10-Q 1 v332927_10q.htm FORM 10-Q

 

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, 2012

 

o 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.)

 

3 rd Floor, Borough A, Block A, No. 181,

South Taibai Road, Xi’an, Shaanxi Province,

               People’s Republic of China  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 o

 

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 o

 

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 x   

Non-accelerated filer

 ¨   Smaller reporting company ¨   

( 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 o   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:  27,938,839 shares of common stock, $.001 par value, as of February 1, 2013.

 

 
 

  

TABLE OF CONTENTS

 

PART I         FINANCIAL INFORMATION   Page
         
Item 1.   Financial Statements.    
         
    Consolidated Condensed Balance Sheets    
    As of December 31, 2012 and June 30, 2012 (Unaudited)    
         
    Consolidated Condensed Statements of Income and Comprehensive Income    
    For the Three and Six Months Ended December 31, 2012 and 2011 (Unaudited)    
         
    Consolidated Condensed Statements of Cash Flows    
    For the Six Months Ended December 31, 2012 and 2011 (Unaudited)    
         
    Notes to Consolidated Condensed Financial Statements    
    As of December 31, 2012 (Unaudited)    
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    
         
Item 3.   Quantitative and Qualitative Disclosures About Market Risk    
         
Item 4.   Controls and Procedures    
         
PART II        OTHER INFORMATION    
         

Item 1.

  

Legal Proceeding

    
         
Item 1A.   Risk Factors    
         
Item 6.   Exhibits    
         
Signatures    
         
Exhibits/Certifications    
             

 

 
 

  

PART I - FINANCIAL INFORMATION

 

Item 1.Financial Statements

  

CHINA GREEN AGRICULTURE INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(UNAUDITED)

 

   December 31, 2012   June 30, 2012 
         
ASSETS          
Current Assets          
Cash and cash equivalents  $74,937,781   $71,978,630 
Accounts receivable, net   61,731,764    62,001,158 
Inventories   51,122,753    28,602,684 
Other current assets   323,712    299,526 
Advances to suppliers   10,880,938    12,207,325 
Total Current Assets   198,996,948    175,089,323 
           
Plant, Property and Equipment, Net   83,367,291    80,065,161 
           
Construction In Progress   175,581    - 
           
Other Assets - Non Current   145,599    182,119 
           
Intangible Assets, Net   26,850,239    27,618,641 
           
Goodwill   5,079,013    5,075,809 
           
Total Assets  $314,614,671   $288,031,053 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current Liabilities          
Accounts payable  $4,826,224   $6,881,748 
Unearned revenue   6,791,730    2,625,014 
Accrued expenses and other payables   4,166,885    4,290,249 
Amount due to related parties   1,180,239    370,719 
Taxes payable   21,102,145    17,675,389 
Short term loans   14,502,750    13,931,280 
Total Current Liabilities   52,569,973    45,774,399 
           
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, 27,938,840 and 27,455,722 shares issued and outstanding as of December 31, 2012 and June 30, 2012, respectively   27,939    27,456 
Additional paid-in capital   104,705,756    102,175,709 
Statutory reserve   17,142,778    15,130,158 
Retained earnings   124,232,932    109,142,824 
Accumulated other comprehensive income   15,935,293    15,780,507 
Total Stockholders' Equity   262,044,698    242,256,654 
           
Total Liabilities and Stockholders' Equity  $314,614,671   $288,031,053 

 

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

 

F-1
 

 

CHINA GREEN AGRICULTURE INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

 

   Three Months Ended December 31,   Six Months Ended December 31, 
   2012   2011   2012   2011 
Sales                    
Jinong  $22,954,851   $18,989,156   $50,805,827   $41,231,407 
Gufeng   17,984,853    25,958,438    28,921,824    55,571,529 
Jintai   -    2,115,689    -    3,314,576 
Yuxing   791,288    30,714    1,516,081    79,079 
Net sales   41,730,992    47,093,997    81,243,732    100,196,591 
Cost of goods sold                    
Jinong   10,652,410    7,559,477    23,491,908    15,669,607 
Gufeng   14,304,747    20,692,393    23,494,509    45,962,063 
Jintai   -    2,258,064    -    3,006,894 
Yuxing   580,302    194,578    1,130,409    259,810 
Cost of goods sold   25,537,459    30,704,512    48,116,826    64,898,374 
Gross profit   16,193,533    16,389,485    33,126,906    35,298,217 
Operating expenses                    
Selling expenses   3,138,284    2,414,748    6,172,371    4,905,222 
General and administrative expenses   3,156,271    3,778,982    6,032,213    6,917,677 
Total operating expenses   6,294,555    6,193,730    12,204,584    11,822,899 
Income from operations   9,898,978    10,195,755    20,922,322    23,475,318 
Other income (expense)                    
Other income   397,980    89,090    397,380    63,666 
Interest income   86,717    90,116    161,149    187,603 
Interest expense, net   (366,447)   (399,868)   (752,239)   (556,347)
Total other income (expense)   118,250    (220,662)   (193,710)   (305,078)
Income before income taxes   10,017,228    9,975,093    20,728,612    23,170,240 
Provision for income taxes   1,775,900    2,231,215    3,625,884    4,694,726 
Net income   8,241,328    7,743,878    17,102,728    18,475,514 
Other comprehensive income                    
Foreign currency translation gain   619,139    1,439,096    154,786    3,343,242 
Comprehensive income  $8,860,467   $9,182,974   $17,257,514   $21,818,756 
                     
Basic weighted average shares outstanding   27,651,920    26,941,860    27,561,556    26,899,599 
Basic net earnings per share  $0.30   $0.29   $0.62   $0.69 
Diluted weighted average shares outstanding   27,651,920    26,941,860    27,561,556    26,899,599 
Diluted net earnings per share   0.30    0.29    0.62    0.69 

  

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

 

F-2
 

 

CHINA GREEN AGRICULTURE INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   Six Months Ended December 31, 
   2012   2011 
Cash flows from operating activities          
Net income  $17,102,728   $18,475,514 
Adjustments to reconcile net income to net cash provided by (used in) operating activities          
Issuance of common stock and stock options for compensation   2,230,530    1,010,243 
Depreciation   5,228,391    2,347,876 
Amortization   785,838    663,442 
Changes in operating assets, net of effects from acquisitions          
Accounts receivable   308,537    (28,829,924)
Other current assets   (23,996)   (728,335)
Inventories   (22,502,012)   (20,446,717)
Advances to suppliers   1,334,094    7,023,757 
Other assets   36,635    (93,189)
Changes in operating liabilities, net of effects from acquisitions          
Accounts payable   (2,059,637)   2,445,043 
Unearned revenue   4,165,059    6,717,226 
Tax payables   3,415,597    4,321,427 
Accrued expenses and other payables   (124,499)   4,346,642 
Amount due to related parties   1,109,500    - 
Net cash provided by (used in) operating activities   11,006,765    (2,746,995)
           
Cash flows from investing activities          
Purchase of plant, property, and equipment   (8,479,974)   (3,840,457)
Increase in construction in progress   (175,581)   (1,541,236)
Net cash used in investing activities   (8,655,555)   (5,381,693)
           
Cash flows from financing activities          
Proceeds from loans   562,675    9,616,925 
Net cash provided by financing activities   562,675    9,616,925 
           
Effect of exchange rate change on cash and cash equivalents   45,266    1,098,840 
Net increase in cash and cash equivalents   2,959,151    2,587,077 
           
Cash and cash equivalents, beginning balance   71,978,630    65,606,413 
Cash and cash equivalents, ending balance  $74,937,781   $68,193,490 
           
Supplement disclosure of cash flow information          
Interest expense paid  $752,239   $556,347 
Income taxes paid  $209,275   $320,704 

  

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

 

F-3
 

 

 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

NOTES TO 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 the notes to the financial statements of the Company, the following are the references herein of all the subsidiaries of the Company (i) Green Agriculture Holding Corporation (“Green New Jersey”), a wholly-owned subsidiary of Green Nevada incorporated in the State of New Jersey; (ii) Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd. (“Jinong”), a wholly-owned subsidiary of Green New Jersey organized under the laws of the PRC; (iii) Xi’an Jintai Agriculture Technology Development Company (“Jintai”), wholly-owned subsidiary of Jinong in the PRC, (iv) Xi’an Hu County Yuxing Agriculture Technology Development Co., Ltd. (“Yuxing”), a wholly-owned subsidiary of Jinong in the PRC; (v) Beijing Gufeng Chemical Products Co., Ltd., a wholly-owned subsidiary of Jinong in the PRC (“Gufeng”), and (vi) Beijing Tianjuyuan Fertilizer Co., Ltd., Gufeng’s wholly-owned subsidiary in the PRC (“Tianjuyuan”).

 

The Company’s corporate structure as of December 31, 2012 is set forth in the diagram below:

 

 

 

F-4
 

 

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, Jintai, Yuxing, Gufeng and Tianjuyuan. 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.

