purpose of this Amendment No. 2 is to revise certain disclosures pursuant to the comment letter received from the SEC in connection with our filing of the Form 10-Q/A on March 16, 2018.

 

In this Amendment, the following changes were made:

 

● The disclosure of recent accounting pronouncements in Note 2 of Notes to Consolidated Condensed Financial Statements was included in the whole financial statements under Item 1 that ASU 2016-10, 2016-11, 2016-12 will be effective for us beginning July 1, 2018.

 

● We had reevaluated the effectiveness of the design and operation of our disclosure controls and procedures. We concluded that the Disclosure Controls and Procedures were not effective as of December 31, 2017 and Internal Controls over Financial Reporting were not effective as of June 30, 2017. We revised the conclusion in Item 4.

 

This Form 10-Q/A has not been updated or modified in any other way and speaks only as of the date of the original filing, February 13, 2018, unless otherwise noticed. Accordingly, this Form 10-Q/A should be read in conjunction with the original filing and all filings made with the SEC subsequent to the date of the original filing.

 

 

TABLE OF CONTENTS

 

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	1
Item 4	Controls and Procedures	23
Signatures		24

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

		December 31, 2017				June 30, 2017
ASSETS
Current Assets
Cash and cash equivalents		$	145,417,158			$	123,050,548
Accounts receivable, net			120,551,994				140,252,335
Inventories			105,613,585				78,013,891
Prepaid expenses and other current assets			3,709,791				4,201,782
Amount due from related parties			1,565,196				1,412,844
Advances to suppliers, net			20,821,812				24,023,062
Total Current Assets			397,679,536				370,954,462
Plant, Property and Equipment, Net			33,227,748				34,191,332
Deferred Asset, Net			0				864,070
Other Assets			296,256				279,031
Other Non-current Assets			17,201,354				17,829,621
Intangible Assets, Net			21,527,536				22,911,876
Goodwill			8,290,857				8,651,238
Total Assets		$	478,223,287			$	455,681,630
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable		$	22,783,659			$	19,643,897
Customer deposits			6,935,326				7,046,570
Accrued expenses and other payables			10,140,609				9,135,312
Amount due to related parties			3,288,189				3,071,102
Taxes payable			2,180,995				2,690,407
Short term loans			6,285,300				7,678,111
Interest payable			324,230				256,904
Derivative liability			70,184				195,812
Total Current Liabilities			52,008,492				49,718,116
Long-term Liabilities
Long-term loan			0				3,549
Convertible notes payable			7,268,851				8,431,912
Total Liabilities		$	59,277,343			$	58,153,577
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, 38,551,265 shares issued and outstanding as of December 31, 2017 and June 30, 2017, respectively			38,551				38,551
Additional paid-in capital			128,915,651				128,915,651
Statutory reserve			30,104,103				28,962,302
Retained earnings			256,518,126				244,738,993
Accumulated other comprehensive income			3,369,512				(5,127,444	)
Total Stockholders' Equity			418,945,944				397,528,052
Total Liabilities and Stockholders' Equity		$	478,223,287			$	455,681,629

 

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

 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

		Three Months Ended December 31,								Six Months Ended December 31,
		2017				2016				2017				2016
Sales
Jinong		$	26,211,280			$	26,825,674			$	52,985,040			$	58,253,394
Gufeng			24,447,721				21,066,559				42,669,787				36,876,073
Yuxing			1,953,748				2,454,314				3,746,391				3,809,725
VIEs - others			11,350,893				8,398,466				27,330,927				21,690,443
Net sales			63,963,642				58,745,013				126,732,145				120,629,635
Cost of goods sold
Jinong			13,265,827				12,332,360				26,378,583				25,601,590
Gufeng			21,160,024				18,138,659				37,146,453				31,523,736
Yuxing			1,536,238				1,934,046				2,928,791				2,979,654
VIEs - others			9,452,987				7,159,707				22,661,751				17,913,386
Cost of goods sold			45,415,076				39,564,772				89,115,578				78,018,366
Gross profit			18,548,566				19,180,241				37,616,567				42,611,269
Operating expenses
Selling expenses			7,682,008				3,965,382				12,861,012				8,977,450
Selling expenses - amortization of deferred asset			0				3,475,438								9,584,220
General and administrative expenses			937,359				4,633,905				7,909,981				7,865,392
Total operating expenses			8,619,367				12,074,725				20,770,993				26,427,062
Income from operations			9,929,199				7,105,516				16,845,574				16,184,207
Other income (expense)
Other income (expense)			(276,850	)			(114,115	)			(284,081	)			(155,172	)
Discontinued VIE operation - Zhenbai			(330,966	)			0				(330,966	)			0
Interest income			130,248				76,494				218,162				153,116
Interest expense			(94,587	)			(93,246	)			(274,162	)			(231,791	)
Total other income (expense)			(572,155	)			(130,867	)			(671,047	)			(233,847	)
Income before income taxes			9,357,045				6,974,649				16,174,528				15,950,360
Provision for income taxes			1,530,938				1,468,638				3,253,593				3,092,769
Net income			7,826,107				5,506,011				12,920,935				12,857,591
Other comprehensive income (loss)
Foreign currency translation gain (loss)			8,256,738				(1,205,884	)			8,496,956				(16,447,063	)
Comprehensive income (loss)		$	16,082,845			$	4,300,127			$	21,417,891			$	(3,589,472	)
Basic weighted average shares outstanding			38,551,264				37,658,062				38,551,264				37,653,333
Basic net earnings per share		$	0.20			$	0.15			$	0.34			$	0.34
Diluted weighted average shares outstanding			38,551,264				37,658,062				38,551,264				37,653,333
Diluted net earnings per share			0.20				0.15				0.34				0.34

 

