10-Q 1 f10q1217_chinagreenagri.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended December 31, 2017

 

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

 

For the transition period from ____________ to ____________

 

Commission File Number 001-34260

 

CHINA GREEN AGRICULTURE, INC.

(Exact name of registrant as specified in its charter)

 

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

  

3rd floor, Borough A, Block A. No. 181, South Taibai Road, Xi’an,

Shaanxi province, PRC 710065

(Address of principal executive offices) (Zip Code)

 

+86-29-88266368

(Issuer’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

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

 

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

 

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

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 38,551,265 shares of common stock, $0.001 par value, as of February 9, 2018.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
PART I FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
  Consolidated Condensed Balance Sheets As of December 31, 2017 and June 30, 2017 (Unaudited) 1
  Consolidated Condensed Statements of Income and Comprehensive Income (Loss) For the Three and Six Months Ended December 31, 2017 and 2016 (Unaudited) 2
  Consolidated Condensed Statements of Cash Flows For the Six Months Ended December 31, 2017 and 2016 (Unaudited) 3
  Notes to Consolidated Condensed Financial Statements As of December 31, 2017 (Unaudited) 4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
Item 4. Controls and Procedures 37
PART II OTHER INFORMATION 38
Item 6. Exhibits 38
Signatures   39
Exhibits/Certifications 40

 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   December 31, 2017   June 30,
2017
 
         
ASSETS        
Current Assets        
Cash and cash equivalents  $145,417,158   $123,050,548 
Accounts receivable, net   120,551,994    140,252,335 
Inventories   105,613,585    78,013,891 
Prepaid expenses and other current assets   3,709,791    4,201,782 
Amount due from related parties   1,565,196    1,412,844 
Advances to suppliers, net   20,821,812    24,023,062 
Total Current Assets   397,679,536    370,954,462 
           
Plant, Property and Equipment, Net   33,227,748    34,191,332 
Deferred Asset, Net   0    864,070 
Other Assets   296,256    279,031 
Other Non-current Assets   17,201,354    17,829,621 
Intangible Assets, Net   21,527,536    22,911,876 
Goodwill   8,290,857    8,651,238 
Total Assets  $478,223,287   $455,681,630 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current Liabilities          
Accounts payable  $22,783,659   $19,643,897 
Customer deposits   6,935,326    7,046,570 
Accrued expenses and other payables   10,140,609    9,135,312 
Amount due to related parties   3,288,189    3,071,102 
Taxes payable   2,180,995    2,690,407 
Short term loans   6,285,300    7,678,111 
Interest payable   324,230    256,904 
Derivative liability   70,184    195,812 
Total Current Liabilities   52,008,492    49,718,116 
           
Long-term Liabilities          
Long-term loan   0    3,549 
Convertible notes payable   7,268,851    8,431,912 
Total Liabilities  $59,277,343   $58,153,577 
           
Stockholders' Equity          
Preferred Stock, $.001 par value, 20,000,000 shares authorized, zero shares issued and outstanding    -    - 
Common stock, $.001 par value, 115,197,165 shares authorized, 38,551,265 shares issued and outstanding as of December 31, 2017 and June 30, 2017, respectively   38,551    38,551 
Additional paid-in capital   128,915,651    128,915,651 
Statutory reserve   30,104,103    28,962,302 
Retained earnings   256,518,126    244,738,993 
Accumulated other comprehensive income   3,369,512    (5,127,444)
Total Stockholders' Equity   418,945,944    397,528,052 
           
Total Liabilities and Stockholders' Equity  $478,223,287   $455,681,629 

 

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

 

1

 

 

CHINA GREEN AGRICULTURE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

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

 

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

 

2

 

 

CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

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

 

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

 

3

 

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

VIE assessment

 

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

 

Use of estimates

 

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

 

Cash and cash equivalents and concentration of cash

 

For statement of cash flows purposes, the Company considers all cash on hand and in banks, certificates of deposit with state owned banks in the People’s Republic of China (“PRC”) and banks in the United States, and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents. The Company maintains large sums of cash in three major banks in China. The aggregate cash in such accounts and on hand as of December 31, 2017 and June 30, 2017 were $145,417,158 and $123,050,548, respectively. The Company had $145,409,838 and $122,907,629 in cash in banks in China, and also had $7,320 and $142,919 in cash in two banks in the United States as of December 31, 2017 and June 30, 2017, respectively. Cash overdrafts as of a balance sheet date will be reflected as liabilities in the balance sheet. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.

 

Accounts receivable

 

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

 

Inventories

 

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

 

5

 

  

Deferred assets

 

Deferred assets represent amounts that the distributors owed to the Company in their marketing efforts and developing standard stores to expand the Company’s products’ competitiveness and market shares. The amount owed to the Company to assist its distributors will be expensed over three years, which is the term as stated in the cooperation agreement, as long as the distributors are actively selling the Company’s products. For the six months ended December 31, 2017 and 2016, the Company amortized $864,070 and $9,894,637 respectively, of the deferred assets. If a distributor breaches, defaults, or terminates the agreement with the Company within the three-year period, the outstanding unamortized portion of the amount owed will become payable to the Company immediately.

 

The deferred assets consist of items inside the distributors’ stores such as furniture, racks, cabinets, and display units, and items outside or attached to the distributors’ stores such as signage and billboards. These types of assets would be capitalized as fixed assets if the Company actually owned the stores or utilized the assets for its own operations. These assets would also be capitalized as leasehold improvements if the Company leased these stores from the distributors. Therefore, the Company believes that under U.S. generally accepted accounting principles, these types of asset purchases are properly capitalized. In addition, the Company believes that these assets are properly classified as deferred assets because if a distributor breaches, defaults, or terminates the agreement with the Company within a three-year period, a proportionate amount expended by the Company is to be repaid by the distributor.

 

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

 

Intangible Assets

 

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

 

Customer deposits

 

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

 

Earnings per share

 

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

 

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

 

   Three Months Ended 
   December 31, 
   2017   2016 
Net Income for Basic Earnings Per Share  $7,826,107   $5,506,011 
Basic Weighted Average Number of Shares   

38,551,264

    37,658,062 
Net Income Per Share – Basic  $0.20   $0.15 
Net Income for Diluted Earnings Per Share  $7,826,107   $5,506,011 
Diluted Weighted Average Number of Shares   

38,551,264

    37,658,062 
Net Income Per Share – Diluted  $0.20   $0.15 

 

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

 

6

 

 

Recent accounting pronouncements

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

7

 

 

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

 

In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock compensation (Topic 718): Scope of modification accounting” (“ASU 2017-09”). The purpose of the amendment is to clarify which changes to the terms or condition of a share-based payment award require an entity to apply modification accounting. For all entities that offer share based payment awards, ASU 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017. The Company is currently assessing the impact of ASU 2017-09 on its condensed consolidated financial statements.

 

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

 

NOTE 3 - INVENTORIES

 

Inventories consisted of the following:

 

   December 31,   June 30, 
   2017   2017 
Raw materials  $29,590,560   $39,397,711 
Supplies and packing materials  $733,214   $540,151 
Work in progress  $436,445   $421,496 
Finished goods  $74,853,366   $37,655,533 
Total  $105,613,585   $78,013,891 

 

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following:

 

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

  

NOTE 5 - INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

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

 

LAND USE RIGHT

 

On September 25, 2009, Yuxing was granted a land use right for approximately 88 acres (353,000 square meters or 3.8 million square feet) by the People’s Government and Land & Resources Bureau of Hu County, Xi’an, Shaanxi Province. The fair value of the related intangible asset was determined to be the respective cost of RMB73, 184,895 (or $11,219,244). The intangible asset is being amortized over the grant period of 50 years using the straight-line method.

 

8

 

  

On August 13, 2003, Tianjuyuan was granted a certificate of Land Use Right for a parcel of land of approximately 11 acres (42,726 square meters or 459,898 square feet) at Ping Gu District, Beijing. The purchase cost was recorded at RMB1,045,950 (or $160,344). The intangible asset is being amortized over the grant period of 50 years.