 

Recent accounting pronouncements

 

FASB Accounting Standards Update No. 2011-08

 

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, which provides an entity the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test for goodwill impairment. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The revised standard is effective for the Company for its annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU 2011-08 is not expected to significantly impact the Company’s consolidated financial statements.

 

FASB Accounting Standards Update No. 2011-11

 

In December 2011, the FASB issued the FASB Accounting Standards Update No. 2011-11 “Balance Sheet: Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). This Update requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS.

 

The amended guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of ASU 2011-11 is not expected to significantly impact the Company’s consolidated financial statements.

 

FASB Accounting Standards Update No. 2012-02

 

On July 27, 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this pronouncement is not expected to have a material impact on the Company’s financial statements.

 

NOTE 3 - 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.

 

F-5
 

 

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

 

   For the Three Months Ended December 31,   For the Six Months Ended December 31, 
   2012   2011   2012   2011 
Net Income for Basic Earnings Per Share  $8,241,328   $7,743,878   $17,102,728   $18,475,514 
Basic Weighted Average Number of Shares   27,651,920    26,941,860    27,561,556    26,899,599 
Net Income per Share – Basic  $0.30   $0.29   $0.62   $0.69 
Net Income for Diluted Earnings Per Share   8,241,328    7,743,878    17,102,728    18,475,514 
Diluted Weighted Average Number of Shares   27,651,920    26,941,860    27,561,556    26,899,599 
Net Income per Share – Diluted  $0.30   $0.29   $0.62   $0.69 

  

NOTE 4 – INVENTORIES

 

Inventories consist of the following:

 

   December 31,   June 30, 
   2012   2012 
Raw materials  $19,233,362   $6,009,686 
Supplies and packing materials   816,165    565,559 
Work in progress   233,623    127,140 
Finished goods   30,839,603    21,900,299 
Total  $51,122,753   $28,602,684 

 

 NOTE 5 – OTHER CURRENT ASSETS

 

Other current assets consisted of the following:

 

   December 31,   June 30, 
   2012   2012 
Advancement  $323,712   $299,526 
Total  $323,712   $299,526 

 

Advancement represents advances made to non-related parties and employees. The amounts were unsecured, interest free, and due on demand.

 

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consist of the following:

 

   December 31,   June 30, 
   2012   2012 
Building and improvements  $35,200,303   $36,174,009 
Auto   715,090    835,412 
Machinery and equipment   72,918,242    63,280,923 
Agriculture assets   3,165,281    3,163,286 
Total property, plant and equipment   111,998,916    103,453,630 
Less: accumulated depreciation   (28,631,625)   (23,388,469)
Total  $83,367,291   $80,065,161 

 

 

Depreciation expenses for the three months ended December 31, 2012 and 2011 were $2,426,100 and $1,215,477, respectively. Depreciation expenses for the six months ended December 31, 2012 and 2011 were $5,228,391 and $2,347,876, respectively.

 

Agriculture assets consist of reproductive trees that are expected to be commercially productive for a period of eight years.

 

NOTE 7 - CONSTRUCTION IN PROGRESS

 

As of December 31, 2012 and June 30, 2012, construction in progress representing construction for Yuxing’s supporting facilities amounted to $175,581 and $0, respectively.

 

F-6
 

 

NOTE 8 - INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

   December 31,   June 30, 
   2012   2012 
Land use rights, net  $11,824,468   $11,014,591 
Technology patent, net   850,617    1,902,131 
Customer relationships, net   7,743,454    8,253,368 
Non-compete agreement, net   104,610    125,453 
Trademarks   6,327,090    6,323,098 
Total  $26,850,239   $27,618,641 

 

 

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 RMB 73,184,895 (or $11,599,806). 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 $165,783). 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 Yanling District, Shaanxi Province. The fair value of the related intangible asset at the time of the contribution was determined to be RMB 7,285,099 (or $1,154,688). The intangible asset is being amortized over the grant period of 50 years.

 

The Land Use Rights consist of the following:

 

   December 31,   June 30, 
   2012   2012 
Land use rights  $12,920,277   $12,912,125 
Less: accumulated amortization   (1,095,809)   (1,897,534)
Total land use rights, net  $11,824,468   $11,014,591 

 

 

TECHNOLOGY PATENT

 

On August 16, 2001, Jinong was issued a technology patent related to a proprietary formula used in the production of humid acid. The fair value of the related intangible asset was determined to be the respective cost of RMB 5,875,068 (or $931,198) and is being amortized over the patent period of 10 years using the straight line method.

 

On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The preliminary fair value on the acquired technology patent was estimated to be RMB 9,200,000 (or $1,458,200) 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, 
   2012   2012 
Technology know-how  $2,389,398   $2,387,891 
Less: accumulated amortization   (1,538,781)   (485,760)
Total technology know-how, net  $850,617   $1,902,131 

 

F-7
 

 

CUSTOMER RELATIONSHIP

 

On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The preliminary fair value on the acquired customer relationships was estimated to be RMB 65,000,000 (or $10,302,500) and is amortized over the remaining useful life of 10 years.

 

   December 31,   June 30, 
   2012   2012 
Customer relationships  $10,302,500   $10,296,000 
Less: accumulated amortization   (2,559,046)   (2,042,632)
Total customer relationships, net  $7,743,454   $8,253,368 

 

 

NON-COMPETE AGREEMENT

 

On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The preliminary fair value on the acquired non-compete agreement was estimated to be RMB1,320,000 (or $209,220) and is amortized over the remaining useful life of five years using the straight line method.  

 

   December 31,   June 30, 
   2012   2012 
Non-compete agreement  $209,220   $209,088 
Less: accumulated amortization   (104,610)   (83,635)
Total non-compete agreement, net  $104,610   $125,453 

 

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 RMB 40,700,000 (or $6,327,090), and is subject to an annual impairment test.

 

Total amortization expenses of intangible assets for the three months ended December 31, 2012 and 2011 amounted to $393,448 and $331,940, respectively. Total amortization expenses of intangible assets for the six months ended December 31, 2012 and 2011 amounted to $785,838 and $663,442, respectively.

 

AMORTIZATION EXPENSE

 

Estimated amortization expenses of intangible assets for the next five (5) years after December 31, 2012, are as follows:

 

Year Ends   Expense ($)
December 31, 2013   1,573,533
December 31, 2014   1,573,533
December 31, 2015   1,531,689
December 31, 2016   1,288,656
December 31, 2017   1,288,656

 

 

NOTE 9 - ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables consist of the following:

 

   December 31,   June 30, 
   2012   2012 
Payroll payable  $142,314   $127,149 
Welfare payable   168,256    168,150 
Accrued expenses   2,648,981    2,827,028 
Other payables   1,084,344    1,045,010 
Other levy payable   122,990    122,912 
Total  $4,166,885   $4,290,249 

 

F-8
 

 

NOTE 10 - AMOUNT DUE TO RELATED PARTIES

 

As of December 31, 2012 and June 30, 2012, the amount due to related parties was $1,180,239 and $370,719, respectively.  These amounts represent unsecured, non-interest bearing loans that are due on demand.  These loans are not subject to written agreements.

 

On August 10, 2010, Xi’an Hu County Yuxing Agriculture Technology Development Co., Ltd (“Yuxing”) which is a subsidiary of the Company, entered into an agreement with Xi’an Kingtone Information Co., Ltd. (“Kingtone Information”) (“Kingtone”) which was responsible for developing certain electronic control systems for Yuxing. Kingtone Information is a Variable Interest Entity (“VIE”) controlled by Kingtone Wirelessinfo Solution Holding Ltd. (Nasdaq: KONE), whose Chairman and majority shareholder is Mr. Tao Li, Green Nevada’s Chairman, President and CEO. The total contracted value of this agreement, including value-added taxes and other taxes, is RMB3,030,000, or approximately $480,255. The performance of the agreement has not been completed due to force majeure arising from the relocation of Jintai and the concurrent construction in Yuxing.

 

On June 29, 2012, 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, 2012 with monthly rent of RMB 24,480 (approximately $3,880).

  

During the quarter ended September 30, 2012, the Company entered into a related party transaction to borrow $1,109,500 (RMB 7,000,000) from Xi’an Techteam Science and Technology (Group) Co., Ltd, a company controlled by Mr. Tao Li, Green Nevada’s Chairman, President and CEO. The amount borrowed is non interest bearing and does not contain a specific maturity date.

 

NOTE 11 - LOAN PAYABLES

 

As of December 31, 2012, the short-term loans payable consist of eight loans which mature on dates ranging from March 23, 2012 through October 25, 2013 with interest rates ranging from 6.30% to 8.20%. The loans No.1, 2 and 3 are collateralized by Tianjuyan’s land use right and building ownership right. The loans No. 4, 5, and 6 are collateralized by the inventory of Gufeng. In addition, the loans No. 7, 8 and 9 are guaranteed by Jinong’s credit.