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

 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Six Months Ended December 31,
		2017				2016
Cash flows from operating activities
Net income		$	12,920,935			$	12,857,591
Adjustments to reconcile net income to net cash provided by operating activities
Issuance of common stock and stock options for compensation			-				1,282,949
Depreciation and amortization			3,434,389				12,115,909
Gain (Loss) on disposal of property, plant and equipment			15,318				109,304
Amortization of debt discount			377,450				155,335
Change in fair value of derivative liability			(114,233	)			(75,918	)
Changes in operating assets
Accounts receivable			19,546,354				(13,023,491	)
Amount due from related parties			1,436,875				(395,616	)
Other current assets			1,019,062				(467,184	)
Inventories			(25,678,033	)			19,962,979
Advances to suppliers			3,625,303				(3,091,976	)
Other assets			974,189				121,719
Changes in operating liabilities
Accounts payable			2,694,536				564,376
Customer deposits			(226,314	)			(2,875,222	)
Tax payables			(554,210	)			(2,146,115	)
Accrued expenses and other payables			921,456				(7,029,002	)
Interest payable			142,283				113,352
Net cash provided by operating activities			20,535,360				18,178,990
Cash flows from investing activities
Purchase of plant, property, and equipment			(11,758	)			(74,353	)
Change in construction in process			(11,328	)			-
Net cash used in investing activities			(23,086	)			(74,353	)
Cash flows from financing activities
Proceeds from loans			153,300				-
Repayment of loans			(1,678,603	)			-
Advance from related party			195,013				300,000
Net cash provided by financing activities			(1,330,290	)			300,000
Effect of exchange rate change on cash and cash equivalents			3,184,627				(4,726,271	)
Net increase in cash and cash equivalents			22,366,611				13,678,366
Cash and cash equivalents, beginning balance			123,050,548				102,896,486
Cash and cash equivalents, ending balance		$	145,417,158			$	116,574,852
Supplement disclosure of cash flow information
Interest expense paid		$	206,368			$	231,791
Income taxes paid		$	3,807,803			$	7,047,713

 

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

 

 

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

 

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

 

Unless the context indicates otherwise, as used in this Report, 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 in the People’s Republic of China (the “PRC”) controlled by Jinong through a series of 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”).

 

On June 30, 2016 the Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition agreements and a series of contractual agreements with the shareholders of the following six companies that are organized under the laws of the PRC and would be deemed VIEs: Shaanxi Lishijie Agrochemical Co., Ltd. (“Lishijie”), Songyuan Jinyangguang Sannong Service Co., Ltd. (“Jinyangguang”), Shenqiu County Zhenbai Agriculture Co., Ltd. (“Zhenbai”), Weinan City Linwei District Wangtian Agricultural Materials Co., Ltd. (“Wangtian”), Aksu Xindeguo Agricultural Materials Co., Ltd. (“Xindeguo”), and Xinjiang Xinyulei Eco-agriculture Science and Technology co., Ltd. (“Xinyulei”). On January 1, 2017, the Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition agreements and a series of contractual agreements with the shareholders of the following two companies that are organized under the laws of the PRC and would be deemed VIEs, Sunwu County Xiangrong Agricultural Materials Co., Ltd. (“Xiangrong”), and Anhui Fengnong Seed Co., Ltd. (“Fengnong”).

 

On November 30, 2017, the Company, through its wholly-owned subsidiary Jinong, discontinued the strategic acquisition agreements and the series of contractual agreements with the shareholders of Zhenbai.

 

Yuxing, Lishijie, Jinyangguang, Wangtian, Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred to as the “the VIE Companies”; Lishijie, Jinyangguang, Zhenbai, Wangtian, Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred to as “the sales VIEs” or “the sales VIE companies”.

 

 

The Company’s corporate structure as of December 31, 2017 is set forth in the diagram below:

 

 

 

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

 

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

 

VIE assessment

 

A VIE is an entity (1) that has total equity at risk that is not sufficient to finance its activities without additional subordinated financial support from other entities, (2) where the group of equity holders does not have the power to direct the activities of the entity that most significantly impact the entity’s economic performance, or the obligation to absorb the entity’s expected losses or the right to receive the entity’s expected residual returns, or both, or (3) where the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected residual returns of the entity, or both, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights. In order to determine if an entity is considered a VIE, the Company first performs a qualitative analysis, which requires certain subjective decisions regarding its assessments, including, but not limited to, the design of the entity, the variability that the entity was designed to create and pass along to its interest holders, the rights of the parties, and the purpose of the arrangement. If the Company cannot conclude after a qualitative analysis whether an entity is a VIE, it performs a quantitative analysis. The qualitative analysis considered the design of the entity, the risks that cause variability, the purpose for which the entity was created, and the variability that the entity was designed to pass along to its variable interest holders. When the primary beneficiary could not be identified through a qualitative analysis, we used internal cash flow models to compute and allocate expected losses or expected residual returns to each variable interest holder based upon the relative contractual rights and preferences of each interest holder in the VIE’s capital structure.

 

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 three major banks in China. The aggregate cash in such accounts and on hand as of December 31, 2017 and June 30, 2017 were $145,417,158 and $123,050,548, respectively. The Company had $145,409,838 and $122,907,629 in cash in banks in China, and also had $7,320 and $142,919 in cash in two banks in the United States as of December 31, 2017 and June 30, 2017, respectively. Cash overdrafts as of a 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.

 

Accounts receivable

 

The Company’s policy is to maintain reserves for potential credit losses on accounts receivable. Management regularly reviews the composition of accounts receivable and analyzes customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves at each year-end. Accounts considered uncollectible are written off through a charge to the valuation allowance. As of December 31, 2017, and June 30, 2017, the Company had accounts receivable of $122,117,190 and $141,665,179, net of allowance for doubtful accounts of $13,949,452 and $9,457,423, respectively.

 

Inventories

 

Inventory is valued at the lower of cost (determined on a weighted average basis) or market. Inventories consist of raw materials; work in process, finished goods and packaging materials. The Company reviews its inventories regularly for possible obsolete goods and establishes reserves when determined necessary.