 

On August 16, 2001, Jinong received a land use right as a contribution from a shareholder, which was granted by the People’s Government and Land & Resources Bureau of Yangling District, Shaanxi Province. The fair value of the related intangible asset at the time of the contribution was determined to be RMB7,285,099 (or $1,116,806). The intangible asset is being amortized over the grant period of 50 years.

 

The Land Use Rights consisted of the following:

 

   December 31,   June 30, 
   2017   2017 
Land use rights  $

12,496,394

    12,246,630 
Less: accumulated amortization   (2,296,358)   (2,125,039)
Total land use rights, net  $10,200,036    10,121,591 

 

TECHNOLOGY PATENT

 

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

 

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

 

The technology know-how consisted of the following:

 

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

 

CUSTOMER RELATIONSHIPS

 

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

 

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

 

NON-COMPETE AGREEMENT

 

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

 

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

 

TRADEMARKS

 

On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The preliminary fair value of the acquired trademarks was estimated to be RMB40,700,000 (or $6,239,310) and is subject to an annual impairment test.

 

9

 

 

AMORTIZATION EXPENSE

 

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

 

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

  

NOTE 6 - OTHER NON-CURRENT ASSETS

 

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

 

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

 

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

 

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

 

NOTE 7 - ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables consisted of the following:

 

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

 

10

 

 

NOTE 8 - RELATED PARTIES TRANSACTIONS

 

As of December 31, 2017, and June 30, 2017, the amount due to related parties was $3,288,189 and $3,071,102, respectively.  As of December 31, 2017, and June 30, 2017, $1,073,100 and $1,051,652, respectively were amounts that Gufeng borrowed from a related party, Xi’an Techteam Science & Technology Industry (Group) Co. Ltd., a company controlled by Mr. Zhuoyu Li, Chairman and CEO of the Company, representing unsecured, non-interest-bearing loans that are due on demand.  These loans are not subject to written agreements.

 

On June 29, 2016, Jinong signed an office lease with Kingtone Information Technology Co., Ltd. (“Kingtone Information”), of which Mr. Zhuoyu Li, Chairman and CEO of the Company, serves as Chairman of its board of directors. Pursuant to the lease, Jinong rented 612 square meters (approximately 6,588 square feet) of office space from Kingtone Information. The lease provides for a two-year term effective as of July 1, 2016 with monthly rent of RMB24,480 (approximately $3,686)

 

NOTE 9- LOAN PAYABLES

 

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

 

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

 

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

 

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

  

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

 

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

 

11

 

 

NOTE 10 - CONVERTIBLE NOTES PAYABLE

 

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

 

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

 

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

 

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

 

NOTE 11 - TAXES PAYABLE

 

Enterprise Income Tax

 

Effective January 1, 2008, the Enterprise Income Tax (“EIT”) law of the PRC replaced the tax laws for Domestic Enterprises (“DEs”) and Foreign Invested Enterprises (“FIEs”). The EIT rate of 25% replaced the 33% rate that was applicable to both DEs and FIEs. The two year tax exemption and three year 50% tax reduction tax holiday for production-oriented FIEs was eliminated. Since January 1, 2008, Jinong became subject to income tax in China at a rate of 15% as a high-tech company, as a result of the expiration of its tax exemption on December 31, 2007. Accordingly, it made provision for income taxes for the six months ended December 31, 2017 and 2016 of $1,845,926 and $1,879,465, respectively, which is mainly due to the operating income from Jinong. Gufeng is subject to 25% EIT rate and thus it made provision for income taxes of $1,106,590 and $792,503 for the six months ended December 31, 2017 and 2016, respectively.

 

Value-Added Tax

 

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

 

Income Taxes and Related Payables

 

Taxes payable consisted of the following:

 

   December 31,  June 30,
   2017  2017
VAT provision  $(628,399)  $(575,872)
Income tax payable   2,141,669    2,229,735 
Other levies   667,724    1,036,544 
Total  $2,180,994   $2,690,407 

 

12

 

 

The provision for income taxes consists of the following:

 

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

 

Tax Rate Reconciliation

 

Our effective tax rates were approximately 20.1% and 19.4% for six months ended December 31, 2017 and 2016, respectively. Substantially all of the Company’s income before income taxes and related tax expense are from PRC sources. Actual income tax benefit reported in the consolidated statements of income and comprehensive income differ from the amounts computed by applying the US statutory income tax rate of 34% to income before income taxes for the six months ended December 31, 2017 and 2016 for the following reasons:

 

Tax Rate Reconciliation

 

December 31, 2017

 

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

 

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

 

13

 

 

NOTE 12 - STOCKHOLDERS’ EQUITY

 

Common Stock

 

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

 

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

 

Preferred Stock

 

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

 

As of December 31, 2017, the Company has 20,000,000 shares of preferred stock authorized, with a par value of $.001 per share, of which no shares are issued or outstanding.

 

NOTE 13 - CONCENTRATIONS

 

Market Concentration

 

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

 

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

 

Vendor and Customer Concentration

 

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

 

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

 

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

 

14

 

 

NOTE 14 - SEGMENT REPORTING

 

As of December 31, 2017, the Company was organized into four main business segments based on location and product: Jinong (fertilizer production), Gufeng (fertilizer production), Yuxing (agricultural products production) and the sales VIEs. Each of the four operating segments referenced above has separate and distinct general ledgers. The chief operating decision maker (“CODM”) receives financial information, including revenue, gross margin, operating income and net income produced from the various general ledger systems to make decisions about allocating resources and assessing performance; however, the principal measure of segment profitability or loss used by the CODM is net income by segment.

 

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

 

15

 

 

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

 

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

(2)Reconciling amounts refer to the unallocated assets or expenses of the Parent Company.
(3)Reconciling amounts refer to the expenses of discontinuation of VIE agreement with Zhenbai.

 

NOTE 15 - COMMITMENTS AND CONTINGENCIES

 

On June 29, 2016, Jinong signed an office lease with Kingtone Information. Pursuant to the lease, Jinong rented 612 square meters (approximately 6,588 square feet) of office space from Kingtone Information. The lease provided for a two-year term effective as of July 1, 2016 with monthly rent of $3,525 (RMB 24,480).

 

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

 

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

 

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

 

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

 

16

 

 

NOTE 16 - VARIABLE INTEREST ENTITIES

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

   December 31,   June 30, 
   2017   2017 
         
ASSETS        
Current Assets        
Cash and cash equivalents  $1,347,719   $374,587 
Accounts receivable, net   31,545,752    30,687,859 
Inventories   22,272,408    21,314,940 
Other current assets   1,101,385    2,195,156 
Advances to suppliers   1,624,932    2,380,812 
Total Current Assets   57,892,196    56,953,354 
           
Plant, Property and Equipment, Net   12,122,345    12,418,906 
Other assets   230,107    225,508 
Intangible Assets, Net   11,925,590    13,002,818 
Goodwill   3,378,474    3,837,038 
Total Assets  $85,548,712   $86,437,624 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current Liabilities          
Short-term loan  $-   $166,311 
Accounts payable   20,454,287    18,355,921 
Customer deposits   694,119    1,375,785 
Accrued expenses and other payables   3,328,483    

3,833,868

 
Amount due to related parties   43,107,165    42,741,043 
Total Current Liabilities  $67,584,054   $66,472,928 
Long-term Loan   0    3,549 
Total Liabilities  $67,584,054   $66,476,477 
           
Stockholders’ equity   17,964,658    19,961,147 
           
Total Liabilities and Stockholders’ Equity   85,548,712   $86,437,624 

 

17

 

 

  

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

 

18

 

 

NOTE 17 - BUSINESS COMBINATIONS

 

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

 

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

 

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

 

The VIE Agreements are as follows:

 

Entrusted Management Agreements

 

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

  

Exclusive Technology Supply Agreements

 

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

 

Shareholder’s Voting Proxy Agreements

 