 

No. Payee Loan period per agreement Interest Rate   As of December 31, 2012
1 Agriculture Bank of China-Beijing Branch January 11, 2012 - January 10, 2013 6.89% $ 1,331,400
2 Agriculture Bank of China-Beijing Branch March 23, 2012 - March 22, 2013 8.20%   1,268,000
3 Agriculture Bank of China-Beijing Branch April 23, 2012 - April 22, 2013 8.20%   1,600,850
4 Bank of Tianjin August 7,2012-May 15, 2013 7.20%   1,109,500
5 Bank of Tianjin August 7,2012-June 19, 2013 7.20%   1,109,500
6 Bank of Tianjin August 7, 2012-June 3, 2013 7.20%   951,000
7 China Merchant Bank August 30, 2012-August 29, 2013 6.30%   3,962,500
8 Industrial and Commercial Bank of China October 25, 2012 - October 25,2013 8.00%   1,585,000
9 Industrial and Commercial Bank of China September 25, 2012-September 24, 2013 8.00%   1,585,000
    Total   $ 14,502,750

 

As of June 30, 2012, the short-term loans payable consist of eight loans which mature on dates ranging from July 23, 2012 through April 22, 2013 interest rates ranging from 6.89% to 8.87%. The loans No.1, 2 and 3 are collateralized by Tianjuyan’s land use right and building ownership right. The loan No. 4 is collateralized by the inventory of Gufeng. In addition, the loans No.5, 6, 7 and 8 are guaranteed by Jinong’s credit.

 

F-9
 

 

            Interest     June 30,  
No.   Payee   Loan period per agreement   Rate     2012  
1   Agriculture Bank of China-Beijing Branch   January 11, 2012 - January 10, 2013     6.89%     $ 1,330,560  
2   Agriculture Bank of China-Beijing Branch   March 23, 2012 -  March 22, 2013     8.20%       1,267,200  
3   Agriculture Bank of China-Beijing Branch   April 23, 2012 - April 22, 2013     8.20%       1,599,840  
4   Bank of Tianjin   September 9, 2011 - July 23, 2012     7.54%       1,813,680  
5   Minsheng Bank   September 8, 2011 - September 8, 2012     8.20%       1,814,372  
6   Minsheng Bank   September 19, 2011 - September 19, 2012     8.20%       561,628  
7   China Merchant Bank   July 25, 2011 - July 26, 2012     8.53%       3,960,000  
8   Industrial and Commercial Bank of China   October 17, 2011 - October 17,2012     8.87%       1,584,000  
        Total           $ 13,931,280  

  

The interest expenses from short-term loans were $366,447 and $399,868 for the three months ended December 31, 2012 and 2011, respectively. The interest expenses from short-term loans were $752,239 and $556,347 for the six months ended December 31, 2012 and 2011, respectively.   

 

NOTE 12 - TAXES PAYABLE

 

Enterprise Income Tax

 

Effective January 1, 2008, the Enterprise Income Tax (“EIT”) law of the PRC replaced the prior tax laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”). The new EIT rate of 25% replaced the 33% DES rate was and became applicable to both DES and FIEs. The two-year exemption and three-year 50% reduction tax holiday for production-oriented FIEs were 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. Jinong’s provision for income taxes for the six months ended December 31, 2012 and 2011 was $3,024,887 and $3,239,986, respectively. Gufeng is subject to 25% EIT rate and thus it made provision for income taxes of $600,997 and $1,454,740 for the six months ended December 31, 2012 and 2011, respectively. Jintai and Yuxing have been exempt from paying income tax since its formation as it produces products which fall into the tax exemption list set out in the EIT. This exemption is expected to last as long as the applicable provisions of the EIT do not change.

 

Value-Added Tax

 

All of the Company’s fertilizer products that are produced and sold in the PRC were subject to a Chinese Value-Added Tax (VAT) of 13% of the gross sales price. On April 29, 2008, the PRC State of Administration of Taxation (SAT) released Notice #56, “Exemption of VAT for Organic Fertilizer Products”, which allows certain fertilizer products to be exempt from VAT beginning June 1, 2008. The Company submitted the application for exemption in May 2009, which was granted effective September 1, 2009, continuing through December 31, 2015. The VAT exemption applies to all agricultural products sold by Jintai and Yuxing, and all but a nominal amount of agricultural products sold by Jinong.

 

Income Taxes and Related Payables

 

Taxes payable consist of the following:

 

   December 31,   June 30, 
   2012   2012 
VAT provision (credit)  $584,451   $68,180 
Income tax payable   20,185,373    17,274,817 
Other levies   332,321    332,392 
Total  $21,102,145   $17,675,389 

 

 

Tax Rate Reconciliation

 

Our effective tax rates were approximately 17.5% and 27.2% for the three months ended December 31, 2012 and 2011, respectively. Substantially all of the Company’s income before income taxes and related tax expense are from PRC sources. Actual income tax benefit reported in the consolidated statements of income and comprehensive income differ from the amounts computed by applying the US statutory income tax rate of 34% to income before income taxes for the three months ended December 31, 2012, 2011 for the following reasons:

 

F-10
 

 

    China         United States                
December 31, 2012   15% - 25%         34%         Total      
                               
Pretax income (loss) $ 23,085,245       $ (2,356,633)       $ 20,728,612      
                               
Expected income tax expense (benefit)   5,771,311   25.0 % (801,255)   34.0 %   4,970,056      
High-tech income benefits on Jinong   (2,015,741)   (8.7) % -   -     (2,015,741)      
Losses from subsidiaries in which no benefit is recognized   (129,686)   (0.56) % -   -     (129,686)      
Change in valuation allowance on deferred tax asset from US tax benefit   -         801,255   (34.0) %   801,255      
Actual tax expense $ 3,625,884   15.7 % $ -   - % $ 3,625,884   17.5 %

 

 

    China         United States                
    15% - 25%         34%         Total      
                               
Pretax income (loss) $ 25,937,891       $ (2,767,651)       $ 23,170,240      
                               
Expected income tax expense (benefit)   6,484,473   33.0 %   (941,001)   34.0 %   5,543,472      
High-tech income benefits on Jinong   -   - %   -   -     -      
Losses from subsidiaries in which no benefit is recognized   (1,789,747)   (9.1) %   -   -     (1,789,747)      
Change in valuation allowance on deferred tax asset from US tax benefit   -         941,001   (34.0) %   941,001      
Actual tax expense $ 4,694,726   18.1 % $ -   - % $ 4,694,726   27.2 %

 

 

NOTE 13 - STOCKHOLDERS’ EQUITY

 

Common Stock

 

On July 2, 1010, the Company issued a total of 2,275,931 shares of common stock to Gufeng’s previous shareholders or their designees. Of the shares being issued in the acquisition, 40% have been held in escrow pending satisfaction of certain conditions such as make good targets set for Gufeng for the fiscal year ended June 30, 2011.

 

On March 31, 2011, the Company granted a total of 96,000 shares of restricted common stock to certain directors and executive officers under its 2009 Equity Incentive Plan. Pursuant to the terms of the grant, 8,000 shares of restricted common stock were vested on April 30, 2011, 44,000 shares vested on June 2, 2011, and 44,000 shares vested on December 31, 2011. These shares were issued in September 2011.

 

On March 8, 2012, the Company issued 63,158 shares of common stock in a private placement to Mr. Tao Li, the Company’s Chairman and Chief Executive Officer, at a purchase price of $4.75 per share, for an aggregate purchase price of $300,001 pursuant to the terms and provisions of a Securities Purchase Agreement in a form previously presented to the Board of Directors of the Company.

 

On March 31, 2012, the Company issued 5,704 shares of Common Stock valued at $24,000 of consulting services to a consultant of the Company.

 

On June 14, 2012, the Company granted a total of 1,000,000 shares of restricted common stock to certain directors, executive officers and key employees under its 2009 Equity Incentive Plan. Pursuant to the terms of the grant, the stock grants vest in three installments on June 30, 2012, September 30, 2012 and December 31, 2012. The Company has issued 445,000 shares of common stock related to these grants with 555,000 yet to be issued.

 

On September 12, 2012, the Company issued 35,041 shares of Common Stock valued at $130,000 of consulting services to a consultant of the Company.

 

F-11
 

 

On September 26, the Company agreed to issue 151,515 shares of Common Stock at the market price of $3.30 per share to Mr. Tao Li, the Company’s Chairman and Chief Executive Officer in the first offering of the Company’s Employee Stock Purchase Plan (“ESPP”) adopted by the Company’s Board of Directors (the “Board”) on August 9, 2012. Mr. Li had previously advanced the Company $300,000 and has unpaid compensation accrued in the accompanying balance sheet. The 151,515 shares were not issued until after September 30, 2012 and accordingly the due to officer of $300,000 and accrued compensation of $200,000 were deducted during the quarter ended December 31, 2012.