 

 

 

Deferred assets

 

Deferred assets represent amounts that the distributors owed to the Company in their marketing efforts and developing standard stores to expand the Company’s products’ competitiveness and market shares. The amount owed to the Company to assist its distributors will be expensed over three years, 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, 2017 and 2016, the Company amortized $864,070 and $9,894,637 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 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 U.S. generally accepted accounting principles, these types of asset 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 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.

 

Intangible Assets

 

The Company records intangible assets acquired individually or as part of a group at fair value. Intangible assets with definitive lives are amortized over the useful life of the intangible asset, which is the period over which the asset is expected to contribute directly or indirectly to the entity’s future cash flows. The Company evaluates intangible assets for impairment at least annually and more often whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.

 

Customer deposits

 

Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as customer deposits. When all revenue recognition criteria are met, the customer deposits are recognized as revenue. As of December 31, 2017, and June 30, 2017, the Company had customer deposits of $6,935,326 and $7,046,570, respectively.

 

Earnings per share

 

Basic earnings per share are 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,
		2017				2016
Net Income for Basic Earnings Per Share		$	7,826,107			$	5,506,011
Basic Weighted Average Number of Shares			38,551,264				37,658,062
Net Income Per Share – Basic		$	0.20			$	0.15
Net Income for Diluted Earnings Per Share		$	7,826,107			$	5,506,011
Diluted Weighted Average Number of Shares			38,551,264				37,658,062
Net Income Per Share – Diluted		$	0.20			$	0.15

 

 

 

		Six Months Ended
		December 31,
		2017				2016
Net Income for Basic Earnings Per Share		$	12,920,935			$	12,857,591
Basic Weighted Average Number of Shares			38,551,264				37,653,333
Net Income Per Share – Basic		$	0.34			$	0.34
Net Income for Diluted Earnings Per Share		$	12,920,935			$	12,857,591
Diluted Weighted Average Number of Shares			38,551,264				37,653,333
Net Income Per Share – Diluted		$	0.34			$	0.34

 

Recent accounting pronouncements

 

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. This update is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company does not anticipate the adoption of this ASU will have a significant impact on its consolidated financial position, results of operations, or cash flows.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance in ASU No. 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 13). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share Based Payment Accounting, to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance will be effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of the adoption of this newly issued guidance to its consolidated financial statements.

 

In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”), which clarifies the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, which will be our interim period beginning July 1, 2018. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.

 

In May 2016, the FASB issued ASU 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-06 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting” (“ASU 2016-11”), which clarifies revenue and expense recognition for freight costs, accounting for shipping and handling fees and costs, and accounting for consideration given by a vendor to a customer. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, which will be our interim period beginning July 1, 2018. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.

 

 

 

In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”), which amends the guidance in the new revenue standard on collectability, noncash consideration, presentation of sales tax, and transition. The amendments are intended to address implementation issues and provide additional practical expedients to reduce the cost and complexity of applying the new revenue standard. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, which will be our interim period beginning July 1, 2018. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, regarding ASC Topic 230 “Statement of Cash Flows.” This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted. The Company does not expect the adoption of this standard to have a significant effect on our consolidated financial statements.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): “Restricted Cash”(“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This update is effective in fiscal years, including interim periods, beginning after December 15, 2017 and early adoption is permitted. The adoption of this guidance will result in the inclusion of the restricted cash balances within the overall cash balance and removal of the changes in restricted cash activity, which is currently recognized in Other financing activities, on the Statements of Consolidated Cash Flows. Furthermore, an additional reconciliation will be required to reconcile Cash and cash equivalents and restricted cash reported within the Consolidated Balance Sheets to sum to the total shown in the Statements of Consolidated Cash Flows. The Company anticipates adopting this new guidance effective January 1, 2018. The Company is currently evaluating this guidance and the impact it will have on the Consolidated Financial Statements and disclosures.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01), which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. This guidance will be effective for us in the first quarter of 2018 on a prospective basis, and early adoption is permitted. We do not expect the standard to have a material impact on our consolidated financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock compensation (Topic 718): Scope of modification accounting” (“ASU 2017-09”). The purpose of the amendment is to clarify which changes to the terms or condition of a share-based payment award require an entity to apply modification accounting. For all entities that offer share based payment awards, ASU 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017. The Company is currently assessing the impact of ASU 2017-09 on its condensed 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 was 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,
		2017				2017
Raw materials		$	29,590,560			$	39,397,711
Supplies and packing materials		$	733,214			$	540,151
Work in progress		$	436,445			$	421,496
Finished goods		$	74,853,366			$	37,655,533
Total		$	105,613,585			$	78,013,891

 

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following:

 

		December 31,				June 30,
		2017				2017
Building and improvements		$	41,038,672			$	40,113,868
Auto			3,528,765				3,473,352
Machinery and equipment			19,045,164				18,760,880
Agriculture assets			780,234				764,660
Total property, plant and equipment			64,392,835				63,111,079
Less: accumulated depreciation			(31,165,087	)			(28,919,747	)
Total		$	33,227,748			$	34,191,332

  

NOTE 5 - INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

		December 31,				June 30,
		2017				2017
Land use rights, net		$	10,200,036			$	10,121,591
Technology patent, net			0				-
Customer relationships, net			4,311,416				5,578,641
Non-compete agreement			772,229				1,092,584
Trademarks			6,243,855				6,119,059
Total		$	21,527,536			$	22,911,876

 

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 $11,219,244). 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 $160,344). The intangible asset is being amortized over the grant period of 50 years.

 

On August 16, 2001, Jinong received a land use right as a contribution from a shareholder, which was granted by the People’s Government and Land & Resources Bureau of 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 $1,116,806). 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,
		2017				2017
Land use rights		$	12,496,394				12,246,630
Less: accumulated amortization			(2,296,358	)			(2,125,039	)
Total land use rights, net		$	10,200,036				10,121,591

 

TECHNOLOGY PATENT

 

On August 16, 2001, Jinong was issued a technology patent related to a proprietary formula used in the production of humic acid. The fair value of the related intangible asset was determined to be the respective cost of RMB 5,875,068 (or $900,648) and is being amortized over the patent period of 10 years using the straight-line method. This technology patent has been fully amortized.

