CHINA GREEN AGRICULTURE, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2011
or
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _____________
Commission file number: 000-18606
CHINA GREEN AGRICULTURE, INC.
(Exact name of registrant as specified in its charter)
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Nevada
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36-3526027
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer Identification No.)
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3rd Floor, Borough A, Block A. No.181
South Taibai Road, Xi’an, Shaanxi Province,
People’s Republic of China 710065
(Address of Principal Executive Offices, Including Zip Code)
Registrant’s telephone number: +86 29-88266368
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, $0.001 Par Value Per Share
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NYSE
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Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
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No
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days. Yes
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No
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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
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Do not check if a smaller reporting
company
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
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The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $159,597,999 as of December 31, 2010, based on the closing price $9.00 of the Company’s common stock on such date.
The number of outstanding shares of the registrant’s common stock on September 9, 2011 was 26,845,859.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2011 Annual Meeting of Stockholders, which the registrant plans to file with the Securities and Exchange Commission within 120 days after June 30, 2011 are incorporated by reference in Part III of this Form 10-K to the extent described herein.
TABLE OF CONTENTS
TO ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JUNE 30, 2011
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PAGE
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PART I
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Item 1.
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Business
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4
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Item 1A.
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Risk Factors
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22
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Item 1B.
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Unresolved Staff Comments
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Item 2.
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Properties
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38
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Item 3.
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Legal Proceedings
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40
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Item 4.
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(Removed and Reserved)
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41
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PART II
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Item 5.
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Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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41
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Item 6.
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Selected Financial Data
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43
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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45
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Item 7A.
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Quantitative and Qualitative Disclosures about Market Risk
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57
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Item 8.
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Financial Statements and Supplementary Data
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58
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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58
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Item 9A.
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Controls and Procedures
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58
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Item 9B.
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Other Information
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58
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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62
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Item 11.
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Executive Compensation
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62
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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62
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence
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62
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Item 14.
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Principal Accountant Fees and Services
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62
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PART IV
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Item 15.
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Exhibits and Financial Statement Schedules
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62
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SIGNATURES
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S-1
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EXHIBIT INDEX
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E-1
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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F-1
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2
FORWARD-LOOKING STATEMENTS
Certain statements in this Report, and the documents incorporated by reference herein, constitute "forward-looking statements". Such forward-looking statements include statements, which involve risks and uncertainties, regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategies, (c) anticipated trends in our industries, (d) our future financing plans, and (e) our anticipated needs for, and use of, working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” or the negative of these words or other variations on these words or comparable terminology. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as in this Report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors including risks described in “Risk Factors” in Item 1A of this Report and matters described in this report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.
The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by 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.
Unless otherwise noted, all currency figures in this filing are in U.S. dollars. References to "yuan" or "RMB" are to the Chinese yuan (also known as the renminbi). According to
http://www.safe.gov.cn/model_safe_en/index.jsp
, the official website of the PRC State Administration of Foreign Exchange, as of September 9, 2011, US $1.00 = 6.3922 yuan (or 1 yuan = US$0.15644).
Unless otherwise specified in this Report, the "Company", "we," "us," "our," and the "Registrant" refer to
(i) China Green Agriculture, Inc. (“Green Nevada”), a corporation incorporated in the State of Nevada; (ii) Green Agriculture Holding Corporation (“Green New Jersey”), a wholly-owned subsidiary of Green Nevada incorporated in the State of New Jersey; (iii) Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd. (“Jinong”), a wholly-owned subsidiary of Green New Jersey organized under the laws of the PRC; (iv) Xi’an Jintai Agriculture Technology Development Company (“Jintai”), wholly-owned subsidiary of Jinong in the PRC, (v) Xi’an Hu County Yuxing Agriculture Technology Development Co., Ltd. (“Yuxing”), a wholly-owned subsidiary of Jinong in the PRC; (vi) Beijing Gufeng Chemical Products Co., Ltd., a wholly-owned subsidiary of Jinong in the PRC (“Gufeng”), and (vii) Beijing Tianjuyuan Fertilizer Co., Ltd., Gufeng’s wholly-owned subsidiary in the PRC (“Tianjuyuan”).
In this Report, references to the “SEC” or the “Commission” shall refer to Securities and Exchange Commission.
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We are engaged in the research, development, production and sale of various types of fertilizers and agricultural products in the PRC though our wholly-owned Chinese subsidiaries, Jinong, Jintai, Yuxing, Gufeng and Tianjuyuan. Our primary business is fertilizer products, specifically humic acid-based compound fertilizer produced through Jinong and compound fertilizer, blended fertilizer, organic compound fertilizer, slow-release fertilizers, highly-concentrated water-soluble fertilizers and mixed organic-inorganic compound fertilizer produced through Gufeng. In addition, through Jintai, we develop and produce agricultural products, such as top-grade fruits, vegetables, flowers and colored seedlings.