 

On September 28, 2012, the Company approved the granting of (i) 200,000 shares of restricted stock to Mr. Ken Ren, the Company’s Chief Financial Officer (the “CFO”), and (ii) 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 is an independent director of the Company (the “Stock Grants”). The Stock Grants all vest in three installments on December 31, 2012, March 31, 2013, and June 30, 2013, with 100,000 shares vesting first and 50,000 shares vesting on each of the other two vesting dates to the CFO; and 10,000 shares vesting first and half of the their respective remaining shares vesting on each of the other two vesting dates to the three independent directors. The vest of the restricted shares is conditioned on the individuals being employed by the Company at the time of the vest. These shares were issued during the quarter ended December 31, 2012 and the expenses associated with the issuance of these shares will be recorded over the vesting period of the shares.

 

Preferred Stock

 

Under the Company’s articles of incorporation, the board of directors 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, 2012, 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.

 

F-12
 

 

NOTE 14 - STOCK OPTIONS

 

On March 31, 2011, the Company’s Compensation Committee approved the cancellation of all those outstanding unvested options granted to officers and directors and former officers on March 1, 2010 and February 7, 2010 under the 2009 Equity Incentive Plan.

 

There were no issuances of stock options during the three months ended December 31, 2012 and 2011.

 

Options outstanding as of December 31, 2012 and related weighted average price and intrinsic value are as follows:

 

       Weighted     
       Average     
   Number   Exercise   Aggregate 
   of Shares   Price   Intrinsic Value 
Outstanding, June 30, 2012   115,099   $14.66   $- 
Granted   -           
Forfeited/Cancelled   -           
Exercised   -           
Outstanding, December 31, 2012   115,099   $14.66   $- 

 

NOTE 15 -CONCENTRATIONS AND LITIGIATION

 

Market Concentration

 

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

 

The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among other things, the political, economic and legal environments 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 was one vendor from which the Company purchased more than 10% of its raw materials for the fertilizer products for the six months ended December 31, 2012 and 2011, respectively.

 

There was one customer that accounted over 10% of the total sales of fertilizer products as of six months ended December 31, 2012 and 2011, respectively.

 

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 current version of the complaint alleges that the Company and certain of its 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 Nevada Federal 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 certain individual defendants from the complaint and 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 certain of the individual defendants.  The Nevada Federal Court also denied the defendants’ motion to strike.

 

F-13
 

 

NOTE 16 - SEGMENT REPORTING

 

The Company was organized into four main business segments based on location and product: Jinong (fertilizer production), Gufeng (fertilizer production), Jintai (agricultural products production) and Yuxing (agricultural products production). 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. Jintai is in the process of combining with Yuxing.

 

The following tables present a summary of our businesses and operating segments results. 

 

   Three months ended December 31, 
Revenues from unaffiliated customers:  2012   2011 
   Jinong  $22,954,851   $18,989,156 
   Gufeng   17,984,853    25,958,438 
   Jintai   -    2,115,689 
   Yuxing   791,288    30,714 
Consolidated  $41,730,992   $47,093,997 
           
Operating income :          
Jinong  $8,400,320   $9,258,832 
Gufeng   2,489,858    3,673,793 
Jintai   -    (1,255,392)
Yuxing   26,526    (199,728)
Reconciling item (1)   -    - 
Reconciling item (2)   119,905    (828,699)
Reconciling item (2)--stock compensation   (1,137,631)   (453,051)
Consolidated  $9,898,978   $10,195,755 
           
Net income:          
Jinong  $7,200,039   $7,928,204 
Gufeng   1,462,374    2,372,435 
Jintai   47    (1,255,300)
Yuxing   596,544    (19,735)
Reconciling item (1)   51    25 
Reconciling item (2)   (1,017,727)   (1,281,751)
Consolidated  $8,241,328   $7,743,878 
           
Depreciation and Amortization:          
Jinong  $2,423,732   $589,232 
Gufeng   79,718    856,511 
Jintai   -    285 
Yuxing   316,098    101,389 
Consolidated  $2,819,548   $1,547,417 
           
Interest expense:          
Jinong  $-   $- 
Gufeng   366,447    399,868 
Consolidated  $366,447   $399,868 
           
Capital Expenditure:          
Jinong  $4,982,678   $2,957,009 
Gufeng   (954,106)   - 
Jintai   -    - 
Yuxing   34,173   55,413 
Consolidated  $4,062,745   $3,012,422 

 

(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.

 

F-14
 

 

   Six months ended December 31, 
Revenues from unaffiliated customers:  2012   2011 
   Jinong  $50,805,827   $41,231,407 
   Gufeng   28,921,824    55,571,529 
   Jintai   -    3,314,576 
   Yuxing   1,516,081    79,079 
Consolidated  $81,243,732   $100,196,591 
           
Operating income :          
Jinong  $20,011,931   $21,446,280 
Gufeng   3,178,497    6,282,382 
Jintai   -    (1,244,933)
Yuxing   88,655    (240,458)
Reconciling item (1)   -    - 
Reconciling item (2)   (482,233)   (1,757,710)
Reconciling item (2)--stock compensation   (1,874,528)   (1,010,243)
Consolidated  $20,922,322   $23,475,318 
           
Net income:          
Jinong  $17,137,626   $18,357,698 
Gufeng   1,670,044    4,190,331 
Jintai   57    (1,244,799)
Yuxing   651,636    (60,066)
Reconciling item (1)   126    303 
Reconciling item (2)   (2,356,761)   (2,767,953)
Consolidated  $17,102,728   $18,475,514 
           
Depreciation and Amortization:          
Jinong  $4,459,585   $1,164,711 
Gufeng   925,081    1,646,103 
Jintai   -    568 
Yuxing   629,563    199,936 
Consolidated  $6,014,229   $3,011,318 
           
Interest expense:          
Jinong  $-   $- 
Gufeng   752,239    556,347 
Consolidated  $752,239   $556,347 
           
Capital Expenditure:          
Jinong  $9,326,617   $3,709,002 
Gufeng   (907,953)   - 
Jintai   -    - 
Yuxing   236,891    131,455 
Consolidated  $8,655,555   $3,840,457 

  

F-15
 

 

   As of   As of 
   December 31, 2012   June 30, 2012 
Identifiable assets:          
Jinong  $197,979,437   $221,575,406 
Gufeng   74,708,823    57,657,305 
Jintai   4,389,105    6,670,058 
Yuxing   37,395,648    1,851,745 
Reconciling item (1)   145,564    280,445 
Reconciling item (2)   (3,906)   (3,906)
Consolidated  $314,614,671   $288,031,053 

 

(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.

 

F-16
 

 

NOTE 17 - COMMITMENTS AND CONTINGENCIES

 

On June 29, 2012, Jinong signed an office lease with Kingtone Information upon the expiration of its existing lease with Kingtone Information. Pursuant to the new 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, 2012 with monthly rent of $3,880 (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 $824 (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 $469 (RMB 2,958) for approximately 47,333 square meters (509,488 square feet) of land in the Ping Gu District of Beijing.

 

Accordingly, the Company recorded an aggregate of $31,039 and $72,625 as rent expenses for the six months ended December 31, 2012 and 2011, respectively. Rent expenses for the next five years ended December 31, are as follows:

 

Years ending:     
December 31, 2013  $62,077 
December 31, 2014   15,517 
December 31, 2015   15,517 
December 31, 2016   15,517 
December 31, 2017   15,517 

 

F-17
 

 

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 global financial markets and its impact on economic growth in general, the competition in the fertilizer industry and the impact of such competition on pricing, revenues and margins, the weather conditions in the areas where our customers are based, the cost of attracting and retaining highly skilled personnel, the prospects for future acquisitions, and the factors set forth elsewhere in this report, our actual results may differ materially from those anticipated in these forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will in fact occur. You should not place undue reliance on the forward-looking statements contained in this report.

 

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

 

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

 

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, Yuxing, Gufeng (including Gufeng’s subsidiary Tianjuyuan). 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 fertilizers, highly-concentrated water-soluble fertilizers and mixed organic-inorganic compound fertilizer produced by Gufeng. In addition, through Yuxing, we develop and produce agricultural products, such as top-grade fruits, vegetables, flowers and colored seedlings. For financial reporting purposes, our operations are organized into four business segments: fertilizer products (Jinong), fertilizer products (Gufeng), agricultural products production (Yuxing) and agricultural products production (Jintai). However, as reported in our previous annual and quarterly reports, we have been in process of relocating Jintai to the facilities of Yuxin due to the deteriorated surrounding environment that caused the death and obsolescence of large amount of Jintai’s flowers and seedlings. As a result, Jintai has not been in operation since March 1, 2012, when the relocation commenced.