 

On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The fair value of the acquired technology patent was estimated to be RMB9,200,000 (or $1,410,360) and is amortized over the remaining useful life of six years using the straight-line method. As of June 30, 2016, this technology patent is fully amortized.

 

The technology know-how consisted of the following:

 

		December 31,				June 30,
		2017				2017
Technology know-how		$	2,311,008			$	2,264,818
Less: accumulated amortization			(2,311,008	)			(2,264,818	)
Total technology know-how, net		$	-			$	-

 

CUSTOMER RELATIONSHIPS

 

On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The fair value of the acquired customer relationships was estimated to be RMB65,000,000 (or $9,964,500) and is amortized over the remaining useful life of ten years. On June 30, 2016 and January 1, 2017, the Company acquired the sales VIE Companies. The fair value of the acquired customer relationships was estimated to be RMB16,472,179 (or $ 2,525,185) and is amortized over the remaining useful life of seven to ten years.

 

		December 31,				June 30,
		2017				2017
Customer relationships		$	12,222,549			$	12,757,628
Less: accumulated amortization			(7,911,133	)			(7,178,987	)
Total customer relationships, net		$	4,311,416			$	5,578,641

 

NON-COMPETE AGREEMENT

 

On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The fair value of the acquired non-compete agreement was estimated to be RMB1,320,000 (or $202,356) and is amortized over the remaining useful life of five years using the straight-line method. On June 30, 2016 and January 1, 2017, the Company acquired the sales VIE Companies. The fair value of the acquired non-compete agreements was estimated to be RMB6,150,683 (or $ 942,900) and is amortized over the remaining useful life of five years using the straight-line method.

 

		December 31,				June 30,
		2017				2017
Non-compete agreement		$	1,251,454			$	1,515,218
Less: accumulated amortization			(479,225	)			(422,634	)
Total non-compete agreement, net		$	772,229			$	1,092,584

 

TRADEMARKS

 

On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The preliminary fair value of the acquired trademarks was estimated to be RMB40,700,000 (or $6,239,310) 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, are as follows:

 

Twelve Months Ended on December 31,		Expense ($)
2018			1,932,908
2019			1,932,908
2020			1,371,461
2021			628,535
2022			588,448

  

NOTE 6 - OTHER NON-CURRENT ASSETS

 

Other non-current assets mainly include advance payments related to leasing land for use by the Company. As of December 31, 2017, the balance of other non-current assets was $17,201,354, consisting of the lease fee advances for agriculture lands that the Company engaged in Shiquan County from 2018 to 2027.

 

In March 2017, Jinong entered into a lease agreement for approximately 3,400 mu, and 2600 hectare agriculture lands in Shiquan County, Shaanxi Province. The lease was from April 2017 and was renewable for every ten-year period up to 2066. The aggregate leasing fee was approximately RMB 13 million per annum, The Company had made 10-year advances of leasing fee per lease terms. The Company has amortized $.5 million as expenses for the three months ended December 31, 2017.

 

Estimated amortization expenses of the lease advance payments for the next four twelve-month periods ended December 31 and thereafter are as follows:

 

Twelve months ending December 31,
2018		$	2,058,053
2019		$	2,058,053
2020		$	2,058,053
2021		$	2,058,053
2022 and thereafter		$	11,174,456

 

NOTE 7 - ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables consisted of the following:

 

		December 31,				June 30,
		2017				2017
Payroll payable		$	101,302			$	103,412
Welfare payable			157,384				154,239
Accrued expenses			5,101,131				4,863,988
Other payables			4,652,225				3,887,676
Other levy payable			128,567				125,998
Total		$	10,140,609			$	9,135,313

 

 

NOTE 8 - RELATED PARTIES TRANSACTIONS

 

As of December 31, 2017, and June 30, 2017, the amount due to related parties was $3,288,189 and $3,071,102, respectively.  As of December 31, 2017, and June 30, 2017, $1,073,100 and $1,051,652, respectively were amounts that Gufeng borrowed from a related party, Xi’an Techteam Science & Technology Industry (Group) Co. Ltd., a company controlled by Mr. Zhuoyu 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, 2016, Jinong signed an office lease with Kingtone Information Technology Co., Ltd. (“Kingtone Information”), of which Mr. Zhuoyu Li, Chairman and CEO of the Company, serves as Chairman of its board of directors. Pursuant to the lease, Jinong rented 612 square meters (approximately 6,588 square feet) of office space from Kingtone Information. The lease provides for a two-year term effective as of July 1, 2016 with monthly rent of RMB24,480 (approximately $3,686)

 

NOTE 9- LOAN PAYABLES

 

As of December 31, 2017, the short-term loan payables consisted of four loans which mature on dates ranging from October 25, 2017 through July 30, 2018 with interest rates ranging from 5.22% to 6.31%. Loan No.4 in the table below is guaranteed with parent company’s credit from Jinong: Loans No. 1, 2 and 3 below are collateralized by Tianjuyuan’s land use right and building ownership right.

 

No.		Payee		Loan period per agreement		Interest Rate				December 31, 2017
1		Postal Saving Bank of China - Pinggu Branch		March 24, 2017-March 5, 2018			6.31	%		$	4,599,000
2		Bank of Beijing - Pinggu Branch		June 9, 2017-June 8, 2018			5.22	%			1,456,350
3		Bank of Beijing-Pinggu Branch		June 9, 2017-June 8, 2018			5.22	%			76,650
4		Beijing Agriculture Investment -small loan		August 1, 2017-July 30, 2018			5.50	%			153,300
		Total								$	6,285,300

 

As of June 30, 2017, the short-term loan payables consisted of four loans which mature on dates ranging from July 28, 2017 through June 8, 2018 with interest rates ranging from 5.22% to 6.31%. Loans No. 2 to 3 in the table below are guaranteed with parent company’s credit from Jinong; Loans No. 1 and 2 below are collateralized by Tianjuyan’s land use right and building ownership right.