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

 

Exclusive Option Agreements

 

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

 

Equity Pledge Agreements

 

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

 

19

 

 

Non-Compete Agreements

 

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

 

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

 

For acquisitions made on June 30, 2016:

 

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

 

A summary of the purchase consideration paid is below:

 

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

 

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

 

For acquisitions made on January 1, 2017:

 

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

 

20

 

 

A summary of the purchase consideration paid is below:

  

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

 

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

 

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

 

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

 

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

 

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

 

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

 

21

 

 

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 notes to the financial statements of the Company, the following are the references herein of all the subsidiaries of the Company (i) Green Agriculture Holding Corporation (“Green New Jersey”), a wholly-owned subsidiary of Green Nevada incorporated in the State of New Jersey; (ii) Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd. (“Jinong”), a wholly-owned subsidiary of Green New Jersey organized under the laws of the PRC; (iii) Xi’an Hu County Yuxing Agriculture Technology Development Co., Ltd. (“Yuxing”), a Variable Interest Entity in the PRC (“VIE”) controlled by Jinong through contractual agreements; (iv) Shaanxi Lishijie Agrochemical Co., Ltd. (“Lishijie”), a VIE controlled by Jinong through contractual agreements; (v) Songyuan Jinyangguang Sannong Service Co., Ltd. (“Jinyangguang”), a VIE in the PRC controlled by Jinong through contractual agreements; (vi) Weinan City Linwei District Wangtian Agricultural Materials Co., Ltd. (“Wangtian”), a VIE controlled by Jinong through contractual agreements; (vii) Aksu Xindeguo Agricultural Materials Co., Ltd. (“Xindeguo”), a VIE controlled by Jinong through contractual agreements; (vii) Xinjiang Xinyulei Eco-agriculture Science and Technology Co., Ltd (“Xinyulei”), a VIE controlled by Jinong through contractual agreements; (ix) Sunwu County Xiangrong Agricultural Materials Co., Ltd. (“Xiangrong”), a VIE controlled by Jinong through contractual agreements; (x) Anhui Fengnong Seed Co., Ltd. (“Fengnong”), a VIE controlled by Jinong through contractual agreements; (xi) Beijing Gufeng Chemical Products Co., Ltd., a wholly-owned subsidiary of Jinong in the PRC (“Gufeng”); and (xii) Beijing Tianjuyuan Fertilizer Co., Ltd., Gufeng’s wholly-owned subsidiary in the PRC (“Tianjuyuan”). Yuxing, Lishijie, Jinyangguang, Wangtian, Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred to as the “the VIE Companies”; Lishijie, Jinyangguang, Wangtian, Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred to as “the sales VIEs” or “the sales VIE companies”.

 

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

 

The fertilizer business conducted by Jinong and Gufeng generated approximately 75.5% and 78.9% of our total revenues for the six months ended December 31, 2017 and 2016, respectively. The sales VIEs generated 21.6% and 18.0% of our revenues for the six months ended December 31, 2017 and 2016, respectively. Yuxing serves as a research and development base for our fertilizer products.

 

Fertilizer Products

 

As of December 31, 2017, we had developed and produced a total of 720 different fertilizer products in use, of which 136 were developed and produced by Jinong, 333 by Gufeng, and 251 by the VIE Companies.

 

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

 

   Three Months Ended   Change 
   December 31,   2016 to 2017 
   2017   2016   Amount   % 
   (metric tons)         
Jinong   13,165    8,955    4,210    47.0%
Gufeng   66,237    63,167    3,070    4.9%
    79,402    72,122    13,922      

 

22

 

 

   Three Months Ended
December 31,
 
   2017   2016 
   (revenue per tons) 
Jinong  $2,107   $2,996 
Gufeng   364    334 

 

   Six Months Ended   Change 
   December 31,   2016 to 2017 
   2017   2016   Amount   % 
   (metric tons)         
Jinong   27,690    18,635    9,055    48.6%
Gufeng   129,404    108,698    20,706    19.0%
    157,094    127,333    29,761      

 

   Six Months Ended
December 31,
 
   2017   2016 
   (revenue per tons) 
Jinong  $2,045   $3,126 
Gufeng   352    339 

 

For the three months ended December 31, 2017, we sold approximately 79,042 metric tons of fertilizer products, as compared to 72,122 metric tons for the three months ended December 31, 2016. For the three months ended December 31, 2017, Jinong sold approximately 13,165 metric tons of fertilizer products, as compared to 8,955 metric tons for the three months ended December 31, 2016. For the three months ended December 31, 2017, Gufeng sold approximately 66,237 metric tons of fertilizer products, as compared to 63,167 metric tons for the three months ended December 31, 2016.

 

For the six months ended December 31, 2017, we sold approximately 157,094 metric tons of fertilizer products, as compared to 127,333 metric tons for the six months ended December 31, 2016. For the six months ended December 31, 2017, Jinong sold approximately 27,690 metric tons of fertilizer products, an increase of 9,055 metric tons, or 48.6%, as compared to 18,635 metric tons for the six months ended December 31, 2016. For the six months ended December 31, 2017, Gufeng sold approximately 129,404 metric tons of fertilizer products, an increase of 20,706 metric tons, or 19.0% as compared to 108,698 metric tons for the six months ended December 31, 2016.

 

Our sales of fertilizer products to customers in five provinces within China accounted for approximately 55.5% of our fertilizer revenue for the three months ended December 31, 2017. Specifically, the provinces and their respective percentage contributing to our fertilizer revenues were: Hebei (23.4%), Heilongjiang (9.0%), Inner Mongolia (7.8%), Liaoning (7.7%), and Shaanxi (7.5%).

 

As of December 31, 2017, we had a total of 1,939 distributors covering 22 provinces, 4 autonomous regions and 4 central government-controlled municipalities in China. Jinong had 1,127 distributors in China. Jinong’s sales are not dependent on any single distributor or any group of distributors. Jinong’s top five distributors accounted for 2.03% of its fertilizer revenues for the three months ended December 31, 2017. Gufeng had 314 distributors, including some large state-owned enterprises. Gufeng’s top five distributors accounted for 74.6% of its revenues for the three months ended December 31, 2017.

 

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 and municipalities that accounted for 80.9% of our agricultural products revenue for the three months ended December 31, 2017 were Shaanxi (60.1%), Sichuan (10.4%), and Zhejiang (7.5%).

 

Recent Developments

 

New Products and distributors

 

During the three months ended December 31, 2017, Jinong did not launch any new fertilizer product. However, Jinong added 6 new distributors during this period. Gufeng did not launch any new fertilizer products, but added two new distributors during the three months ended December 31, 2017

 

Strategic Acquisitions

 

On June 30, 2016 and January 1, 2017, through Jinong, we entered into (i) Strategic Acquisition Agreements (the “SAA”), and (ii) Agreements for Convertible Notes (the “ACN”), with the shareholders of the companies as identified below (the “Targets”).