 

Yuxing serves as a research and development base for our fertilizer products. The fertilizer business conducted by Jinong and Gufeng generated approximately 98.1%, and 95.4% of our total revenues for the three months ended December 31, 2012 and 2011, respectively. Yuxing had served as a research and development base for our fertilizer products.

 

Fertilizer Products

 

As of December 31, 2012, we had developed and produced a total of 448 different fertilizer products in use, of which 131 were developed and produced by Jinong and 317 by Gufeng.

 

 
 

 

Below are tables that show the metric tons of fertilizer sold by Jinong and Gufeng and the revenue per ton for the periods indicated:

 

    For the Three Months Ended December 31,       For the Six Months Ended December 31, 
　   2012   2011   　   2012   2011 
 　    (Metric Tons)    (Metric Tons)    　    (Metric Tons)    (Metric Tons) 
 Jinong     15,207    14,798    Jinong     32,656    31,644 
 Gufeng     41,297    59,189    Gufeng     63,447    124,063 
 Total     56,504    73,987    Total     96,103    155,707 
 　    　    　    　    　    　 
      For the Three Months Ended December 31, 　         For the Six Months Ended December 31, 
 　    2012    2011    　    2012    2011 
 　    (Revenue per ton)    (Revenue per ton)    　    (Revenue per ton)    (Revenue per ton) 
 Jinong    $1,509   $1,283    Jinong    $1,556   $1,303 
 Gufeng    $436   $439    Gufeng    $456   $448 

 

 

Our sales of fertilizer products to the top five provinces accounted for approximately 57.4% of our fertilizer revenue for the three months ended December 31, 2012; Specifically, the provinces and their respective percentage contributed to our fertilizer revenues were, Hei Longjiang (32.9%), Hebei (6.8%), Shaanxi (6.0%), Shandong (6.0%) and Jilin (5.8%).

 

As of December 31, 2012, we had a total of 978 distributors covering 22 provinces, four autonomous regions and three central government-controlled municipalities in China. Jinong had 789 distributors in China. Jinong’s sales are not dependent on any single distributor or any group of distributors. Its top five distributors accounted for 2.6% of Jinong’s fertilizer revenues for the three months ended December 31, 2012. Gufeng had 189 distributors, including some large state-owned enterprises. Gufeng’s top five distributors accounted for 84.0% of its revenues with one single distributor accounting for more than 10% of our total revenues for the three months ended December 31, 2012, i.e.: Beijing Baohenongxiang Agricultural Production Material Co Limited, which accounted for 27.7% of the total revenues for the three months ended December 31, 2012.

 

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 100% of our agricultural products revenue for the three months ended December 31, 2012 were Shaanxi (94.0%), Ningxia (3.1%) and Gansu (2.9%).

 

Recent Developments

 

New Products

 

During the three months ended December 31, 2012, Jinong launched two new fertilizer products, i.e.: broad-spectrum fertilizer product and humic-acid based fertilizer product. Jinong’s new products generated approximately $138,291, or 0.6% of Jinong’s fertilizer revenues for the three months ended December 31, 2012. Jinong also added 10 new distributors for the three months ended December 31, 2012. Jinong’s new distributors accounted for approximately $398,474, or 1.7% of Jinong’s fertilizer revenues for the three months ended December 31, 2012. During the quarter ended December 31, 2012, $25,360, or 0.1% was attributable to Jinong’s new products distributed by its new distributors. During the three months ended December 31, 2012, Gufeng launched no new fertilizer product but added two new distributors during the three months ended December 31, 2012, which accounted for approximately $45,078, or 0.3%, of Gufeng’s fertilizer revenues.

 

 
 

 

Results of Operations

 

Three months ended December 31, 2012 compared to three months ended December 31, 2011

 

The following table shows the operating results of the Company on a consolidated basis for the three months ended December 31, 2012 and 2011.

 

　  Three Months Ended December 31, 
　  2012   2011   Change   Change% 
Sales   　    　    　    　 
Jinong  $22,954,851   $18,989,156   $3,965,695    20.9%
Gufeng   17,984,853    25,958,438    (7,973,585)   (30.7)%
Jintai   -    2,115,689    (2,115,689)   (100.0)%
Yuxing   791,288    30,714    760,574    2476.3%
Net sales   41,730,992    47,093,997    (5,363,005)   (11.4)%
Cost of goods sold   　    　    　    　 
Jinong   10,652,410    7,559,477    3,092,933    40.9%
Gufeng   14,304,747    20,692,393    (6,387,646)   (30.9)%
Jintai   -    2,258,064    (2,258,064)   (100.0)%
Yuxing   580,302    194,578    385,724    198.2%
Cost of goods sold   25,537,459    30,704,512    (5,167,053)   (16.8)%
Gross profit   16,193,533    16,389,485    (195,952)   (1.2)%
Operating expenses   　    　    　    　 
Selling expenses   3,138,284    2,414,748    723,536    30.0%
General and administrative expenses   3,156,271    3,778,982    (622,711)   (16.5)%
Total operating expenses   6,294,555    6,193,730    100,825    1.6%
Income from operations   9,898,978    10,195,755    (296,777)   (2.9)%
Other income (expense)   　    　    　    　 
Other income (expense)   397,980    89,090    308,890    346.7%
Interest income   86,717    90,116    (3,399)   (3.8)%
Interest expense, net   (366,447)   (399,868)   33,421    (8.4)%
Total other income (expense)   118,250    (220,662)   338,912    (153.6)%
Income before income taxes   10,017,228    9,975,093    42,135    0.4%
Provision for income taxes   1,775,900    2,231,215    (455,315)   (20.4)%
Net income   8,241,328    7,743,878    497,450    6.4%
Other comprehensive income   　    　    　    　 
Foreign currency translation gain (loss)   619,139    1,439,096    (819,957)   (57.0)%
Comprehensive income  $8,860,467   $9,182,974   $(322,507)   (3.5)%
　   　    　    　    　 
Basic weighted average shares outstanding   27,651,920    26,941,860    710,060    2.6%
Basic net earnings per share  $0.30   $0.29   $0.01    3.7%
Diluted weighted average shares outstanding   27,651,920    26,941,860    710,060    2.6%
Diluted net earnings per share   0.30    0.29    0.01    3.7%

 

 
 

 

Net Sales

 

Total net sales for the three months ended December 31, 2012 were $41,730,992, a decrease of $5,363,005, or 11.4%, from $47,093,997 for the three months ended December 31, 2011. This decrease was largely due to the decrease in Gufeng’s export sales.

 

For the three months ended December 31, 2012, Jinong’s net sales increased $3,965,695, or 20.9%, to $22,954,851 from $18,989,156 for the three months ended December 31, 2011. This increase was mainly attributable to the greater sales of humic acid fertilizer products including our liquid and powder fertilizers during this period as a result of our increased distributors and the aggressive marketing strategy.

 

For the three months ended December 31, 2012, net sales at Gufeng were $17,984,853, a decrease of $7,973,585, or 30.7%, from $25,958,438 for the three months ended December 31, 2011. The fiscal quarter ended December 31, 2012 fell in the “export window” in which no special tariff tax applied, however, due to the lower demand on Nitrogen-Phosphorous elemented compound fertilizer by importing countries which is arising from the backlog of their imported compound fertilizers in previous quarters, Gufeng had no export contract in the quarter ended December 31, 2012. Despite of that, Gufeng has been expanding and penetrating the domestic market particularly since the fiscal quarter ended March 31, 2012, during which period no revenue was generated from fertilizer exportation either due to special tariff tax levied by China authority or due to weak demand by importing countries. However, net domestic sales at Gufeng for the three months ended December 31, 2012 was $17,984,853, an increase of $2,632,408, or 17.1%, from $15,352,454 for the same period in 2011.

 

Jintai had not generated any sales revenue since March 1, 2012 when the relocation started. Jintai’s net sales was $2,115,689 for the three months ended December 31, 2011. Jintai’s relocation is still on going. We expect Jintai will likely remain unprofitable until the relocation gets completed by the end of fiscal year 2013. Further, the Company may consider merging the subsidiaries of Yuxing and Jintai together to reduce operating cost and streamline management at appropriate time in the future.

 

For the three months ended December 31, 2012, Yuxing’s net sales were $791,288, an increase of $760,574, from $30,714, or 2476.3% during the three months ended December 31, 2011. The increase was mainly attributable both to the strong sales of Yuxing’s top-grade flowers and increased client base by combining Jintai’s.

 

The Company’s current credit policy allows clients to pay off their receivable balance by up to 180 days from the point the revenue is recognized. Under this policy, for receivable older than 180 days, the Company will book 100% allowance toward the outstanding balance immediately. Such a policy became effective since the fiscal quarter period ended March 31, 2012. The extended credit period was referred to in the Company’s quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2012. The current policy is a revision of the Company’s previous credit policy, which allowed the clients to pay off receivables up to a shorter period of 90 days, instead of 180 days.