Fertilizer business was our main business as Jinong produced approximately $65,629,265, $45,816,377 and $28,889,131, or 36.5%, 88.0% and 82.1% of our total revenues for the years ended June 30, 2011, 2010 and 2009, respectively. Such amounts do not include revenues and net income from Gufeng, which we acquired on July 2, 2010, in fiscal year 2011, 2010 and 2009. Gufeng, a Beijing-based fertilizer producer, had sales revenues of $107,081,018 for the year ended June 30, 2011. Through the acquisition of Gufeng and its direct, wholly-owned subsidiary, Tianjuyuan, our total annual production capacity increased from 55,000 to 555,000 metric tons.
Our research and development system and plans underscore our strong commitment to producing high quality fertilizer and agricultural products, as evidenced by the following:
(i) Our subsidiary Jintai operates advanced greenhouse facilities located on approximately 137,000 square meters (approximately 1.5 million square feet) of land in Xi’an. These facilities consist of six “intelligent” greenhouses that are equipped with automated systems, including advanced drip irrigation systems and water purification facilities, to control environmental variables for obtaining optimal results in the cultivation of our agriculture products and the testing of our new fertilizers. Agricultural products manufactured by Jintai and Yuxing also serve as a research and development base for our fertilizer products.
(ii) Our subsidiary Yuxing has the land use right to 353,000 square meters (approximately 3.8 million square feet) of land, on which we have constructed 100 sunlight greenhouses and 6 “intelligent” greenhouses to produce agricultural products, such as colored seedlings, for commercial sale and to be a testing field for new fertilizer products.
As of June 30, 2011, we sold our products through a network of 797 regional distributors covering 22 provinces, 4 autonomous regions and 3 central government-controlled municipalities in China. We do not rely on any single distributor. Our top five distributors accounted for an approximately 29.7% of our fertilizer revenues for the fiscal year ended June 30, 2011, of which Sinoagri Holding Company Limited accounted for 18.3% of the total fertilizer revenues and Beijing Baofengnian Agricultural Material Co. Ltd took up 5.3% of the total fertilizer revenues.
As of June 30, 2011, we developed 454 different fertilizer products. We conduct our research and development activities through Jintai and Yuxing, Jinong’s direct, wholly-owned subsidiaries, which test new fertilizers and grow high quality flowers, vegetables and seedlings for commercial sale.
During the fiscal years ended June 30, 2011, 2010, and 2009, our revenues were $179,717,966, $52,090,752, and $35,207,997 respectively, and our net income was $32,914,101, $21,289,758, and $14,464,422 respectively. Such amounts do not include revenues and net income from Gufeng in fiscal year 2010 and 2009, which we acquired on July 2, 2010.
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Recent Developments
Strategic Alliance Agreement with the China Humic Acid Industry Association
As disclosed in a press release dated March 2, 2011, on February 27, 2011, we signed a Strategic Alliance Agreement (the "Agreement") with the China Humic Acid Industry Association ("CHAIA" or the "Association"), pursuant to which we will work extensively with the Association in the design of the Humic Acid-based Granular Compound Fertilizer Protocol (the "Protocol") and in establishing the National Engineering Research Center of Humic Acid-based Fertilizers of China (the "Engineering Center"). CHAIA is a nationwide non-profit organization sponsored by the Chinese government that functions as the humic acid industry's self-regulatory body. With dozens of corporate members, the Association aims to regulate and thus improve the humic acid market in China. By the end of 2011, the Association plans to release the Protocol, which will be the first ever in the Chinese fertilizer industry to standardize the ingredients and the formulas used in fertilizer products, thus establishing the product quality of humic acid-based granular fertilizers. The Protocol is largely expected to regulate the production and distribution of humic acid granular fertilizers among manufacturers and hopefully eliminate misuse of the humic acid label. We are also currently working with the Association to advocate approval for the Engineering Center by the PRC central government. The mandate of the Engineering Center would mainly include conducting humic acid-related research, discovering new uses for humic acid in the fertilizer industry and experimenting and developing new humic acid-based fertilizer products for various farming uses.
Ten-Year Growth Plan
As disclosed in a press release dated March 2, 2011, on February 28, 2011, our Board of Directors approved our ten-year corporate growth plan (the "Growth Plan") for the period from 2011 to 2020. The Growth Plan underpins our goal of becoming a leader in the overall fertilizer industry in China by 2020. It is the result of one year of intensive research and analysis covering market research, peer analysis, government information and projections, and evolved over many internal review meetings involving all managers responsible for key parts of our business. After careful review, our management and Board of Directors concluded that we should work towards the following revenue targets over the next ten years:
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at least $150 million for fiscal year 2011;
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at least $750 million for fiscal year 2015; and
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at least $3 billion for fiscal year 2020.