 

23

 

 

June 30, 2016:

 

      Cash   Principal of 
      Payment for   Notes for 
      Acquisition   Acquisition 
Company Name  Business Scope  (RMB[1])   (RMB) 
Shaanxi Lishijie Agrochemical Co., Ltd.  Sales of pesticides, agricultural chemicals, chemical fertilizers, agricultural materials; Manufacture and sales of mulches.   10,000,000    3,000,000 
              
Songyuan Jinyangguang Sannong Service Co., Ltd.  Promotion and consulting services regarding agricultural technologies; Retail sales of chemical fertilizers (including compound fertilizers and organic fertilizers); Wholesale and retail sales of pesticides, agricultural machinery and accessories; Collection of agricultural information; Development of saline-alkali soil; Promotion and development of high-efficiency agriculture and related information technology solutions for agriculture, agricultural and biological engineering high technologies; E-commerce; Cultivation of freshwater fish, poultry, fruits, flowers, vegetables, and seeds; Recycling and complex utilization of straw and stalk; Technology transfer and training; Recycling of agricultural materials ; Ecological industry planning.   8,000,000    12,000,000 
              
Shenqiu County Zhenbai Agriculture Co., Ltd. [2]  Cultivation of crops; Storage, sales, preliminary processing and logistics distribution of agricultural by-products; Promotion and application of agricultural technologies; Purchase and sales of agricultural materials; Electronic commerce.   3,000,000    12,000,000 
              
Weinan City Linwei District Wangtian Agricultural Materials Co., Ltd.  Promotion and application of new agricultural technologies; Professional prevention of plant diseases and insect pests; Sales of plant protection products, plastic mulches, material, chemical fertilizers, pesticides, agricultural medicines, micronutrient fertilizers, hormones, agricultural machinery and medicines, and gardening tools.   6,000,000    12,000,000 
              
Aksu Xindeguo Agricultural Materials Co., Ltd.  Wholesale and retail sales of pesticides; Sales of chemical fertilizers, packaged seeds, agricultural mulches, micronutrient fertilizers, compound fertilizers, plant growth regulators, agricultural machineries, and water economizers; Consulting services for agricultural technologies; Purchase and sales of agricultural by- products.   10,000,000    12,000,000 
              
Xinjiang Xinyulei Eco-agriculture Science and Technology Co., Ltd  Sales of chemical fertilizers, packaged seeds, agricultural mulches, micronutrient fertilizers, organic fertilizers, plant growth regulators, agricultural machineries, and water economizers; Purchase and sales of agricultural by-products; Cultivation of fruits and vegetables; Consulting services and training for agricultural technologies; Storage services; Sales of articles of daily use, food and oil; On-line sales of the above-mentioned products.          
              
Total      37,000,000    51,000,000 

 

(1)The exchange rate between RMB and U.S. dollars on June 30, 2016 is RMB1=US$0.1508, according to the exchange rate published by Bank of China.
  (2) On November 30, 2017, the Company, through its wholly-owned subsidiary Jinong, discontinued the strategic acquisition agreements and the series of contractual agreements with the shareholders of Zhenbai. In return, the shareholders of Zhenbai agreed to tender the whole payment consideration in the SAA back to the Company with early termination penalties. The convertible notes paid to Zhenbai’s shareholders and the accrued interest has been forfeited.

 

24

 

 

January 1, 2017:

 

      Cash   Principal of 
      Payment for   Notes for 
      Acquisition   Acquisition 
Company Name  Business Scope   (RMB[1])   (RMB) 
Sunwu County Xiangrong Agricultural Materials Co., Ltd.  Sales of pesticides, agricultural chemicals, chemical fertilizers, agricultural materials; Manufacture and sales of mulches.   4,000,000    6,000,000 
              
Anhui Fengnong Seed Co., Ltd.  Wholesale and retail sales of pesticides; Sales of chemical fertilizers, packaged seeds, agricultural mulches, micronutrient fertilizers, compound fertilizers and plant growth regulators   4,000,000    6,000,000 
              
Total      8,000,000    12,000,000 

 

(2) The exchange rate between RMB and U.S. dollars on January 1, 2017 is RMB1=US$0.144, according to the exchange rate published by Bank of China.

 

Pursuant to the SAA and the ACN, the shareholders of the Targets, while retaining possession of the equity interests and continuing to be the legal owners of such interests, agreed to pledge and entrust all of their equity interests, including the proceeds thereof but excluding any claims or encumbrances, and the operations and management of its business to Jinong, in exchange of an aggregate amount of RMB45,000,000 (approximately $6,731,600) to be paid by Jinong within three days following the execution of the SAA, ACN and the VIE Agreements, and convertible notes with an aggregate face value of RMB 63,000,000 (approximately $9,418,800) with an annual fixed compound interest rate of 3% and term of three years.

 

Jinong acquired the Targets using the VIE arrangement based on our need to further develop our business and comply with the regulatory requirements under the PRC laws.

 

As our business focuses on the production of fertilizer, all our business activities intertwine with those in the agriculture industry in China. Specifically, we deal with compliance, regulation, safety, inspection, and licenses in fertilizer production, farm land use and transfer, growing and distribution of agriculture goods, agriculture basic supplies, seeds, pesticides, and trades of grains. It is an industry in which heavy regulations get implemented and strictly enforced. In addition, E-commerce, which is also under strict government regulation in the PRC, has lately become a sales and distribution channel for agricultural products. Currently, we are developing an online platform to connect the physical distribution network we either own or lease.

 

Compared with the regulatory environment in other jurisdictions, the regulatory environment in the PRC is unique. For example, the “M&A Rules” purports to require that an offshore special purpose vehicle controlled directly or indirectly by PRC companies or individuals and formed for purposes of overseas listing through acquisition of PRC domestic interests held by such PRC companies or individuals obtain the approval of the China Securities Regulatory Commission (the “CSRC”) prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published procedures regarding its approval of overseas listings by special purpose vehicles.

 

For both e-commerce and agriculture industries, PRC regulators limit the investment from foreign entities and set particularly rules for foreign-owned entities to conduct business. We expect these limitations on foreign-owned entities will continue to exist in e-commerce and agriculture industries. The VIE arrangement, however, provides feasibility for obtaining administrative approval process and avoiding industry restrictions that can be imposed on an entity that is a wholly-owned subsidiary of a foreign entity. The VIE agreements reduce uncertainty and the current limitation risk. It is our understanding that the VIE agreements, as well as the control we obtained through VIE arrangement, are valid and enforceable. Such legal structure does not violate the known, published, and current PRC laws. While there are substantial uncertainties regarding the interpretation and application of PRC Laws and future PRC laws and regulations, and there can be no assurance that the PRC authorities will take a view that is not contrary to or otherwise different from our belief and understanding stated above, we believe the substantial difficulty that we experienced previously to conduct business in agriculture as a foreign ownership ca be greatly reduced by the VIE arrangement. Further, as an integral part of the VIE arrangement, the underlying equity pledge agreements provide legal protection for the control we obtained. Pursuant to the equity pledge agreements, we have completed the equity pledge processes with the Targets to ensure the complete control of the interests in the Targets. The shareholders of the Targets are not entitled to transfer any shares to a third party under the exclusive option agreements. If necessary, they may transfer shares to our company without consideration.

 

While the VIE arrangement provides us with the feasibility to conduct our business in the E-Commerce and agriculture industries, validity and enforceability of VIE arrangement is subject to (i) any applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or similar laws affecting creditors’ rights generally, (ii) possible judicial or administrative actions or any PRC Laws affecting creditors’ rights, (iii) certain equitable, legal or statutory principles affecting the validity and enforceability of contractual rights generally under concepts of public interest, interests of the State, national security, reasonableness, good faith and fair dealing, and applicable statutes of limitation; (iv) any circumstance in connection with formulation, execution or implementation of any legal documents that would be deemed materially mistaken, clearly unconscionable, fraudulent, coercive at the conclusions thereof; and (v) judicial discretion with respect to the availability of indemnifications, remedies or defenses, the calculation of damages, the entitlement to attorney’s fees and other costs, and the waiver of immunity from jurisdiction of any court or from legal process. Validity and enforceability of VIE arrangement is also subject to risk derived from the discretion of any competent PRC legislative, administrative or judicial bodies in exercising their authority in the PRC. As a result, there can no assurance that any of such PRC Laws will not be changed, amended or replaced in the immediate future or in the longer term with or without retrospective effect.

 

25

 

 

Results of Operations

 

Three Months ended December 31, 2017 Compared to the Three Months ended December 31, 2016.