 

The implementation of the current policy was a result of the change in fertilizer market in the middle of fiscal year 2012. It applies to the Company’s subsidiaries in fertilizer segment, Jinong and Gufeng. Starting from 2011, the economy in China slowed down. The demand in the fertilizer market declined from previous year and remained softened toward year end. In addition, in December 2011, in overseeing the fertilizer market in China, the Ministry of Finance under the supervision of the State Council of the Central Government of the PRC, or the PRC authority, raised the 2012 export tariff for certain fertilizer products that Gufeng exports to in the international market. While we always keep a balanced mix of our domestic clients and oversea clients, Gufeng’s export ability was largely expected to be reduced during 2012 due to the prohibitively high export tariff imposed. We then had to rely on domestic clients to fill in the orders that could be under the export contract instead. To combat the adverse effect of high export tariff, we launched aggressive marketing campaign by forgoing advance payments and offering warehouse credit sales to selected clients. Coupled with the marketing efforts to selected clients, Gufeng and Jinong, adopted the updated 180-day credit policy for all clients, effective beginning 2012. The updated policy eased the payback period and provided much needed liquidity to the constraint clients. These policy adjustments and marketing tools were approved very essential in time for the Company in expanding its sales in the domestic segment and offsetting the negative effect of reduced export capacity up to date.

 

Cost of Goods Sold

 

Total cost of goods sold for the three months ended December 31, 2012 was $25,537,459, a decrease of $5,167,053, or 16.8%, from $30,704,512 for the three months ended December 31, 2011. This decrease was proportional to the decrease in sales, which was mainly due to Gufeng’s decreased export sales for the three months ended December 31, 2012.

 

Cost of goods sold by Jinong for the three months ended December 31, 2012 was $10,652,410, an increase of $3,092,933, or 40.9%, from $7,559,477 for the same period in 2011. The increase was primarily attributable to (i) 62.8% increase in the cost of raw materials and (ii) 29.7% increases in the cost of packing material.

 

 
 

 

Cost of goods sold by Gufeng for the three months ended December 31, 2012 was $14,304,747, a decrease of $6,387,646, or 30.9%, from $20,692,393 for the same period in 2011. The decrease was proportional to Gufeng’s sales decrease for the three months ended December 31, 2012.

 

Cost of goods sold by Jintai for the three months ended December 31, 2012 was zero, comparing to $2,258,064 for the three month ended December 31, 2011, because Jintai had no operation since March 2011 due to the ongoing relocation.

 

For three months ended December 31, 2012, cost of goods sold by Yuxing was $580,302, an increase of $385,724, or 198.2%, from $194,578 for the three months ended December 31, 2011. The increase was proportional to Yuxing’s increased sales for the three months ended December 31, 2012.

 

Gross Profit

 

Total gross profit for the three months ended December 31, 2012 decreased by $195,952, or 1.2%, to $16,193,533, as compared to $16,389,485 for the three months ended December 31, 2011. Gross profit margin was approximately 38.8% and 34.8% for the three months ended December 31, 2012 and 2011, respectively.

 

Gross profit generated by Jinong increased by $872,762, or 7.6%, to $12,302,441 for the three months ended December 31, 2012 from $11,429,679 for the three months ended December 31, 2011. Gross profit margin from Jinong’s sales was approximately 53.6% and 60.2% for the three months ended December 31, 2012 and 2011, respectively. The decrease of Jinong’s gross profit margin is due to the increase in the cost of raw materials.

 

For the three months ended December 31, 2012, gross profit generated by Gufeng was $3,680,106, a decrease of $1,585,939, or 30.1%, from $5,266,045 for the three months ended December 31, 2011. Gross profit margin from Gufeng’s sales was approximately 20.5% and 20.3% for the three months ended December 31, 2012 and 2011, respectively.

 

Gross profit from Jintai was zero for the three months ended December 31, 2012 due to its relocation since March 1, 2012, as compared to a loss of $142,375 for the three months ended December 31, 2011. Gross profit margin from Jintai’s sales was approximately negative 6.7% for the three months ended December 31, 2011. 

 

For the three months ended December 31, 2012, gross profit generated by Yuxing was $210,986, an increase of $374,850 from negative $163,864 for the three months ended December 31, 2011. Gross profit margin from Yuxing’s sales was approximately 26.7% and negative 533.5% for the three months ended December 31, 2012 and 2011, respectively.

 

Selling Expenses

 

Our selling expenses consist primarily of salaries of sales personnel, advertising and promotion expenses, freight-out costs and related compensation. Selling expenses were $3,138,284, or 7.5%, of net sales for the three months ended December 31, 2012, as compared to $2,414,748, or 5.1% of net sales for the three months ended December 31, 2011, an increase of $723,536, or 30.0%. The selling expenses of Gufeng were $146,180, or 0.8% of Gufeng’s net sales for the three months ended December 31, 2012, as compared to $689,934, or 2.7% of Gufeng’s net sales for the three months ended December 31, 2011. The selling expenses of Jinong for the three months ended December 31, 2012 were $2,977,043, or 13.0% of Jinong’s net sales, as compared to selling expenses of $1,711,467 or 9.0% of Jinong’s net sales in fiscal year 2011. Most of this increase was due to Jinong’s expanded marketing efforts.

 

General and Administrative Expenses

 

General and administrative expenses consisted primarily of related salaries, rental expenses, business development, depreciation and travel expenses incurred by our general and administrative departments and legal and professional expenses including expenses incurred and accrued for certain litigations. General and administrative expenses were $3,156,271, or 7.6% of net sales, for the three months ended December 31, 2012, as compared to $3,778,982, or 8.0%, of net sales for the three months ended December 31 2011, a decrease of $622,711, or 16.5%. The decrease was mainly due to the absence of biological asset write off compared with the same period in fiscal year 2012.

 

Total Other Income (Expenses)

 

Total other income (expense) consisted of income from subsidies received from the PRC government, interest income, interest expenses and bank charges. Total other income for the three months ended December 31, 2012 was $118,250, as compared to total other expense of $220,662 for the three months ended December 31, 2011, an increase in income of $338,912, or 153.6%. The increase was mainly attributable to the governmental subsidies for Yuxing’s greenhouses project .

 

 
 

 

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 $1,270,687 for the three months ended December 31, 2012, as compared to $1,399,127 for the three months ended December 31, 2011, a decrease of $128,440, or 9.2%, which was primarily due to Jinong’s increased cost of goods sold and expenses.

 

Gufeng, subject to a tax rate of 25%, incurred income tax expenses of $505,213 for the three months ended December 31, 2012, as compared to $832,087 for the three months ended December 31, 2011, a decrease of $326,874, or 39.3%, which was primarily due to Gufeng’s decreased net sales.

 

Jintai has been exempt from paying income tax as its products fall into the tax exemption list set out in the EIT and Jintai did not have any taxable income for the quarter ended December 31, 2012.

 

Yuxing has no income tax for the three months ended December 31, 2012 as a result of being exempted from paying income tax due to its products fall into the tax exemption list set out in the EIT.

 

Net Income

 

Net income for the three months ended December 31, 2012 was $8,241,328, an increase of $497,450, or 6.4%, compared to $7,743,878 for the three months ended December 31, 2011. Net income as a percentage of total net sales was approximately 19.7% and 16.4% for the three months ended December 31, 2012 and 2011, respectively. The increase is mainly attributable to the increased other income.

 

 
 

 

Six months ended December 31, 2012 compared to Six months ended December 31, 2011

 

The following table shows the operating results of the Company on a consolidated basis for the six months ended December 31, 2012 and 2011.

 

　  Six Months Ended December 31, 
　  2012   2011   Change   Change% 
Sales   　    　    　    　 
Jinong  $50,805,827   $41,231,407   $9,574,420    23.2%
Gufeng   28,921,824    55,571,529    (26,649,705)   (48.0)%
Jintai   -    3,314,576    (3,314,576)   (100.0)%
Yuxing   1,516,081    79,079    1,437,002    1817.2%
Net sales   81,243,732    100,196,591    (18,952,859)   (18.9)%
Cost of goods sold   　    　    　    　 
Jinong   23,491,908    15,669,607    7,822,301    49.9%
Gufeng   23,494,509    45,962,063    (22,467,554)   (48.9)%
Jintai   -    3,006,894    (3,006,894)   (100.0)%
Yuxing   1,130,409    259,810    870,599    335.1%
Cost of goods sold   48,116,826    64,898,374    (16,781,548)   (25.9)%
Gross profit   33,126,906    35,298,217    (2,171,311)   (6.2)%
Operating expenses   　    　    　    　 
Selling expenses   6,172,371    4,905,222    1,267,149    25.8%
General and administrative expenses   6,032,213    6,917,677    (885,464)   (12.8)%
Total operating expenses   12,204,584    11,822,899    381,685    3.2%
Income from operations   20,922,322    23,475,318    (2,552,996)   (10.9)%
Other income (expense)   　    　    　    　 
Other income (expense)   397,380    63,666    333,714    524.2%
Interest income   161,149    187,603    (26,454)   (14.1)%
Interest expense, net   (752,239)   (556,347)   (195,892)   35.2%
Total other income (expense)   (193,710)   (305,078)   111,368    (36.5)%
Income before income taxes   20,728,612    23,170,240    (2,441,628)   (10.5)%
Provision for income taxes   3,625,884    4,694,726    (1,068,842)   (22.8)%
Net income   17,102,728    18,475,514    (1,372,786)   (7.4)%
Other comprehensive income   　    　    　    　 
Foreign currency translation gain (loss)   154,786    3,343,242    (3,188,456)   (95.4)%
Comprehensive income  $17,257,514   $21,818,756   $(4,561,242)   (20.9)%
　   　    　    　    　 
Basic weighted average shares outstanding   27,561,556    26,899,599    661,957    2.5%
Basic net earnings per share  $0.62   $0.69   $(0.07)   (9.6)%
Diluted weighted average shares outstanding   27,561,556    26,899,599    661,957    2.5%
Diluted net earnings per share   0.62    0.69    (0.07)   (9.6)%