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The Growth Plan lays out several strategies and business objectives in order for us to achieve the aforementioned revenue goals. Our management is expected to implement the following strategies; however, our Board of Directors reserves the right to revise such strategies at any time based on changing circumstances:
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Establish the Engineering Center;
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Participate in the design of the Protocol;
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Expand market share by broadening our geographic distribution network and increasing brand awareness;
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Reduce future manufacturing costs by securing raw material supplies; and
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Further utilize our research and development platform.
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Our History
The Company was incorporated under the laws of the state of Kansas on February 6, 1987 under the name Videophone, Inc. The Company had no operations from December 1996 to December 2007. In October 2007, the Company was reincorporated in the state of Nevada. On December 26, 2007, the Company acquired all of the issued and outstanding capital stock of Green New Jersey, through a share exchange (the “Share Exchange”). As a result of the Share Exchange, the Company owns 100% of Green New Jersey. The Share Exchange occurred simultaneously with a private placement of $20,519,255 on December 26, 2007.
Green New Jersey was incorporated on January 27, 2007 under the laws of the State of New Jersey. On August 24, 2007, Green New Jersey acquired 100% of the outstanding shares of Jinong, a company incorporated in the PRC on June 19, 2000. On January 19, 2007, Jinong incorporated Jintai as its direct, wholly-owned subsidiary to be research and development base for fertilizer products manufactured by Jinong.
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After the acquisition of Green New Jersey, the Company changed its name to China Green Agriculture, Inc., effective February 5, 2008. The trading symbol changed from DCOV.OB to CGAG.OB on the same day.
On July 23, 2009, Yuxing became a direct, wholly-owned subsidiary of Jinong to facilitate the research and development of agricultural products and fertilizers.
On March 9, 2009, the Company’s common stock was listed on the NYSE Amex Equities under the trading symbol “CGA”. On December 4, 2009, the Company voluntarily ceased trading its common stock on the NYSE Amex Equities and transferred its listing to the New York Stock Exchange on December 7, 2009. The Company’s ticker symbol remains “CGA”.
On July 2, 2010, the Company, through Jinong, consummated a transaction to acquire all of the equity interests of Gufeng and its subsidiary Tianjuyuan. As a result, Gufeng and Tianjuyuan are now wholly-owned subsidiaries of Jinong and indirect subsidiaries of the Company. Our principal executive offices are located at 3
rd
Floor, Borough A, Block A. No. 181, South Taibai Road, Xi’an, Shaanxi Province, People’s Republic of China 710065 and our telephone number is +86-29-88266368. Our website address is
www.cgagri.com
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Our current corporate structure is set forth in the following diagram:
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Industry Analysis
Fertilizer Market in China
China is both the world’s largest manufacturer and consumer of fertilizer. According to the China Statistical Year Book, China’s fertilizer consumption grew at a compound annual growth rate of 2.5% from 1998 to 2007, reaching 51.1 million metric tons in 2007, as compared to 40.8 million metric tons in 1998. According to a 2009 Market Analysis and Development Trend Report of the Fertilizer Industry by Ai Kai Data & Research Center, by the end of 2010, the total demand for fertilizer in China will be 56 million tons, up 40% from 2003. The demand for fertilizer products is continuing to grow as arable land becomes scarce.
It is forecasted by the Ministry of Agriculture that, based on the grain self-sufficiency ratios of 100% and 95% respectively, and chemical fertilizer consumption in 2005, consumption of chemical fertilizer in the industries including grain and economic crops, forestry, grass and breeding industries, will be increased by approximately 14.5 million tons, 11.0 million tons and 18.5 million tons, 14.9 million tons in 2015 and 2020 respectively. In accordance with the National Adjustment and Revitalization Plan on the Petrochemical Industry, the chemical fertilizer output in China will reach 62.5 million tons (counting only active ingredients) till 2011, of which the output for potash fertilizer will hit 4 million tons (counting only active ingredients), output for high concentration fertilizer will be increased to 80%, and output for chemical fertilizer manufactured in the original place of raw material will be increased to 60%.
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With the rapid development in China’s agricultural economy recently, the structure of agricultural plantation has changed significantly. The plantation area for economic crops (oil plants, vegetable, fruits, tea and sugar crops) has increased year by year. The statistics showed that from 2000 to 2008 the plantation area for vegetables has increased by 17.31% to 268 million mu (44 million acres). The fertilizers that economic crops consume are 1.2-2.6 times that of common field crops. Additionally, high quality fertilizers, like compound fertilizers and controlled-release fertilizers, are commonly used on economic crops. The increasing plantation areas for economic crops results in a larger demand for high quality fertilizers.
Along with the vigorous promotion and application of soil testing and fertilizer recommendation technology, and also the increased awareness on scientific fertilizer application, farmers’ recognition and acceptance level of compound fertilizers has increased. Scientific fertilizer application and increasing application of compound fertilizers have become the trend for future agriculture development.