 

   2017   2016   Change $   Change % 
Sales                
Jinong   26,211,280    26,825,674    (614,394)   -2.3%
Gufeng   24,447,721    21,066,559    3,381,162    16.0%
Yuxing   1,953,748    2,454,314    (500,566)   -20.4%
Sales VIEs   11,350,893    8,398,466    2,952,427    35.2%
Net sales   63,963,642    58,745,013    5,218,629    8.9%
Cost of goods sold                    
Jinong   13,265,827    12,332,360    933,467    7.6%
Gufeng   21,160,024    18,138,659    3,021,365    16.7%
Yuxing   1,536,238    1,934,046    (397,808)   -20.6%
Sales VIEs   9,452,987    7,159,707    2,293,280    32.0%
Cost of goods sold   45,415,076    39,564,772    5,850,304    14.8%
Gross profit   18,548,566    19,180,241    (631,675)   -3.3%
Operating expenses                    
Selling expenses   7,682,008    3,965,382    3,716,626    93.7%
Selling expenses - amortization of deferred asset   0    3,475,438    (3,475,438)   -100.0%
General and administrative expenses   937,359    4,633,905    (3,696,546)   -79.8%
Total operating expenses   8,619,367    12,074,725    (3,455,358)   -28.6%
Income from operations   9,929,199    7,105,516    2,823,683    39.7%
Other income (expense)                    
Other income (expense)   (669,760)   (114,115)   (555,645)   486.9%
Interest income   130,248    76,494    53,754    70.3%
Interest expense   (94,587)   (93,246)   (1,341)   1.4%
Total other income (expense)   (634,099)   (130,867)   (503,232)   384.5%
Income before income taxes   9,295,101    6,974,649    2,320,452    33.3%
Provision for income taxes   1,521,646    1,468,638    53,008    3.6%
Net income   7,773,455    5,506,011    2,267,444    41.2%
Other comprehensive income (loss)                    
Foreign currency translation gain (loss)   8,255,781    (1,205,884)   9,461,665    -784.6%
Comprehensive income (loss)   16,029,236    4,300,127    11,729,109    272.8%
                     
Basic weighted average shares outstanding   365,987    37,658,062    (37,292,075)   -99.0%
Basic net earnings per share   0.20    0.15    (0.07)   37.0%
Diluted weighted average shares outstanding   365,987    37,658,062    (37,292,075)   -99.0%
Diluted net earnings per share   0.20    0.15    (0.07)   37.0%

 

26

 

 

Net Sales

 

Total net sales for the three months ended December 31, 2017 were $63,963,642, an increase of $5,218,629 or 8.9%, from $58,745,013 for the three months ended December 31, 2016. This increase was primarily due to an increase in sales VIE’s and Gufeng’s net sales.

 

For the three months ended December 31, 2017, Jinong’s net sales decreased $614,394, or 2.3%, to $26,211,280 from $26,825,674 for the three months ended December 31, 2016. This decrease was mainly attributable to the decrease in Jinong’s sales volume in the last three months.

 

For the three months ended December 31, 2017, Gufeng’s net sales were $24,447,721, an increase of $3,381,162, or 16.0% from $21,066,559 for the three months ended December 31, 2016. This increase was mainly attributable to the increase in market demand during the last three months.

 

For the three months ended December 31, 2017, Yuxing’s net sales were $1,953,748, a decrease of $500,566 or 20.4%, from $2,454,314 for the three months ended December 31, 2016. The decrease was mainly due to the decrease in market demand during the last three months.

 

For the three months ended December 31, 2017, VIEs’ net sales were $11,350,893, an increase of $2,952,427 or 35.2%, from $8,398,466 for the three months ended December 31, 2016. The increase was mainly attributable to the increase in market demand during the last three months.

 

Cost of Goods Sold

 

Total cost of goods sold for the three months ended December 31, 2017 was $45,415,076, an increase of $5,850,304, or 14.8%, from $39,564,772 for the three months ended December 31, 2016. The increase was mainly due to the increase in sales VIE’s and Gufeng’s cost of goods sold which increased 32.0% and 16.7% respectively.

 

Cost of goods sold by Jinong for the three months ended December 31, 2017 was $13,265,827, a decrease of $933,467, or 7.6%, from $12,332,360 for the three months ended December 31, 2016. The decrease in cost of goods was primarily attributable to the 2.3% decrease in net sale during the last three months.

 

Cost of goods sold by Gufeng for the three months ended December 31, 2017 was $21,160,024, an increase of $3,021,365, or 16.7%, from $18,138,659 for the three months ended December 31, 2016. This increase was primarily attributable to the more products sold during the last three months.

 

For three months ended December 31, 2017, cost of goods sold by Yuxing was $1,536,238, a decrease of $397,808 or 20.6%, from $1,934,046 for the three months ended December 31, 2016. The decrease in cost of goods was primarily attributable to the 20.4% decrease in net sale during the last three months.

 

Cost of goods sold by VIEs for the three months ended December 31, 2017 was $9,452,987, an increase of $2,293,280, or 32.0%, from $7,159,707 for the three months ended December 31, 2016. This increase was primarily attributable to the more products sold during the last three months.

 

Gross Profit

 

Total gross profit for the three months ended December 31, 2017 decreased by $631,675, or 3.3%, to $18,548,566, as compared to $19,180,241 for the three months ended December 31, 2016. Gross profit margin was 29.0% and 32.6% for the three months ended December 31, 2017 and 2016, respectively.

 

Gross profit generated by Jinong decreased by $1,547,861, or 10.7%, to $12,945,453 for the three months ended December 31, 2017 from $14,493,314 for the three months ended December 31, 2016. Gross profit margin from Jinong’s sales was approximately 49.4% and 54.0% for the three months ended December 31, 2017 and 2016, respectively. The decrease in gross profit margin was mainly due to higher raw material cost and higher packaging cost.

 

For the three months ended December 31, 2017, gross profit generated by Gufeng was $3,287,697, an increase of $359,797, or 12.3%, from $2,927,900 for the three months ended December 31, 2016. Gross profit margin from Gufeng’s sales was approximately 13.4% and 13.9% for the three months ended December 31, 2017 and 2016, respectively. The decrease in gross profit percentage was mainly due to the increase in product costs and the decrease in sales prices.

 

For the three months ended December 31, 2017, gross profit generated by Yuxing was $417,510, a decrease of $102,758, or 19.8% from $520,268 for the three months ended December 31, 2016. The gross profit margin was approximately 21.4% and 21.2% for the three months ended December 31, 2017 and 2016, respectively, which is slightly increased.

 

Gross profit generated by VIEs increased by $659,147, or 53.2%, to $1,897,906 for the three months ended December 31, 2017 from $ 1,234,759 for the three months ended December 31, 2016. Gross profit margin from VIE’s sales was approximately 16.7% and 14.7% for the three months ended December 31, 2017 and 2016, respectively.

 

27

 

 

Selling Expenses

 

Our selling expenses consisted primarily of salaries of sales personnel, advertising and promotion expenses, freight-out costs and related compensation. Selling expenses were $7,682,008, or 12.0%, of net sales for the three months ended December 31, 2017, as compared to $3,965,382, or 6.8% of net sales for the three months ended December 31, 2016, an increase of $3,716,626, or 93.7%.

 

The selling expenses of Jinong for the three months ended December 31, 2017 were $7,172,773 or 27.4% of Jinong’s net sales, as compared to selling expenses of $3,637,790 or 13.6% of Jinong’s net sales for the three months ended December 31, 2016. The increase in Jinong’s selling expenses was due to Jinong’s expanded marketing efforts. The selling expenses of Yuxing were $10,498 or 0.5% of Yuxing’s net sales for the three months ended December 31, 2017, as compared to $11,264 or 0.5% of Yuxing’s net sales for the three months ended December 31, 2016. The selling expenses of Gufeng were $ 189,945 or 0.1% of Gufeng’s net sales for the three months ended December 31, 2017, as compared to $68,080 or 0.3% of Gufeng’s net sales for the three months ended December 31, 2016. The selling expenses of VIEs were $319,290 or 2.4% of VIEs’ net sales for the three months ended December 31, 2017, as compared to $248,248, or 3.0% of VIEs’ net sales for the three months ended December 31, 2016.