 

 
 

 

Net Sales

 

Total net sales for the six months ended December 31, 2012 were $81,243,732, a decrease of $18,952,859, or 18.9%, from $100,196,591 for the six months ended December 31, 2011. This decrease was largely due to the decrease in Gufeng’s export sales.

 

For the six months ended December 31, 2012, Jinong’s net sales increased $9,574,420, or 23.2%, to $50,805,827 from $41,231,407 for the six months ended December 31, 2011. This increase was mainly attributable to the greater sales of humic acid fertilizer products including our liquid and powder fertilizers during this period as a result of our increased distributors and the aggressive marketing strategy.

 

For the six months ended December 31, 2012, net sales at Gufeng were $28,921,824, a decrease of $26,649,705, or 48.0%, from $55,571,529 for the six months ended December 31, 2011. The decrease was due to the lower demand on Nitrogen-Phosphorous elemented compound fertilizer by importing countries which is arising from the backlog of their imported compound fertilizers in previous quarters. Despite of that, Gufeng has been expanding and penetrating the domestic market particularly since the fiscal quarter ended March 31, 2012, during which period no revenue was generated from fertilizer exportation either due to special tariff tax levied by China authority or due to weak demand by importing countries. Net domestic sales at Gufeng for the six months ended December 31, 2012 was $28,918,424, an increase of $4,480,919, or 18.3%, from $24,437,505 for the same period in 2011.

 

Jintai had not generated any sales revenue since March 1, 2012 when the relocation started. Jintai’s net sales was $3,314,576 for the six months ended December 31, 2011. Jintai’s relocation is still in the process.

 

For the six months ended December 31, 2012, Yuxing’s net sales were $1,516,081, an increase of $1,437,002, from $79,079 during the six months ended December 31, 2011. The increase was mainly attributable both to the strong sales of Yuxing’s top-grade flowers and increased client base by combining Jintai’s.

 

Cost of Goods Sold

 

Total cost of goods sold for the six months ended December 31, 2012 was $48,116,826, a decrease of $16,781,548, or 25.9%, from $64,898,374 for the six months ended December 31, 2011. This increase was proportional to the decrease in sales, which was mainly due to Gufeng’s decreased export sales for the six months ended December 31, 2012.

 

Cost of goods sold by Jinong for the six months ended December 31, 2012 was $23,491,908, an increase of $7,822,301, or 49.9%, from $15,669,607 for the same period in 2011. The increase was primarily attributable to (i) 56.5% increase in the cost of raw materials and (ii) 26.0% increases in the cost of packing materials.

 

Cost of goods sold by Gufeng for the six months ended December 31, 2012 was $23,494,509, a decrease of $22,467,554, or 48.9%, from $45,962,063 for the same period in 2011. The decrease was proportional to Gufeng’s decrease in export sales for the six months ended December 31, 2012.

 

Cost of goods sold by Jintai for the six months ended December 31, 2012 was zero, comparing to $3,006,894 for fiscal year 2011, because Jintai had no operation during the that period as a result of ongoing relocation.

 

For six months ended December 31, 2012, cost of goods sold by Yuxing was $1,130,409, an increase of $870,599, or 335.1%, from $259,810 for the six months ended December 31, 2011. The increase was proportional to Yuxing’s increased sales for the six months ended December 31, 2012.

 

Gross Profit

 

Total gross profit for the six months ended December 31, 2012 decreased by $2,171,311, or 6.2%, to $33,126,906, as compared to $35,298,217 for the six months ended December 31, 2011. Gross profit margin was approximately 40.8% and 35.2% for the six months ended December 31, 2012 and 2011, respectively.

 

Gross profit generated by Jinong increased by $1,752,119, or 6.9%, to $27,313,919 for the six months ended December 31, 2012 from $25,561,800 for the six months ended December 31, 2011. Gross profit margin from Jinong’s sales was approximately 53.8% and 62.0% for the six months ended December 31, 2012 and 2011, respectively. The decrease of Jinong’s gross profit margin is due to the increase in the cost of raw materials.

 

For the six months ended December 31, 2012, gross profit generated by Gufeng was $5,427,315, a decrease of $4,182,151, or 43.5%, from $9,609,466 for the six months ended December 31, 2011. Gross profit margin from Gufeng’s sales was approximately 18.8% and 17.3% for the six months ended December 31, 2012 and 2011, respectively.

 

Gross profit from Jintai was zero for the six months ended December 31, 2012 due to its relocation since March 1, 2012, as compared to $307,682 for the six months ended December 31, 2011. Gross profit margin from Jintai’s sales was approximately 9.3% for the six months ended December 31, 2011. 

 

For the six months ended December 31, 2012, gross profit generated by Yuxing was $385,672, an increase of $566,403, from negative $180,731 for the six months ended December 31, 2011. Gross profit margin from Yuxing’s sales was approximately 25.4% and negative 228.5% for the six months ended December 31, 2012 and 2011, respectively.

 

 
 

 

Selling Expenses

 

Our selling expenses consist primarily of salaries of sales personnel, advertising and promotion expenses, freight-out costs and related compensation. Selling expenses were $6,172,371, or 7.6%, of net sales for the six months ended December 31, 2012, as compared to $4,905,222, or 4.9% of net sales for the six months ended December 31, 2011, an increase of $1,267,149, or 25.8%. The selling expenses of Gufeng were $370,689, or 1.3% of Gufeng’s net sales for the six months ended December 31, 2012, as compared to $1,533,273, or 2.8% of Gufeng’s net sales for the six months ended December 31, 2011. The selling expenses of Jinong for the six months ended December 31, 2012 were $5,769,477, or 11.4% of Jinong’s net sales, as compared to selling expenses of $3,346,393 or 8.1% of Jinong’s net sales in fiscal year 2011. Most of this increase was due to Jinong’s expanded marketing efforts.

 

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 $6,032,213, or 7.4% of net sales, for the six months ended December 31, 2012, as compared to $6,917,677, or 6.9%, of net sales for the six months ended December 31 2011, a decrease of $885,464, or 12.8%. Such a decrease in expenses was because we incurred a write-off on Jintai’s obsoleted plants during the corresponding period last year while we did not incur such a write-off this time.

 

Total Other Income (Expenses)

 

Total other income (expenses) consisted of income from subsidies received from the PRC government, interest income, interest expenses and bank charges. Total other expense for the six months ended December 31, 2012 was $193,710 as compared to $ 305,078 for the six months ended December 31, 2011, a decrease of $111,368, or 36.5%. The decrease in expenses was mainly attributable to the governmental subsidies for Yuxing’s greenhouses project, which partially offset our other expenses.

 

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 $3,024,887 for the six months ended December 31, 2012, as compared to $3,239,986 for the six months ended December 31, 2011, a decrease of $215,099, or 6.6%.

 

Gufeng, subject to a tax rate of 25%, incurred income tax expenses of $600,997 for the six months ended December 31, 2012, as compared to $1,454,740 for the six months ended December 31, 2011, a decrease of $853,743, or 58.7%, which was primarily due to Gufeng’s decreased export sales.

 

Jintai has been exempt from paying income tax as its products fall into the tax exemption list set out in the EIT and Jintai did not have any taxable income during the six months ended December 31, 2012.

 

Yuxing has no income tax for the six months ended December 31, 2012 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, 2012 was $17,102,728, a decrease of $1,372,786, or 7.4%, compared to $18,475,514 for the six months ended December 31, 2011. The decrease was attributable to the decrease in gross profit, primarily Gufeng’s. Net income as a percentage of total net sales was approximately 21.1% and 18.4% for the six months ended December 31, 2012 and 2011, respectively.