China devotes less of its land to agricultural cultivation than most nations as reported in the October 3, 2008 article in China Daily, and arable land, which is defined as land that is capable of being cultivated and supporting agricultural production, has been steadily reduced in China due to factors such as increasing industrialization and urbanization, desertification, soil degradation and low availability of water. According to the figures provided by the PRC Ministry of Land and Resources, in 2008, per capita farmland in China was only 1,400 square meters (15,070 square feet), which is approximately 48.6% of the world level. In addition, according to the Food and Agriculture Organization of the United Nations, the Chinese population is expected to reach over 1.4 billion by 2050. There is an obvious and increasing demand on grains due to the population growth and improvement in people’s living standards. China has set a target for grain production to increase by 50 billion kilograms by 2020. As stated in a 2007 research report by Renmin University of China, arable land in China is predicted to decrease by 20% by 2050. The implication is that by the middle of this century, per capita farmland in China may be only 16% of the world average level. Moreover, according to an article dated December 1, 2009 from the China Meteorological Administration, it is estimated that by 2030, global warming may further reduce China’s current grain production by 5-10%.
These statistics highlight the fact that if China is to remain largely self sufficient on an agricultural basis, its farmers will have to substantially increase crop yields to meet future demand. Fertilizer demand throughout China has continued to grow as a result of increased demand in food volume, low crop yields compared to other producer nations and a decrease in arable land.
In addition to the fertilizer market demand, governmental support on agricultural industry may serve as another factor to our business growth. According to an article published in the Guangming Daily Newspaper, in 2009, China’s government budgeted RMB595.5 billion for spending on agriculture, rural areas and farmers, an increase of 37.9% from the previous year. The newspaper article also reported that the budget included RMB102.9 billion, twice the amount from the previous year, in direct subsidies for grain production and purchases of agricultural materials. China’s government is planning additional farm subsidies and land reform initiatives, and to eliminate certain agricultural taxes and promote the production of organically grown products by setting new standards. We believe that these supportive government policies will encourage growth in China’s agricultural industry as well as drive the sale of our fertilizers and agricultural products.
Organic versus Chemical Fertilizers
In general, fertilizer products are categorized as either organic or chemical fertilizers. Organic fertilizers can be natural or developed artificially. Natural organic fertilizers include manure, slurry, worm castings, peat, seaweed, humic acid, brassin and guano. Artificial organic fertilizers include compost, bloodmeal, bone meal, humic acid, and are typically supplemented with other nutrient ingredients. Chemical fertilizers normally are composed of synthetic chemicals such as phosphate and potassium compounds. The primary difference between organic fertilizers and chemical fertilizers is in the sourcing process of ingredients as the nutrient contents are largely the same.
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Over the last 20 years, the use of chemical fertilizers in China has substantially increased food production as ingredients in chemical fertilizers are fully absorbed into crops as compared to organic fertilizers. However, years of chemical fertilizer use has created unintended consequences for the Chinese agriculture industry. Many chemical fertilizers lack minerals, which crops must absorb from soil to the extent available. The overall effect is that soil with insufficient natural resources will yield agricultural products lacking certain minerals.
In addition, heavy use of chemical fertilizers may create in "fertilizer burn", which is over-fertilization of a single nutrient such as nitrogen. The resulting imbalance in compound salts and soil acidification can dry roots and suspend crop growth. Another drawback of chemical fertilizers is that they are more easily depleted from soil by irrigation, rainfall and flooding as compared to organic fertilizers. The production of chemical fertilizers can be very intensive in energy consumption. For example, the production of synthetic ammonia, a common chemical fertilizer, currently consumes about 5% of the world’s natural gas consumption.
Organic fertilizers, on the other hand, can improve the biodiversity and long-term productivity of soil. Organic nutrients increase the abundance of soil organisms by providing organic matter and micronutrients. Unlike chemical fertilizers, the content, solubility, and release rates of organic fertilizer nutrients are typically more dilutive and much less readily available to plants. Organic fertilizers provide nutrients for crops as well as improve physical and biological mechanisms for storing nutrients in soils, thus mitigating the risk of over-fertilization. In addition, unlike chemical fertilizers, organic fertilizers require less application to maintain soil fertility, which averts the runoff caused by chemical fertilizers in components such as soluble nitrogen and phosphorus. However, the composition of organic fertilizer is more complex than a standardized chemical product, and thus more costly to manufacture. As an alternative to pure chemical fertilizer use, farmers can also use inorganic fertilizer supplemented with the application of organic fertilizers.