 

No.		Payee		Loan period per agreement		Interest Rate				June 30, 2017
1		Postal Saving Bank of China - Pinggu Branch		March 24, 2017-March 5, 2018			6.31	%			4,507,080
2		Bank of Beijing - Pinggu Branch		June 9, 2017-June 8, 2018			5.22	%			1,502,360
3		Bank of Beijing - Pinggu Branch		June 28, 2016-July 28, 2017			5.22	%		$	1,502,360
4		Bank of China-Anhui		November 25, 2016-October 25, 2017			LPR	*		$	166,311
		Total								$	7,678,111

  

*LPR stands for Loan Prime Rate. The LPR rate is a 1-year lending rate used by commercial banks to their top grade borrowers whose credit are comparable to the interbank borrowing creditworthiness in China. The LPR rate is a variable rate and is published along with Shanghai Interbank Offer Rates daily.

 

The interest expense from short-term loans was $274,162 and $231,791 for the six months ended December 31, 2017 and 2016, respectively.

 

 

NOTE 10 - CONVERTIBLE NOTES PAYABLE

 

Relating to the acquisition of the sales VIE Companies, the Company subsidiary, Jinong, issued convertible notes payable to the shareholders of sales VIE Companies twice, in the aggregate notional amount of RMB 63,000,000 ($9,462,600) with a term of three years and an annual interest rate of 3%.

 

No.		Related Acquisitions of Sales VIEs		Issuance Date		Maturity Date		Notional Interest Rate				Conversion Price				Notional Amount (in RMB)
1		Wangtian, Lishijie, Shenqiu, Xindeguo, Xinyulei, Jinyangguang		June 30, 2016		June 30, 2019			3	%		$	5.00				51,000,000
2		Fengnong, Xiangrong		January 1, 2017		December 31, 2019			3	%		$	5.00				12,000,000

 

The convertible notes take priority over the preferred stock and common stock of Jinong, and any other class or series of capital stock Jinong issues in the future in terms of interest and payments in the event of any liquidation, dissolution or winding up of Jinong. On or after the third anniversary of the issuance date of the note, noteholders may request Jinong to process the note conversion to convert the note into shares of the Company’s common stock. The notes cannot be converted prior to the maturity date. The per share conversion price of the notes is the higher of the following: (i) $5.00 per share or (ii) 75% of the closing price of the Company’s common stock on the date the noteholder delivers the conversion notice. Due to the discontinuation of VIE agreements with Zhenbai’s shareholders, certain convertible notes issued on June 30, 2016 with a face amount of RMB 12,000,000 ($1,839,600) were tendered back to the Company. All outstanding balance of unpaid principal and accrued interest in the tendered convertible notes were forfeited.

 

The Company determined that the fair value of the convertible notes payable outstanding was RMB 47,415,859 (or $7,268,851) and RMB 56,124,446 ($8,431,912) as of December 31, 2017 and June 30, 2017, respectively. Aside from the forfeiture of the convertible notes previously issued to Zhenbai’s shareholders, the difference between the fair value of the notes and the face amount of the notes is being amortized to accretion implied interest expense over the three-year life of the notes. As of December 31, 2017, the accumulated amortization of this discount into accretion expenses was $480,774.

 

NOTE 11 - TAXES PAYABLE

 

Enterprise Income Tax

 

Effective January 1, 2008, the Enterprise Income Tax (“EIT”) law of the PRC replaced the tax laws for Domestic Enterprises (“DEs”) and Foreign Invested Enterprises (“FIEs”). The EIT rate of 25% replaced the 33% rate that was applicable to both DEs and FIEs. The two year tax exemption and three year 50% tax reduction tax holiday for production-oriented FIEs was eliminated. Since January 1, 2008, Jinong became subject to income tax in China at a rate of 15% as a high-tech company, as a result of the expiration of its tax exemption on December 31, 2007. Accordingly, it made provision for income taxes for the six months ended December 31, 2017 and 2016 of $1,845,926 and $1,879,465, 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 $1,106,590 and $792,503 for the six months ended December 31, 2017 and 2016, 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 includes non-organic fertilizer products starting from September 1, 2015, but granted taxpayers 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,
		2017				2017
VAT provision		$	(628,399	)		$	(575,872	)
Income tax payable			2,141,669				2,229,735
Other levies			667,724				1,036,544
Total		$	2,180,994			$	2,690,407

 

 

The provision for income taxes consists of the following:

 

		December 31,				June 30,
		2017				2017
Current tax			3,253,593			$	7,371,967
Deferred tax		$	0				0
Total			3,253,593			$	7,371,967

 

Tax Rate Reconciliation

 

Our effective tax rates were approximately 20.1% and 19.4% for six months ended December 31, 2017 and 2016, 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, 2017 and 2016 for the following reasons:

 

Tax Rate Reconciliation

 

December 31, 2017

 

		China								United States
		15% - 25%								34%								Total
Pretax income (loss)		$	16,805,296							$	(630,768	)						$	16,174,528
Expected income tax expense (benefit)			4,201,324				0.250				(214,461	)			34	%			3,986,863
High-tech income benefits on Jinong			(1,230,618	)			-0.073												(1,230,618	)
Losses from subsidiaries in which no benefit is recognized			282,887				0.017												282,887
Change in valuation allowance on deferred tax asset from US tax benefit			0								214,461				-34	%			214,461
Actual tax expense		$	3,253,593				19.4	%		$	0				0.00	%		$	3,253,593				20.1	%

 

December 31, 2016
		China								United States
		15% - 25%								34%								Total
Pretax income (loss)		$	17,806,630								(1,856,270	)						$	15,950,360
Expected income tax expense (benefit)			4,451,658				25.0	%			(631,132	)			34.0	%			3,820,526
High-tech income benefits on Jinong			(1,139,344	)			(6	)%			-				-				(1,139,344	)
Losses from subsidiaries in which no benefit is recognized			(219,544	)			(1	)%			-				-				(219,544	)
Change in valuation allowance on deferred tax asset from US tax benefit			-								631,132				(34.0	)%			631,132
Actual tax expense		$	3,092,769				17	%		$	-				-	%		$	3,092,769				19.4	%

 

 

NOTE 12 - STOCKHOLDERS’ EQUITY

 

Common Stock

 

On December 30, 2016, the Company granted an aggregate of 870,000 shares of restricted stock under the 2009 Plan to certain key employees. The stock grants vest immediately. The value of the restricted stock awards was $1,044,000 and is based on the fair value of the Company’s common stock on the grant date.