 

Selling Expenses – amortization of deferred assets

 

Our selling expenses - amortization of our deferred assets were 0 for the three months ended December 31, 2017, as compared to $3,475,438, or 5.9% of net sales for the three months ended December 31, 2016. This decrease was due to the fact that all deferred assets were fully amortized and therefore no amortization was recorded on the fully amortized assets during the three months ended December 31, 2017. 

 

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 litigation. General and administrative expenses were $937,359, or 1.5% of net sales for the three months ended December 31, 2017, as compared to $ 4,633,905, or 12.1%, of net sales for the three months ended December 31, 2016, a decrease of $ 3,696,546, or 79.8%.

 

Total Other Expenses

 

Total other expenses consisted of income from subsidies received from the PRC government, interest income, interest expenses and bank charges. Total other expense for the three months ended December 31, 2017 was $572,155, as compared to $130,867 for the three months ended December 31, 2016, an increase in expense of $441,288, or 337.2%. The increase in total other expense was largely resulted from the increase for bank charges and accretion expenses offset by the decrease in interest 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 $1,836,635 for the three months ended December 31, 2017, as compared to $891,953 for the three months ended December 31, 2016, an increase of $ 944,682, or 105.9%.

 

Gufeng is subject to a tax rate of 25%, incurred income tax expenses of $ 1,159,097 for the three months ended December 31, 2017, as compared to $484,768 for the three months ended December 31, 2016, an increase of $ 674,329, or 139.1%, which was primarily due to Gufeng’s increased net income.

 

Yuxing has no income tax for the three months ended December 31, 2017 and 2016 as a result of being exempted from paying income tax due to its products falling into the tax exemption list set out in the EIT.

 

Net Income

 

Net income for the three months ended December 31, 2017 was $7,773,455, an increase of $2,267,444, or 41.2%, compared to $5,506,011 for the three months ended December 31, 2016. Net income as a percentage of total net sales was approximately 12.2% and 9.4% for the three months ended December 31, 2017 and 2016, respectively.

 

28

 

 

Six Months ended December 31, 2017 Compared to the Six Months ended December 31, 2016.

 

   2017   2016   Change $   Change % 
Sales                
Jinong   52,985,040    58,253,394    (5,268,354)   -9.0%
Gufeng   42,669,787    36,876,073    5,793,714    15.7%
Yuxing   3,746,391    3,809,725    (63,334)   -1.7%
Sales VIEs   27,330,927    21,690,443    5,640,484    26.0%
Net sales   126,732,145    120,629,635    6,102,510    5.1%
Cost of goods sold                    
Jinong   26,378,583    25,601,590    776,993    3.0%
Gufeng   37,146,453    31,523,736    5,622,717    17.8%
Yuxing   2,928,791    2,979,654    (50,863)   -1.7%
Sales VIEs   22,661,751    17,913,386    4,748,365    26.5%
Cost of goods sold   89,115,578    78,018,366    11,097,212    14.2%
Gross profit   37,616,567    42,611,269    (4,994,702)   -11.7%
Operating expenses                    
Selling expenses   12,861,012    8,977,450    3,883,562    43.3%
Selling expenses - amortization of deferred asset        9,584,220    (9,584,220)   -100.0%
General and administrative expenses   7,909,981    7,865,392    44,589    0.6%
Total operating expenses   20,770,993    26,427,062    (5,656,069)   -21.4%
Income from operations   16,845,574    16,184,207    661,367    4.1%
Other income (expense)                    
Other income (expense)   (676,991)   (155,172)   (521,819)   336.3%
Interest income   218,162    153,116    65,046    42.5%
Interest expense   (274,162)   (231,791)   (42,371)   18.3%
Total other income (expense)   (732,991)   (233,847)   (499,144)   213.4%
Income before income taxes   16,112,584    15,950,360    162,224    1.0%
Provision for income taxes   3,244,301    3,092,769    151,532    4.9%
Net income   12,868,283    12,857,591    10,692    0.1%
Other comprehensive income (loss)                    
Foreign currency translation gain (loss)   8,495,999    (16,447,063)   24,943,062    -151.7%
Comprehensive income (loss)   21,364,282    (3,589,472)   24,953,754    -695.2%
                     
Basic weighted average shares outstanding   38,551,264    37,653,333    897,931    2.4%
Basic net earnings per share   0.33    0.34    (0.01)   -2.2%
Diluted weighted average shares outstanding   38,551,264    37,653,333    897,931    2.4%
Diluted net earnings per share   0.33    0.34    (0.01)   -2.2%

 

Net Sales

 

Total net sales for the six months ended December 31, 2017 were $126,732,145, an increase of $6,102,510, or 5.1%, from $120,629,635 for the six months ended December 31, 2016.

 

This increase was largely due to the increase of VIEs’ net sales during the six months ended December 31, 2017. The VIEs’ net sales for the six months ended December 31, 2017 were $27,330,927, an increase of $5,640,484, or 26.0% from the same period a year ago.

 

29

 

 

For the six months ended December 31, 2017, Jinong’s net sales decreased by $5,268,354, or 9.0%, to $52,985,040 from $58,253,394 for the six months ended December 31, 2016. This decrease was mainly attributable to the decrease in Jinong’s sales volume, which was result of Jinong’s implementation of its new sales strategy that further focuses on producing high-margin liquid fertilizer during the last six months.

 

For the six months ended December 31, 2017, Gufeng’s net sales were $42,669,787, an increase of $5,793,714 or 15.7% from $36,876,073 for the six months ended December 31, 2016. This increase was mainly attributable to the increase in Gufeng’s sales volume, which was result of the increase in market demand during the six months ended December 31, 2017.

 

For the six months ended December 31, 2017, Yuxing’s net sales were $3,746,391, a slight decrease of $63,334 or 1.7%, from $3,809,725 during the six months ended December 31, 2016. The decrease was mainly attributable to the decrease in market demand.

 

For the six months ended December 31, 2017, VIEs’ net sales were $ 27,330,927, an increase of $ 5,640,484 or 26.0% from $ 21,690,443 for the six months ended December 31, 2016. This increase was mainly attributable to the increase in VIEs’ sales volume, which was result of the increase in market demand during the six months ended December 31, 2017.

 

Cost of Goods Sold

 

Total cost of goods sold for the six months ended December 31, 2017 was $89,115,578, an increase of $11,097,212, or 14.2%, from $78,018,366 for the six months ended December 31, 2016. This increase was mainly due to the increase for Jinong and VIE’s cost of goods sold.

 

Cost of goods sold by Jinong for the six months ended December 31, 2017 was $26,378,583, an increase of $776,993, or 3.0%, from $25,601,590 for the six months ended December 31, 2016. The increase was primarily due to the higher labor cost.

 

Cost of goods sold by Gufeng for the six months ended December 31, 2017 was $37,146,453 an increase of $5,622,717, or 17.8%, from $31,523,736 for the six months ended December 31, 2016. This increase was primarily attributable to the increase in net sales during the last six months.

 

For the six months ended December 31, 2017, cost of goods sold by Yuxing was $2,928,791, a slight decrease of $50,863, or 1.7%, from $2,979,654 for the six months ended December 31, 2016. This decrease was mainly due to the decrease in Yuxing’s net sales.

 

Cost of goods sold by VIEs for the six months ended December 31, 2017 was $22,661,751 an increase of $4,748,365, or 26.5%, from $ 17,913,386 for the six months ended December 31, 2016. This increase was primarily attributable to the increase in net sales during the last six months.

 

Gross Profit

 

Total gross profit for the six months ended December 31, 2017 decreased by $4,994,702 to $37,616,567, as compared to $42,611,269 for the six months ended December 31, 2016. Gross profit margin was 29.7% and 35.3% for the six months ended December 31, 2017 and 2016, respectively.

 

Gross profit generated by Jinong decreased by $ 6,045,347, or 18.5%, to $26,606,457 for the six months ended December 31, 2017 from $32,651,804 for the six months ended December 31, 2016. Gross profit margin from Jinong’s sales was approximately 50.2% and 56.1% for the six months ended December 31, 2017 and 2016, respectively. The decrease in gross profit margin was mainly due to higher raw material cost and higher packaging cost.  