Since the 1980s, China has intensified the use of chemical fertilizers in order to increase crop yields. While the increase in crop yield has slowed in recent years, the overuse of chemical fertilizers also caused many environmental issues ranging from water pollution to soil damage. As a result, the PRC government has been promoting the use of environmental friendly green fertilizers as an effective alternative to chemical fertilizers. Green fertilizers, including humic acid-based organic compound fertilizers and mixed organic-inorganic compound fertilizers, assist crops to gain incremental yield by adding various nutrients essential to soil and crops, as well as protecting the environment. At present, green fertilizer products are less used than chemical fertilizers in China, as they are relatively new to farmers. However, the demand for these green fertilizers has been increasing and we expect this trend to continue in the coming years. Although we recently began to distribute our products into several other Asian and Southeast Asian countries, the PRC is the principal market for our organic compound fertilizers and related agricultural products.
The “Green Food” Industry in the PRC
The rise of the PRC industry for food that is free from pollutants or harmful chemicals, or “green food”, is also increasing demand for organic fertilizers. Green food is the certificate for agricultural products promoted by Chinese Government. It has two levels: AA Green Food and A Green Food. The production standard of “AA Green Food” nearly equals to that of organic agriculture. Green food is a kind of food existing between the ordinary agricultural food produced by the common farming practice and the organic food. Organic food holds the highest standard in the food industry. The market for organic agricultural products in China has huge potential. It is forecasted that the increase of organic agricultural products consumption in China will be higher than that of the average organic agricultural products consumption in the world in the next few years. Additionally, the market of Chinese organic agricultural products will reach between RMB 10.8 billion and RMB 16.0 billion in 2011 and between RMB 24.8 billion and 59.4 billion in 2015.
With the rapid development of the organic food industry in China, an increasing number of companies have been entering into the green food sector to take advantage of market opportunities. In 1990, the PRC Ministry of Agriculture began to encourage the production of green food. In 1992, the PRC Ministry of Agriculture established the CGFDC to oversee food quality and the development and management of green food at the national and provincial levels in the PRC. In 1993, the PRC Ministry of Agriculture established regulations on the use of green food labeling. In 1996, an identifying trademark for green food was registered in the PRC and put into use.
Crops grown with the use of our products are eligible to qualify for the “AA Green Food” rating administered by the CGFDC. The green food rating system consists of an “A” rating and a more stringent “AA” rating. The “AA” rating indicates that the crops contain minimal chemical residue from fertilizers. Although our products themselves do not bear the “AA green food” designation, they are (except for those produced by Gufeng) certified by the CGFDC as green food production material.
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According to the statistics from the CGFDC, China's annual output of green food reached 15 million tons in 2008. However, the domestic consumption level remains relatively low, comprising approximately 3% of the market share of food commodities. The low consumption level is primarily due to: (i) small scale of production of green food; (ii) lack of consumer awareness of green food and (iii) the presence of counterfeit green food products that adversely affect consumers’ purchases.
As described by the CGFDC, the development strategy and goals of China’s green food industry are as follows: first, to assure the standards of quality and focus on the development of key products; second, to accelerate the industry’s pace of development to promote and facilitate the industrialization of green food; third, to implement an integrated development strategy emphasizing producers, production base and farmers; fourth, to accelerate the pace of development with the aid of the government and the market; and fifth, to carry out an international development strategy, aimed at promoting the export of agricultural products.
According to the China Green Food Industry Report 2008 by Research in China, a Chinese market research company, the green food industry is a high growth industry with significant investment potential. According to the report, leading green food producers will experience growth as they achieve national and provincial agricultural industrialization, because they are supported by favorable government policies and tax breaks.
Growth Strategy
We believe that our increased production capacity to produce diverse fertilizer products and our research and development capabilities, makes us well positioned to benefit from the anticipated growth of the PRC fertilizer market. We expect to expand sales and gain increased revenues through the following strategies:
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Enhance Production Utilization.
The current utilization rate of the production facilities of Jinong and Gufeng are at 87% and 58%, respectively. Jinong and Gufeng have a total annual production capacity of 55,000 metric tons and 500,000 metric tons, respectively. To meet the increasing customer demand, we plan to hire additional sale persons, upgrade certain existing facilities and construct new facilities.
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Expand Capacity and Diversify Product Offerings.
Through our acquisition of Gufeng, we increased our annual fertilizer production capacity to 555,000 metric tons and our portfolio of fertilizers to 454 products. To meet the needs of farmers in the PRC, we will expand our existing line of fertilizer products, develop new fertilizers and execute other strategic acquisitions of PRC fertilizer manufacturers that complement our strategies and product lines.
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Capitalize on Synergies Created by Research and Development Efforts.
In connection with the pending construction of Yuxing’s research and development center, we have completed the construction of 100 sunlight greenhouses and 6 “intelligent” greenhouses. We expect the Yuxing facility to help us shorten the fertilizer market cycle by providing an advanced testing field for new fertilizer products manufactured by Jinong. In addition, through our research and development efforts on fertilizers, we expect to simultaneously facilitate the production of superior agricultural products, such as flower bulbs, flowers, fruits and vegetables, resulting in increased revenues.