 

There was no issuance share of common stock during the three and six months ended December 31, 2017.

 

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, 2017, the Company has 20,000,000 shares of preferred stock authorized, with a par value of $.001 per share, of which no shares are issued or outstanding.

 

NOTE 13 - CONCENTRATIONS

 

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

 

None of the vendors accounted over 10% of the Company’s purchase of raw materials and supplies for the six months ended December 31, 2017.

 

There were two vendors from which the Company purchased 20.1% and 14.6% of its raw materials for the six months ended December 31, 2016. Total purchase from these two vendors amounted to $10,100,403 for the six months ended December 31, 2016.

 

None of the customers accounted over 10% of the Company’s sales for the six months ended December 31, 2017 and 2016.

 

 

NOTE 14 - SEGMENT REPORTING

 

As of December 31, 2017, the Company was organized into four main business segments based on location and product: Jinong (fertilizer production), Gufeng (fertilizer production), Yuxing (agricultural products production) and the sales VIEs. Each of the four 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,
Revenues from unaffiliated customers:		2017				2016				2017				2016
Jinong		$	26,211,280			$	26,825,674			$	52,985,040			$	58,253,394
Gufeng			24,447,721				21,066,559				42,669,787				36,876,073
Yuxing			1,953,748				2,454,314				3,746,391				3,809,725
Sales VIEs			11,350,893				8,398,466				27,330,927				21,690,443
Consolidated		$	63,963,642			$	58,745,013			$	126,732,145			$	120,629,635
Operating income :
Jinong		$	5,577,154			$	5,740,784			$	12,343,229			$	12,120,004
Gufeng			2,549,525				1,906,816				4,655,738				2,991,899
Yuxing			222,275				330,780				397,748				487,810
Sales VIEs			2,012,999				637,284				79,630				2,440,764
Reconciling item (1)			(2	)			0				0				0
Reconciling item (2)			(432,753	)			(1,510,148	)			(630,772	)			(1,856,270	)
Consolidated		$	9,929,199			$	7,105,516			$	16,845,574			$	16,184,207
Net income:
Jinong		$	4,719,159			$	4,849,485			$	10,460,249			$	10,195,773
Gufeng			1,727,764				1,268,439				3,216,831				1,984,925
Yuxing			222,869				330,509				398,491				487,589
Sales VIEs			1,914,125				567,726				(198,809	)			2,045,574
Reconciling item (1)			2				0				3				0
Reconciling item (2)			(432,753	)			(1,510,148	)			(630,772	)			(1,856,270	)
Reconciling item (3)			(325,058	)			0				(325,058	)
Consolidated		$	7,826,108			$	5,506,011			$	12,920,936			$	12,857,591
Depreciation and Amortization:
Jinong		$	422,383			$	3,675,142			$	1,276,126			$	9,988,231
Gufeng			552,299				631,041				1,100,057				1,258,350
Yuxing			315,282				306,210				627,801				620,126
Sales VIEs			210,482				123,070				430,405				249,202
Consolidated		$	1,500,446			$	4,735,463			$	3,434,389			$	12,115,909
Interest expense:
Jinong			71,447				55,979				142,283				113,352
Gufeng			101,645				58,306				206,368				118,439
Yuxing			0				0				0				0
Sales VIEs			(78,505	)			0				(74,489	)			0
Consolidated		$	94,587			$	114,285			$	274,162			$	231,791
Capital Expenditure:
Jinong		$	808			$	571			$	4,149			$	1,793
Gufeng			297				556				14,165				4,999
Yuxing			4,773				0				4,773				548
Sales VIEs			0				0				0				0
Consolidated		$	5,878			$	1,127			$	23,086			$	7,340

 

 

		As of
		December 31,				June 30,
		2017				2017
Identifiable assets:
Jinong		$	230,059,040			$	213,355,900
Gufeng			162,568,545				156,648,924
Yuxing			41,487,750				40,965,345
Sales VIEs			43,643,613				44,571,422
Reconciling item (1)			467,218				142,918
Reconciling item (2)			(2,879	)			(2,879	)
Consolidated		$	478,223,287			$	455,681,630

 

	(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.
	(3)	Reconciling amounts refer to the expenses of discontinuation of VIE agreement with Zhenbai.

 

NOTE 15 - COMMITMENTS AND CONTINGENCIES

 

On June 29, 2016, 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, 2016 with monthly rent of $3,525 (RMB 24,480).

 

In January 2008, Jintai signed a ten-year land lease with Xi’an Jinong Hi-tech Agriculture Demonstration Zone for a monthly rent of $749 (RMB 5,200).

 

In February 2004, Tianjuyuan signed a fifty-year lease with the village committee of Dong Gao Village and Zhen Nan Zhang Dai Village in the Beijing Ping Gu District, at a monthly rent of $426 (RMB 2,958).

 

Accordingly, the Company recorded an aggregate of $30,020 and $28,198 as rent expenses for the six months ended December 31, 2017 and 2016, respectively. Rent expenses for the next five years ended December 31, are as follows:

 

Years ending December 31,
2018		$	27,958
2019			5,442
2020			5,442
2021			5,442
2022			5,442

 

NOTE 16 - 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.

 

 

On June 30, 2016 and January 1, 2017, the Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition agreements and also into a series of contractual agreements to qualify as VIEs with the shareholders of the sales VIE Companies.

 

Jinong, the sales VIE Companies, and the shareholders of the sales VIE Companies also entered into a series of contractual agreements for the sales VIE Companies to qualify as VIEs (the “VIE Agreements”).