 

 
 

 

Discussion of Segment Profitability Measures

 

As of December 31, 2012, 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 through Yuxing. For financial reporting purpose, our operations were organized into four main business segments based on locations and products: Jinong (fertilizer production), Gufeng (fertilizer production), Jintai (agricultural products production) and Yuxing (agricultural products production). Each of the segments has its own annual budget with regard to development, production and sales. However, as reported in our previous annual and quarterly reports, we have been in process of relocating Jintai to the facilities of Yuxin due to the deteriorated surrounding environment that caused the death and obsolescence of large amount of Jintai’s flowers and seedlings. As a result, Jintai has not been in operation since March 1, 2012, when the relocation commenced.

 

Each of the four 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 9.2% by $728,165 to $7,200,039 for the three month ended December 31, 2012 from $7,928,204 for the same period in 2011.

 

For Gufeng, the net income decreased 38.4% by $910,061 to $1,462,374 for the three months ended December 31, 2012 from $2,372,435 for the same period in 2011.

 

Jintai is located at the Economic and Technical Development Zone (the "Zone") in the metro area of the city of Xi'an. The Zone has been inhabited by a large and dense population and the periphery of Jintai has bristled with various industrial factories and utility plants in the latest years. The Zone’s concentrated industrial activities and dense population changed the micro bio environment for the growth of Jintai's agricultural products and disturbed Jintai’s normal fertilizer research and development. As of December 31, 2012, Jintai was still under the relocation process and there was no revenue from Jintai.

 

For Yuxing, the net income increased by $616,279 to $596,544 for the three months ended December 31, 2012 from net loss of $19,735 for the same period in 2011.

 

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, 2012, cash and cash equivalents were $74,937,781, an increase of $2,959,151, or 4.1%, from $71,978,630 as of June 30, 2012.

 

We intend to use some of the remaining net proceeds from the Public Offerings, as well as other working capital if required, to acquire new businesses, upgrade production lines and complete Yuxing’s new greenhouse facilities for agriculture products located on 88 acres of land in Hu County, 18 kilometers southeast of Xi’an city. 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, 
   2012   2011 
Net cash provided by (used in) operating activities  $11,006,765   $(2,746,995)
Net cash used in investing activities   (8,655,555)   (5,381,693)
Net cash provided by financing activities   562,675    9,616,925 
Effect of exchange rate change on cash and cash equivalents   45,266    1,098,840 
Net increase in cash and cash equivalents   2,959,151    2,587,077 
Cash and cash equivalents, beginning balance   71,978,630    65,606,413 
Cash and cash equivalents, ending balance  $74,937,781   $68,193,490 

 

 
 

 

Operating Activities

 

Net cash provided by operating activities was $11,006,765 for the six months ended December 31, 2012, an increase of $13,753,760, or 500.7% from $2,746,995 which was used in operating activities for the same period in 2011. The increase was mainly attributable to the increased collections of account receivables comparing to the same period in 2011.

 

Investing Activities

 

Net cash used in investing activities for the six months ended December 31, 2012 was $8,655,555, an increase of $3,273,862, or 60.8% from $5,381,693 for the six months ended December 31, 2011. The increase was attributable to the additions of Jinong’s directly owned shops.

 

Financing Activities

 

Net cash provided by financing activities in the six months ended December 31, 2012 and 2011 totaled $562,675 and $9,616,925, respectively, which was attributable to the short-term loan proceeds. 

 

As of December 31, 2012 and June 30, 2012, our loans payable were as follows:

 

   December 31, 2012   June 30, 2012 
Short term loans payable:  $14,520,750   $13,931,280 
Total  $14,520,750   $13,931,280 

    

Accounts Receivable

 

We had accounts receivable of $61,731,764 as of December 31, 2012, as compared to $62,001,158 as of June 30, 2012, a decrease of $269,394 or 0.43%, which is mainly attributable to the implementation of 180-day credit policy as compared to the previous 90-day credit policy.

Allowance for doubtful accounts in account receivable as of December 31, 2012 was $933,670, an increase of $254,402, or 37.5% from $679,268 as of June 30, 2012. And the allowance for doubtful accounts as a percentage of accounts receivable was 1.5% as of December 31, 2012 and 1.1% as of June 30, 2012 respectively. The increase in the allowance of doubtful accounts was mainly due to the gradual aging in the balance of historical outstanding receivables.

 

Inventories

 

We had an inventory of $51,122,753 as of December 31, 2012, as compared to $28,602,684 as of June 30, 2012, an increase of $22,520,069, or 78.7%. The increase in the inventory level was seasonal. Such increase was largely attributable to the preparatory replenishment of raw material by Gufeng, for its granular fertilizer production in the upcoming peak sales seasons.

 

Advances to Suppliers

 

We had advances to suppliers of $10,880,938 as of December 31, 2012 as compared to $12,207,325 as of June 30, 2012, representing a decrease of $1,326,387 or 10.9%.

 

Accounts Payable

 

We had accounts payable of $4,826,224 as of December 31, 2012 as compared to $6,881,748 as of June 30, 2012, representing a decrease of $2,055,524, or 29.9% mainly due to the business seasonality of Gufeng.

 

Unearned Revenue

 

We had unearned revenue of $6,791,730 as of December 31, 2012 as compared to $2,625,014 as of June 30, 2012, representing an increase of $4,166,716, or 158.7%.  The increase in unearned revenue was seasonal. Such increase was largely attributable to the advancement deposits made by Gufeng’s clients for the following purposes: 1) reservation and storage for the upcoming planting season in spring after spring festival; and 2) locking up a lower price in anticipation of increased price after the Spring Festival in China.

 

Tax Payable

 

We had taxes payable of $21,102,145 as of December 31, 2012 as compared to $17,675,389 as of June 30, 2012, representing an increase of $3,426,756, or 19.4%. This increase was mainly due to the increase in Jinong’s income tax, which resulted from Jinong’s increased revenue over the past six months period.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

 
 

 

Critical Accounting Policies and Estimates

 

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

 

Segment reporting

 

FASB ASC 280, (previously SFAS No. 131, Segment Reporting) 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, 2012, we were organized into four main business segments: Jinong (fertilizer production), Gufeng (fertilizer production), Jintai (agricultural products production) and Yuxing (agricultural products production). However, as reported in our previous annual and quarterly reports, we have been in process of relocating Jintai to the facilities of Yuxin due to the deteriorated surrounding environment that caused the death and obsolescence of large amount of Jintai’s flowers and seedlings. As a result, Jintai has not been in operation since March 1, 2012, when the relocation commenced. Jintai is in process of combining with Yuxing.

  

 
 

 

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 use financial instruments in the normal course of business 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 the 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 the U.S. dollar. Exchange rate fluctuations may adversely affect the value, in U.S. dollar terms, of our net assets and income derived from our operations in the PRC.

 

Our reporting currency is the U.S. dollar. Except for the U.S. holding companies, all of our consolidated revenues, consolidated costs and expenses, and our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. dollars and RMB. If the RMB depreciates against the U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue 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, 2012, our accumulated other comprehensive income was $15.9 million. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk. The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July 2005, the Renminbi has not been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in the Renminbi 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, 2012 and June 30, 2012 was $14.5 million and $13.9 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, 2012. The original loan term on average is one year, and the remaining average life of the short term-loans is approximately six 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 product 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, 2012 we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, 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 Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this 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 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 Chief Executive Officer and Chief Financial Officer, 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 our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 
 

 

PART II         OTHER INFORMATION

 

  

Item 1.Legal Proceedings

 

On October 15, 2010, a class action lawsuit was filed against us and certain of our current and former officers in the United States District Court for the District of Nevada (the "Nevada Federal Court") on behalf of purchasers of our common stock between November 12, 2009 and September 1, 2010. The current version of the complaint alleges that we and certain of our 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 our 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 Nevada Federal 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 certain individual defendants from the complaint and 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 certain of the individual defendants. The Nevada Federal Court also denied the defendants’ motion to strike.

 

 

Item 1A.Risk Factors

 

Gufeng’s concentration of customers could have a material adverse effect on us.

 

Unlike Jinong, whose top five distributors accounted for 2.6% of its fertilizer revenues for the three months ended December 31, 2012, Gufeng’s top five distributors accounted for 84.0% of its revenues with one single distributor accounting for more than 10% of our total revenues for the three months ended December 31, 2012. Gufeng’s largest distributor accounted for 27.7% of the total revenues for the three months ended December 31, 2012 .  If this customer reduces or discontinues its product purchases from us and we are unable to find a replacement, it would adversely affect our results of operations.

 

 

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 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 7, 2013 By: /s/ Tao Li  
    Name: Tao Li  
    Title: President and Chief Executive Officer  
    (principal executive officer)  

 

 

Date: February 7, 2013 By: /s/ Ken Ren  
    Name: Ken Ren  
    Title: Chief Financial Officer  
    (principal financial officer and principal accounting officer)  

 

 
 

 

EXHIBIT INDEX

 

No.Description

 

31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2Certification 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

 

 

 

* Furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise not subject to liability under these sections.