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Products
Our principal products are our fertilizers, which consist of liquid, granular and powdered fertilizers developed to increase crop yields and quality without the harmful effects of chemical fertilizers. We manufacture and sell 454 fertilizer products from humic acid-based fertilizers to mixed organic-inorganic compound fertilizers. In addition, we produce high quality agricultural products such as fruits, vegetables and flowers for commercial sale.
10
Fertilizer Products
We expect that over 90% of our fertilizer business, which is our main business, will continue to be the production and sale of fertilizers through Jinong and Gufeng. We believe that Jinong utilizes one of the most advanced automated humic acid production lines in China. Humic acid is a complex natural, organic ingredient that is essential for balanced, fertile soil. It is one of the major constituents of organic matter in fertile soil, making a vital contribution to the quality of the soil’s composition. When plant or animal matter decomposes, it naturally turns into a form of humic acid-rich material, such as peat, lignite or weathered coal.
Humic acid exhibits a high capacity for cation exchange (a chemical process in which cations of like charge are exchanged equally between a solid and a solution), which serves to chelate plant nutrient elements and release them as the plant requires. The chelation process prevents leaching of nutrients by holding them in the soil solution. Moreover, humic acids can bind soil toxins along with plant nutrients, thereby strongly stabilizing soils. The regular use of humic acid organic liquid compound fertilizer can effectively reduce the use of fertilizer, insecticide, herbicide and water. This mechanism is important to environmental protection, because it can prevent contamination of water sources caused by runoff.
In nature, humic acid improves soil structure and aeration, nutrient absorption and water retention. It also increases soil’s buffering capacity against fluctuations in pH levels, and reduces soil crusting and erosion problems from wind and water as well as radical toxic pollutants. Humic acid promotes the development of root systems, seed germination and overall plant development. It also enhances health, resistance to stress and overall appearance of plants. We believe that there is no synthetic material currently known to match humic acid's effectiveness and versatility.
The pure humic acid used in our fertilizers is distilled and extracted from weathered coal by way of alkaline digestion and acid recrystallization. Our Jinong fertilizers are dark brown to black in color, and principally used as a foliar fertilizer (a liquid, water soluble fertilizer applied to a plant’s foliage by a fine spray so that the plant can absorb the nutrients through its leaves), or sprayed directly on soil or injected into the irrigation systems. Benefits of using our products are to stimulate growth, yield, and protect plants from drought, disease and temperature damage while improving soil structure and enhancing soil fertility. For example, green leafy vegetables will have more than 15% increases in yield by using our fertilizer to effectively promote the development of root systems.
We have a multi-tiered product line of 454 fertilizer products, covering humic acid-based compound fertilizer produced through Jinong and compound fertilizer, blended fertilizer, organic compound fertilizer, slow-release fertilizers, highly-concentrated water-soluble fertilizers and mixed organic-inorganic compound fertilizer.
During the fiscal years ended June 30, 2011, 2010 and 2009, we earned $172,710,283, $45,816,377, and $28,889,131 respectively, in gross revenues from sales of our fertilizer products, representing 96.1%, 88.0 % and 82.1% of our total revenues for such periods. Such amounts do not include revenues from Gufeng in fiscal year 2010 and 2009, which we acquired on July 2, 2010.
Gufeng and Tianjuyuan produce compound fertilizer, blended fertilizer, organic compound fertilizer, slow-release fertilizers, highly-concentrated water-soluble fertilizers and mixed organic-inorganic compound fertilizer. Gufeng sells its products under four brands, namely “KEBA”, “Mei Er An”, “Huang Cheng Gen” and “SPR HOP”, which are all registered trademarks in the PRC. Tianjuyuan’s products are marketed under the brands “AGR GFJ” and “T.J.Y.” with AGR GFJ and T.J.Y. as PRC registered trademarks.
Gufeng and Tianjuyuan manufacture a total of 311 fertilizer products. Their principal product categories include:
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·
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Compound fertilizer- composed of various elements such as urea, ammonium chloride, ammonium sulfate, potassium chloride, potassium sulfate and etc. It is for common crops.
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·
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Organic/inorganic compound fertilizer- composed of such elements as urea, ammonium phosphate, potassium chloride, potassium sulfate, humic acid and etc. It applies to vegetable and economic crops.
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·
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Blended fertilizer-with the ingredients of urea, potassium chloride and etc. It suits to maize in the northeast region.
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·
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Slow-release fertilizer with the main ingredients of urea and resin. It applies to maize and other crops.
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·
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Water-soluble fertilizers with humic acid- composed of such elements as urea, potassium chloride, potassium sulfate, humic acid and etc. It suits to fruit trees and vegetable.