 

On November 30, 2017, the Company, through its wholly-owned subsidiary Jinong, exited the VIE agreements with the shareholders of Zhenbai.

 

As a result of these contractual arrangements, with Yuxing and the sales VIE Companies the Company is entitled to substantially all of the economic benefits of Yuxing and the VIE Companies. The following financial statement amounts and balances of the VIEs were included in the accompanying consolidated financial statements as of December 31, 2017 and June 30, 2016:

 

		December 31,				June 30,
		2017				2017
ASSETS
Current Assets
Cash and cash equivalents		$	1,347,719			$	374,587
Accounts receivable, net			31,545,752				30,687,859
Inventories			22,272,408				21,314,940
Other current assets			1,101,385				2,195,156
Advances to suppliers			1,624,932				2,380,812
Total Current Assets			57,892,196				56,953,354
Plant, Property and Equipment, Net			12,122,345				12,418,906
Other assets			230,107				225,508
Intangible Assets, Net			11,925,590				13,002,818
Goodwill			3,378,474				3,837,038
Total Assets		$	85,548,712			$	86,437,624
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Short-term loan		$	-			$	166,311
Accounts payable			20,454,287				18,355,921
Customer deposits			694,119				1,375,785
Accrued expenses and other payables			3,328,483				3,833,868
Amount due to related parties			43,107,165				42,741,043
Total Current Liabilities		$	67,584,054			$	66,472,928
Long-term Loan			0				3,549
Total Liabilities		$	67,584,054			$	66,476,477
Stockholders’ equity			17,964,658				19,961,147
Total Liabilities and Stockholders’ Equity			85,548,712			$	86,437,624

 

		Three months ended								Six months ended
		December 31,								December 31,
		2017				2016				2017				2016
Revenue		$	13,304,643			$	10,852,779			$	31,077,318			$	25,500,167
Expenses			10,989,225				9,954,543				25,590,542				22,967,005
Net income (loss)		$	2,136,994			$	898,236			$	199,680			$	2,533,162

 

 

NOTE 17 - BUSINESS COMBINATIONS

 

On June 30, 2016, the Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition agreements and also into a series of contractual agreements to qualify as VIEs with the shareholders of Shaanxi Lishijie Agrochemical Co., Ltd., Songyuan Jinyangguang Sannong Service Co., Ltd., Shenqiu County Zhenbai Agriculture Co., Ltd., Weinan City Linwei District Wangtian Agricultural Materials Co., Ltd., Aksu Xindeguo Agricultural Materials Co., Ltd., and Xinjiang Xinyulei Eco-agriculture Science and Technology Co., Ltd.

 

Subsequently, on January 1, 2017, Jinong entered into similar strategic acquisition agreements and a series of contractual agreements to qualify as VIEs with the shareholders of Sunwu County Xiangrong Agricultural Materials Co., Ltd., and Anhui Fengnong Seed Co., Ltd.

 

On November 30, 2017, the Company, through its wholly-owned subsidiary Jinong, discontinued the strategic acquisition agreements and the series of contractual agreements with the shareholders of Zhenbai.

 

The VIE Agreements are as follows:

 

Entrusted Management Agreements

 

Pursuant to the terms of certain Entrusted Management Agreements dated June 30, 2016 and January 1, 2017, between Jinong and the shareholders of the sales VIE Companies (the “Entrusted Management Agreements”), the sales VIE Companies and their shareholders agreed to entrust the operations and management of its business to Jinong. According to the Entrusted Management Agreement, Jinong possesses the full and exclusive right to manage the sales VIE Companies’ operations, assets and personnel, has the right to control all the sales VIE Companies’ cash flows through an entrusted bank account, is entitled to the sales VIE Companies’ net profits as a management fee, is obligated to pay all the sales VIE Companies’ payables and loan payments, and bears all losses of the sales VIE Companies. The Entrusted Management Agreements will remain in effect until (i) the parties mutually agree to terminate the agreement; (ii) the dissolution of the sales VIE Companies; or (iii) Jinong acquires all the assets or equity of the sales VIE Companies (as more fully described below under “Exclusive Option Agreements”).

  

Exclusive Technology Supply Agreements

 

Pursuant to the terms of certain Exclusive Technology Supply Agreements dated June 30, 2016 and January 1, 2017, between Jinong and the sales VIE companies (the “Exclusive Technology Supply Agreements”), Jinong is the exclusive technology provider to the sales VIE companies. The sales VIE companies agreed to pay Jinong all fees payable for technology supply prior to making any payments under the Entrusted Management Agreement. The Exclusive Technology Supply Agreements shall remain in effect until (i) the parties mutually agree to terminate the agreement; (ii) the dissolution of the sales VIE companies; or (iii) Jinong acquires the sales VIE companies (as more fully described below under “Exclusive Option Agreements”).

 

Shareholder’s Voting Proxy Agreements

 

Pursuant to the terms of certain Shareholder’s Voting Proxy Agreements dated June 30, 2016 and January 1, 2017, among Jinong and the shareholders of the sales VIE companies (the “Shareholder’s Voting Proxy Agreements”), the shareholders of the sales VIE companies irrevocably appointed Jinong as their proxy to exercise on such shareholders’ behalf all of their voting rights as shareholders pursuant to PRC law and the Articles of Association of the sales VIE companies, including the appointment and election of directors of the sales VIE companies. Jinong agreed that it shall maintain a board of directors, the composition and appointment of which shall be approved by the Board of the Company. The Shareholder’s Voting Proxy Agreements will remain in effect until Jinong acquires all the assets or equity of the sales VIE companies.