 

For the six months ended December 31, 2017, gross profit generated by Gufeng was $5,523,334, an increase of $170,997, or 3.2%, from $5,352,337 for the six months ended December 31, 2016. Gross profit margin from Gufeng’s sales was approximately 12.9% and 14.5% for the six months ended December 31, 2017 and 2016, respectively. The decrease in gross profit percentage was mainly due to the increased weight for lower-margin products sales in Gufeng’s total sales answering to market demand.

 

30

 

 

For the six months ended December 31, 2017, gross profit generated by Yuxing was $817,600, a slight decrease of $12,471, or 1.5% from $830,071 for the six months ended December 31, 2016. The gross profit margin was approximately 21.8% and 21.8% for the six months ended December 31, 2017 and 2016, respectively.

 

For the six months ended December 31, 2017, gross profits generated by VIEs were $4,669,176, an increase of $892,119, or 23.6%, from $3,777,057 for the six months ended December 31, 2016. Gross profit margin from VIEs’ sales was approximately 17.1% and 17.4% for the six months ended December 31, 2017 and 2016, respectively. The slight decrease in gross profit percentage was mainly due to higher raw material cost.

 

Selling Expenses

 

Our selling expenses consisted primarily of salaries of sales personnel, advertising and promotion expenses, freight-out costs and related compensation. Selling expenses were $12,861,012, or 10.1%, of net sales for the six months ended December 31, 2017, as compared to $8,977,450or 7.4% of net sales for the six months ended December 31, 2016, an increase of $3,883,562, or 43.3%. This increase was primarily due to Jinong. The selling expenses of Jinong for the six months ended December 31, 2017 were $12,015,951 or 22.7% of Jinong’s net sales, as compared to selling expenses of $8,142,911 or 14.0% of Jinong’s net sales for the six months ended December 31, 2016. The increase in Jinong’s selling expenses was due to Jinong’s expanded marketing efforts and the increase in shipping costs. The selling expenses of Yuxing were $20,144 or 0.5% of Yuxing’s net sales for the six months ended December 31, 2017, as compared to $18,975, or 0.5% of Yuxing’s net sales for the six months ended December 31, 2016. The selling expenses of Gufeng were $285,721 or 0.7% of Gufeng’s net sales for the six months ended December 31, 2017, as compared to $213,408 or 0.6% of Gufeng’s net sales for the six months ended December 31, 2016. The selling expenses of VIEs were $559,341, or 1.8%, of VIEs’ net sales or the six months ended December 31, 2017, as compared to $602,156, or 2.8% of VIEs’ net sales for the six months ended December 31, 2016.

 

Selling Expenses – amortization of deferred assets

 

Our selling expenses - amortization of deferred assets were 0 for the six months ended December 31, 2017, as compared to $9,584,220, or 7.9% of net sales, for the six months ended December 31, 2016. This decrease was due to the fact that all deferred assets were fully amortized and therefore no amortization was recorded on the fully amortized assets during the six months ended December 31, 2017.

 

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 litigation. General and administrative expenses were $7,909,981, or 6.2% of net sales for the six months ended December 31, 2017, as compared to $7,865,392, or 6.5%, of net sales for the six months ended December 31, 2016, an increase of $44,589, or 0.6%. 

 

Total Other Income and Expenses

 

Total other income and expenses consisted of income from subsidies received from the PRC government, interest income, interest expenses and bank charges. The total other expense for the six months ended December 31, 2017 was $732,991, as compared to $ 233,847 for the six months ended December 31, 2016, an increase of $499,144, or 213.4%. The increase in total other expense mainly resulted from the increase for bank charges and accretion expenses. The bank charges increased by $128,854 or 1207.4%, to $139,626 during the six months ended December 31, 2017 as compared to $10,672 during the six months ended December 31, 2016. Accretion expenses increased by $174,274 or 112.2%, to $329,609 during the six months ended December 31, 2017 as compared to $155,335 during the six months ended December 31, 2016.

 

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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 $ 1,845,926 for the six months ended December 31, 2017, as compared to $1,879,465 for the six months ended December 31, 2016, a decrease of $33,539, or 1.8%.

 

Gufeng, subject to a tax rate of 25%, incurred income tax expenses of $ 1,159,097 for the six months ended December 31, 2017, as compared to $792,503 for the six months ended December 31, 2016, an increase of $366,594, or 46.3%. The increase is mainly due to the increase in net sales for Gufeng for the six months ended December 31, 2017 comparing to the same period of last year.

 

Yuxing had no income tax for the six months ended December 31, 2017 as a result of being exempted from paying income tax due to its products falling into the tax exemption list set out in the EIT.

 

Net Income

 

Net income for the six months ended December 31, 2017 was $12,868,283, a slight increase of $10,692, or 0.1%, compared to $12,857,591 for the six months ended December 31, 2016. Net income as a percentage of total net sales was approximately 10.2% and 10.7 % for the six months ended December 31, 2017 and 2016, respectively.

 

Discussion of Segment Profitability Measures

 

As of December 31, 2017, we were engaged in the following businesses: the production and sale of fertilizers through Jinong and Gufeng, the production and sale of high-quality agricultural products by Yuxing, and the sales of agriculture materials by the sales VIEs. For financial reporting purpose, our operations were organized into four main business segments based on locations and products: Jinong (fertilizer production), Gufeng (fertilizer production) and Yuxing (agricultural products production) and the sales VIEs. Each of the segments has its own annual budget about development, production and sales.

 

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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 by $ 264,477, or 2.6% to $ 10,460,249 for six months ended December 31, 2017, from $10,195,772 for the six months ended December 31, 2016. The decrease was principally due to higher selling expenses.

 

For Gufeng, the net income increased by $ 1,492,367 or 75.2% to $ 3,477,292.48 for six months ended December 31, 2017 from $ 1,984,925 for six months ended December 31, 2017. The increase was principally due to the increase in net sales.

 

For Yuxing, the net income decreased $89,368 or 18.3% to $ 398,491 for six months ended December 31, 2017 from $ 487,859 for six months ended December 31, 2017. The decrease was mainly due to the decrease in net sales.

 

For the VIEs, the net income was $ 199,680 for year ended December 31, 2017, decreased by $ 1,845,894 or 90.2%, from $2,045,574 for six months ended December 31, 2016. The decrease was mainly due to the increase in general and administrative expenses for the sales VIEs.

 

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, 2017, cash and cash equivalents were $145,417,158, an increase of $22,366,610, or 18.2%, from $123,050,548 as of June 30, 2017.

 

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. Yuxing purchased a set of agricultural products testing equipment for the year of 2016. 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, 
   2017   2016 
Net cash provided by operating activities  $20,535,360   $18,178,990 
Net cash used in investing activities   (23,086)   (74,353)
Net cash provided by (used in) financing activities   (1,330,290)   300,000 
Effect of exchange rate change on cash and cash equivalents   3,184,627    (4,726,271)
Net increase in cash and cash equivalents   22,366,611    13,678,366 
Cash and cash equivalents, beginning balance   123,050,548    102,896,486 
Cash and cash equivalents, ending balance  $145,417,159   $116,574,852 

 

Operating Activities

 

Net cash provided by operating activities was $20,535,360 for the six months ended December 31, 2017, an increase of $2,356,370, or 13.0%, from cash provided by operating activities of $18,178,990 for the six months ended December 31, 2016. The increase was mainly attributable to an increase in accounts payable and decrease in advances to suppliers during the six months ended December 31, 2017 as compared to the same period in 2016.

 

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Investing Activities

 

Net cash used in investing activities for the six months ended December 31, 2017 was $23,086, an increase of $51,267, or 69.0%, compared to cash used in investing activities of $74,353 for the six months ended December 31, 2016. The difference was due to the fact that the Company purchased less plant, property and equipment during the last six months compared to the same period last year.