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Gufeng’s product lines are comprised of 70% organic-inorganic compound fertilizers, 24% inorganic formula fertilizer, and 6% water soluble fertilizer.
Agricultural Products
Our subsidiaries, Jintai and Yuxing, produce top-grade fruits, vegetables, flowers and colored seedlings for commercial sale. Jintai and Yuxing produce the following categories of products:
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·
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Top-grade flowers, including principally, faber cymbidium and phalaenopsis. These two types of flowers are mainly distributed to the middle and high-end consumers in Shaanxi Province and its adjacent areas. Their seedlings are distributed across the country, primarily to the southern regions of China.
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·
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Green vegetables and fruits, including, principally, Holland cucumbers, sweet and colored pimientos, eggplant and Japanese watermelons, which are distributed to middle and high-end consumers in Shaanxi Province, primarily in Xi’an.
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·
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Multicolored seedlings, including, principally, photinia serrulata (Chinese Photinia), which is distributed to customers across China.
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The gross revenues from the sale of our agricultural products for the fiscal years ended June 30, 2011, 2010 and 2009, were $7,007,683, $6,274,375, and $6,318,866 respectively, representing 3.9%, 12.1%, and 17.9% of our total revenues, respectively.
Jintai and Yuxing were originally established to be the research and development base for humic acid fertilizers produced by Jinong. By simulating the various growing conditions and cycles of a variety of plants, such as flowers, vegetables and seedlings, Jintai and Yuxing can conduct experimental testing to enhance the efficacy of our new fertilizers.
Fertilizer Manufacturing Process
Our production lines employ scientifically-designed production procedures and strict quality control systems to ensure high quality in our products. Our production lines are fully automated and run by a central control system with minimal manual input by control technicians. The machinery and vats for the line are supplied by a local medical machinery manufacturer and the automated control systems were developed by us. Our access rights management system ensures that our proprietary ingredient mixes are protected at all times from any unauthorized use. Our computer server is connected to the electronic scales on each of the material input bins to ensure that the exact quantity of each element or ingredient is delivered every time, thus maintaining our quality standards and reducing waste. Our production line that produces liquid fertilizer and powered fertilizer is centrally controlled with a wireless panoramic audio and video monitoring system that allows connectivity with mobile terminals such as cell phones.
Through Jinong, we operate a 6,500 square meter (69,965 square feet) production facility that manufactures liquid fertilizer products and a 31,000 square meter (333,681 square feet) production facility that produces liquid and highly concentrated (powdered) fertilizers. Jinong’s total annual production capacity of these facilities is 55,000 metric tons and Jinong’s current utilization rate is 87%.
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Through Gufeng and Tianjuyuan, we operate eight manufacturing facilities comprising 12,286 square meters (approximately 132 thousand square feet) located in No. 6 Mafang Logistics Park, Pinggu, Beijing. These facilities produce various kinds of fertilizers and have a total annual production capacity of 500,000 metric tons. Gufeng’s current utilization rate of these facilities is 58%.
The manufacturing techniques utilized by Gufeng include extruder granulation, rotary drum steam granulation, urea-based spraying granulation and resin-coated sustained release, which enable Gufeng to effectively meet the production requirements of its different compound fertilizers. To ensure high standards of quality, Gufeng and Tianjuyuan employ strict quality controls on purchases of raw materials to sales of products to end users.
We produced and sold approximately 337,769 metric tons of fertilizer products during the fiscal year ended June 30, 2011.
Raw Materials and Suppliers
Fertilizer Products
Among the three materials that can be utilized to produce humic acid (weathered coal, lignite and peat), we have chosen weathered coal as our principal raw material because it is abundant and relatively cheap at approximately $77 per metric ton. We have been using Inner Mongolia Tianlibao Fertilizer Co., Ltd. (“Tianlibao”) as our main supplier of weathered coal because of abundance and high quality of weathered coal in Inner Mongolia Autonomous Region. We do not have any purchase volume commitment pursuant to our supply agreement with Tianlibao, which is renewable on a monthly basis.
In addition to weathered coal, we also use approximately 50 different components in our production process, including elements such as sodium, calcium, zinc, iron and potassium, all of which can be readily obtained from numerous sources in local markets. We utilize spectral analysis technology to select the raw materials with the best quality, and we have specially-trained buyers to ensure the quality and consistency of the raw materials that we procure.
The fertilizer products that Gufeng and Tianjuyuan manufacture incorporate over 50 different raw materials, including coal, sulfuric acid and NPK (nitrogen, phosphorus and potassium) related compounds such as amide and hydronitrogen. Beijing Baofengnian Agricultural Material Co. Ltd and Inner Mogolia Chemical Products Co., Ltd. are the primary suppliers of raw materials to Gufeng, accounting for approximately 15.8% and 10.2%, respectively, of Gufeng’s total purchase for the fiscal year 2011. The loss of any of these suppliers would not have a material adverse effect on our business. We do not believe there is any material risk of losing these suppliers during the next 12 months.