 

Exclusive Option Agreements

 

Pursuant to the terms of certain Exclusive Option Agreements dated June 30, 2016 and January 1, 2017, among Jinong, the sales VIE companies, and the shareholders of the sales VIE companies (the “Exclusive Option Agreements”), the shareholders of the sales VIE companies granted Jinong an irrevocable and exclusive purchase option (the “Option”) to acquire the sales VIE companies’ equity interests and/or remaining assets, but only to the extent that the acquisition does not violate limitations imposed by PRC law on such transactions. The Option is exercisable at any time at Jinong’s discretion so long as such exercise and subsequent acquisition of the sales VIE companies does not violate PRC law. The consideration for the exercise of the Option is to be determined by the parties and memorialized in the future by definitive agreements setting forth the kind and value of such consideration. Jinong may transfer all rights and obligations under the Exclusive Option Agreements to any third parties without the approval of the shareholders of the sales VIE companies so long as a written notice is provided. The Exclusive Option Agreements may be terminated by mutual agreements or by 30 days written notice by Jinong.

 

Equity Pledge Agreements

 

Pursuant to the terms of certain Equity Pledge Agreements dated June 30, 2016 and January 1, 2017, among Jinong and the shareholders of the sales VIE companies (the “Pledge Agreements”), the shareholders of the sales VIE companies pledged all of their equity interests in the sales VIE companies to Jinong, including the proceeds thereof, to guarantee all of Jinong’s rights and benefits under the Entrusted Management Agreements, the Exclusive Technology Supply Agreements, the Shareholder’ Voting Proxy Agreements and the Exclusive Option Agreements. Prior to termination of the Pledge Agreements, the pledged equity interests cannot be transferred without Jinong’s prior written consent. The Pledge Agreements may be terminated only upon the written agreement of the parties.

 

 

Non-Compete Agreements

 

Pursuant to the terms of certain Non-Compete Agreements dated June 30, 2016 and January 1, 2017, among Jinong and the shareholders of the sales VIE companies (the “Non-Compete Agreements”), the shareholders of the sales VIE companies agreed that during the period beginning on the initial date of their services with Jinong, and ending five (5) years after termination of their services with Jinong, without Jinong’s prior written consent, they will not provide services or accept positions including but not limited to partners, directors, shareholders, managers, proxies or consultants, provided by any profit making organizations with businesses that may compete with Jinong. They will not solicit or interfere with any of the Jinong’s customers, or solicit, induce, recruit or encourage any person engaged or employed by Jinong to terminate his or her service or engagement. If the shareholders of the sales VIE companies breach the non-compete obligations contained therein, Jinong is entitled to all loss and damages; if the damages are difficult to determine, remedies bore the shareholders of the sales VIE companies shall be no less than 50% of the salaries and other expenses Jinong provided in the past.

 

The Company entered into these VIE Agreements as a way for the Company to have more control over the distribution of its products. The transactions are accounted for as business combinations in accordance with ASC 805. A summary of the purchase price allocations at fair value is below:

 

For acquisitions made on June 30, 2016:

 

Cash		$	708,737
Accounts receivable			6,422,850
Advances to suppliers			1,803,180
Prepaid expenses and other current assets			807,645
Inventories			7,787,043
Machinery and equipment			140,868
Intangible assets			270,900
Other assets			3,404,741
Goodwill			3,158,179
Accounts payable			(3,962,670	)
Customer deposits			(3,486,150	)
Accrued expenses and other payables			(4,653,324	)
Taxes payable			(16,912	)
Purchase price		$	12,385,087

 

A summary of the purchase consideration paid is below:

 

Cash		$	5,568,500
Convertible notes			6,671,769
Derivative liability			144,818
		$	12,385,087

 

The cash component of the purchase price for these acquisitions made on June 30, 2016 was paid in July and August 2016.

 

For acquisitions made on January 1, 2017:

 

Working Capital		$	941,192
Machinery and equipment			222,875
Intangible assets			1440
Goodwill			684,400
Customer Relationship			522,028
Non-compete Agreement			392,852
Purchase price		$	2,764,787

 

 

A summary of the purchase consideration paid is below:

  

Cash		$	1,201,888
Convertible notes			1,559,350
Derivative liability			3,549
		$	2,764,787

 

The cash component of the purchase price for these acquisitions made on January 1, 2017 was paid during March 2017.

 

On November 30, 2017, the Company, through its wholly-owned subsidiary Jinong, discontinued the strategic acquisition agreements and the series of contractual agreements with the shareholders of Zhenbai. In return, the shareholders of Zhenbai agreed to tender the whole payment consideration in the SAA back to the Company with early termination penalties. The convertible notes paid to Zhenbai’s shareholders and the accrued interest has been forfeited.

 

For the discontinuation of Zhenbai made on November 30, 2017, the Company gave up the control of the following assets in Zhenbai:

 

Working Capital		$	1,175,696
Intangible assets			893,780
Customer  Relationship			682,604
Non-compete Agreement			211,176
Goodwill			536,819
Total Asset		$	2,606,296

 

In return, the purchase consideration returned to the Company from Zhenbai’s shareholders is summarized below:

 

Cash		$	459,900
Interest Payable			82,782
Convertible notes			1,719,336
Derivative liability			13,312
Total Payback		$	2,275,330
Net Loss			-330,966

 

 

Item 4. Controls and Procedures

 

(a)

Evaluation of disclosure controls and procedures

 

At the conclusion of the period ended December 31, 2017 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”)). In March 2018, we reevaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon the additional 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 not 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, due to our ability to record and classify payments we made in acquisitions. Our inability to properly record and classify such acquisition payments may result in inadequate or deficient financial reporting.

 

Despite the material weakness reported above, our management believes that our unaudited condensed consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented because we have retained a consultant who has U.S. GAAP experience to assist us in the preparation of our unaudited condensed consolidated financial statements.

 

(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, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

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: April 13, 2018	By:	/s/ Zhuoyu Li
	Name:	Zhuoyu Li
	Title:	Chief Executive Officer
		(principal executive officer)
Date: April 13, 2018	By:	/s/ Yongcheng Yang
	Name:	Yongcheng Yang
	Title:	Chief Financial Officer
		(principal financial officer and
		principal accounting officer)

 

 

EXHIBIT INDEX

 

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

 

	*	Filed herewith
	+	In accordance with the SEC Release 33-8238, deemed being furnished and not filed.