 

Financing Activities

 

Net cash used by financing activities for the six months ended December 31, 2017 was $1,330,290 compared to $300,000 net cash provided in financing activities for the six months ended December 31, 2016, which was largely due to $1,678,603 in repayment of loans for the six months ended December 31, 2017, compared to zero repayment of loans in the same period last year.

 

As of December 31, 2017 and June 30, 2017, our loans payable were as follows:

 

   December 31,   June 30, 
   2017   2017 
Short term loans payable:  $6,285,300   $7,678,111 
Total  $6,285,300   $7,678,111 

 

Accounts Receivable

 

We had accounts receivable of $136,066,642 as of December 31, 2017, as compared to $141,665,179 as of June 30, 2017, a decrease of $5,598,537 or 4.0 %. The decrease was primarily attributable to Gufeng’s accounts receivable. As of December 31, 2017, Gufeng’s accounts receivable was $46,610,891, a decrease of $18,552,537 or 28.5% compared to $65,163,428 as of June 30, 2017.

 

Allowance for doubtful accounts in accounts receivable for the six months ended December 31, 2017 was $13,949,452, from $9,457,423 as of June 30, 2017,and the allowance for doubtful accounts as a percentage of accounts receivable was 10.3% as of December 31, 2017 and 6.3% as of June 30, 2017.

 

Deferred assets

 

We had no deferred assets as of December 31, 2017, as compared to $864,070 as of June 30, 2017. During the six months, we assisted the distributors in certain marketing efforts and developing standard stores to expand our competitive advantage and market shares. Based on the distributor agreements, the amount owed by the distributors in certain marketing efforts and store development will be expensed over three years if the distributors are actively selling our products. If a distributor defaults, breaches, or terminates the agreement with us earlier than the contractual terms, the unamortized portion of the amount owed by the distributor is payable to us immediately. The deferred assets had been fully amortized as of December 31, 2017.

 

Inventories

 

We had inventories of $105,613,585 as of December 31, 2017, as compared to $78,013,891 as of June 30, 2017, an increase of $27,599,694, or 35.4%. The increase was primarily attributable to Jinong’s inventory. As of December 31, 2017, Jinong’s inventory was $ 1,309,529, compared to $980,159 as of June 30, 2017.

 

Advances to Suppliers

 

We had advances to suppliers of $20,821,812 as of December 31, 2017 as compared to $24,023,062 as of June 30, 2017, representing a decrease of $3,201,250 or 13.3%. Our inventory level may fluctuate from time to time, depending how quickly the raw material is consumed and replenished during the production process, and how soon the finished goods are sold. The replenishment of raw material relies on management’s estimate of numerous factors, including but not limited to, the raw materials future price, and spot price along with its volatility, as well as the seasonal demand and future price of finished fertilizer products. Such estimate may not be accurate, and the purchase decision of raw materials based on the estimate can cause excessive inventories in times of slow sales and insufficient inventories in peak times.

 

Accounts Payable

 

We had accounts payable of $22,783,659 as of December 31, 2017 as compared to $19,643,897 as of June 30, 2017, representing an increase of $3,139,762, or 16.0%. The increase was primarily due to the increase of accounts payable for VIEs. They have accounts payable of $20,454,287 as of December 31, 2017 as compared to $18,355,921 as of June 30, 2017, representing an increase of $2,098,366, or 11.4%.

  

Unearned Revenue (Customer Deposits)

 

We had customer deposits of $6,935,326 as of December 31, 2017 as compared to $7,046,570 as of June 30, 2017, representing a decrease of $111,244, or 1.6%. The decrease was mainly attributable to VIE’s $ 718,647 unearned revenue as of December 31, 2017, compared to $1,375,785 unearned revenue as of June 30, 2017, caused by the advance deposits made by clients. This decrease was due to seasonal fluctuation and we expect to deliver products to our customers during the next three months at which time we will recognize the revenue.

 

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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 most critical accounting policies that currently affect our financial condition and results of operations:

 

Use of estimates

 

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

 

Revenue recognition

 

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

 

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

 

Cash and cash equivalents

 

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

 

Accounts receivable

 

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

 

Deferred assets

 

Deferred assets represent amounts the Company advanced to the distributors in their marketing and stores development to expand our competitive advantage and market shares. Based on the distributor agreements, the amount owed by the distributors in certain marketing efforts and store development will be expensed over three years if the distributors are actively selling our products. If a distributor defaults, breaches, or terminates the agreement with us earlier than the realization of the contractual terms, the unamortized portion of the amount owed by the distributor is to be refunded to us immediately. The deferred assets had been fully amortized as of December 31, 2017.

 

Segment reporting

 

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

 

As of December 31, 2017, we were organized into eleven main business units: Jinong (fertilizer production), Gufeng (fertilizer production), Yuxing (agricultural products production), Lishijie (agriculture sales), Jinyangguang (agriculture sales), Wangtian (agriculture sales), Xindeguo (agriculture sales), Xinyulei (agriculture sales), Fengnong (agriculture sales) and Xiangrong (agriculture sales). For financial reporting purpose, our operations were organized into four main business segments based on locations and products: Jinong (fertilizer production), Gufeng (fertilizer production) and Yuxing (agricultural products production) and the sales VIEs. Each of the segments has its own annual budget regarding development, production and sales.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Disclosures About Market Risk

 

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

 

Currency Fluctuations and Foreign Currency Risk

 

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

 

Our reporting currency is U.S. dollar. Except for U.S. holding companies, all of our consolidated revenues, consolidated costs and expenses, and our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. dollars and RMB. If RMB depreciates against U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. Assets and liabilities are translated at the exchange rates as of the balance sheet dates, revenues and expenses are translated at the average exchange rates, and shareholders’ equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of shareholders’ equity. As of December 31, 2017, our accumulated other comprehensive income was $3.7 million. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk. The value of RMB against U.S. dollar and other currencies is affected by, among other things, changes in the PRC’s political and economic conditions. In 2016, China’s currency dropped by a cumulative 6.8% against the U.S. dollar. The effect on trade can be substantial. Moreover, it is possible that, in the future, PRC authorities may lift restrictions on fluctuations in RMB exchange rate and lessen intervention in the foreign exchange market.

 

Interest Rate Risk

 

We deposit surplus funds with Chinese banks earning daily interest. We do not invest in any instruments for trading purposes. All of our outstanding debt instruments carry fixed rates of interests. The amount of short-term debt outstanding as of December 31, 2017 and June 30, 2017 was $6.3 million and $7.7 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 six months ended December 31, 2017. The original loan term on average is one year, and the remaining average life of the short term-loans is approximately five months.

 

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

 

Credit Risk

 

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

 

Inflation Risk

 

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

 

Item 4. Controls and Procedures

 

(a)Evaluation of disclosure controls and procedures

 

At the conclusion of the period ended December 31, 2017 we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, our CEO and CFO concluded that as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective and adequately designed to ensure that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that such information was accumulated and communicated to our management, including our CEO and CFO, in a manner that allowed for timely decisions regarding required disclosure.

 

(b)Changes in internal controls

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There are no other actions, suits, proceedings, inquiries or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

There were no unregistered sales of the Company’s equity securities during the three months ended December 31, 2017, that were not otherwise disclosed in a Current Report on Form 8-K.

 

Item 3. Defaults Upon Senior Securities

 

There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

There is no other information required to be disclosed under this item which was not previously disclosed.

 

Item 6. Exhibits

 

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

 

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SIGNATURES

 

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

 

  CHINA GREEN AGRICULTURE, INC.
   
Date: February 13, 2018 By: /s/ Zhuoyu Li
  Name: Zhuoyu Li
  Title: Chief Executive Officer
    (principal executive officer)
     
Date: February 13, 2018 By: /s/ Yongcheng Yang
  Name: Yongcheng Yang
  Title: Chief Financial Officer
    (principal financial officer and
    principal accounting officer)

 

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EXHIBIT INDEX

 

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

 

*Filed herewith

+ In accordance with the SEC Release 33-8238, deemed being furnished and not

 

 

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