Our products are packaged in bottles, bags and boxes. Each type of packaging material, along with packaging labels, is readily available for purchase from manufacturers in Shaanxi, Beijing, Shandong and Zhejiang province.
Agricultural Products
The plants that generate our top-grade flowers and multi-colored seedlings are mainly planted and cultivated in research and development facilities maintained by Jintai and Yuxing. We purchase the seeds of green vegetables and fruits from agricultural companies, such as Rijk Zwaan Company,
that import the seeds from foreign markets including
Holland and Japan. We cultivate our agricultural products by applying fertilizers produced by Jinong.
Inventory
For our fertilizer products, our efficient production methods allow us to maintain low inventory levels, which keep inventory costs down. We purchase raw materials and packaging materials based on production demands. Generally, we maintain less than one month’s supply of such materials. The majority of sales orders we receive are shipped directly to distributors after production. We normally carry finished goods up to one week and do not maintain any work-in-process.
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For our agricultural products, we maintain about one month’s inventory because we need a significant amount of agricultural products to serve as our product testing base for the research and development of our new fertilizers.
Return Policy
The Company only accepts returns of defective fertilizer products. During the fiscal year ended June 30, 2011, the Company did not experience any significant returns.
Backlog
As of June 30, 2011, we had a backlog of orders in the amount of $211,540 as compared to $125,885, and $164,278 in backlog orders as of June 30, 2010 and 2009 respectively.
Seasonality
The peak selling season for fertilizer products used to be from April through September. However, during the fiscal year ended June 30, 2011, we did not have any seasonality with respect to our fertilizer sales as approximately 58.8% of our annual fertilizer sales volume occurred in the first fiscal quarter (summer) and the fourth fiscal quarter (spring) because our addition of granular and powder fertilizers experienced demand during the off-peak season of our liquid fertilizers. Going forward, we may experience a different seasonality pattern for our fertilizers as compared that in the past because July through September is the off-peak season for fertilizers sold by Gufeng.
The peak selling season for our agricultural products is from October through March the next calendar year during our second fiscal quarter (fall) and the third fiscal quarter (winter). This was primarily due to the strong demand for our high-end fruits and decorative flowers during the holiday seasons. During the period from October 2010 through March 2011, Jintai generated approximately $4.5 million, or 64.2% of our annual sales of agricultural products. Such amounts do not include revenues from Yuxing, because we did not receive any revenues from Yuxing during this period.
Marketing, Distribution and Customers
Overview
We currently market our fertilizer products to private wholesalers and retailers of agricultural farm products in 22 provinces, 4 autonomous regions and 3 central government-controlled municipalities in China. For the fiscal year 2011, the following five PRC provinces, collectively accounted for 38.9% of our total fertilizer revenue: Hebei (10.4%), Beijing (8.5%), Liaoning (7.6%), Jilin (6.9%) and Shaanxi (5.5%). We believe this geographically diverse distribution greatly helps us to become a leader in the compound fertilizer market as compared to regional competitors because we are not heavily dependent on any single geographic area for sales and are able to raise our brand/product awareness over a broad geographic area. We also manufacture our fertilizer products for export to contracted distributors in foreign countries, including India, Zimbabwe, Philippines, Mongolia and Brazil. Total revenues from exported products currently account for approximately 23.6% of our total fertilizer revenues in fiscal 2011.
Our agricultural products are distributed through various distribution channels in Shaanxi Province and neighboring provinces. Decorative flowers are usually sold through our fertilizer distributors to end-users such as flower shops, luxury hotels and government agencies. Fruits and vegetables are sold to high-end supermarkets and upscale restaurants. Seedlings are sold primarily to city planning departments.
We utilize a multi-tiered product strategy that allows us to tailor our fertilizer products to the needs and preferences of the various geographic regions in China. Our fertilizers can be tailored to different crops grown in varying climate and soil conditions. For example, climate and rainfall conditions in Southern and Eastern China allow farmers to grow high margin crops such as fruit and seasonal vegetables. As a result, these farmers can obtain more return on their investment by using more expensive and specialized fertilizers. In contrast, we market a broader spectrum, low-cost fertilizer to farmers in the Northwest areas of China because climate conditions prevent them from investing in expensive fertilizers.
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Our research and development capabilities, which are described more fully below, allow us to develop products that are tailored to specific farming needs in different regions, including different crops, humidity, weather and soil conditions.
Marketing
Our marketing staff is trained to closely work with distributors and customers, including retailers and farmers, providing professional advice on customizing our products to customer needs and offering agricultural knowledge and other extensive customer support. In addition, our employees educate and inform our distributors and customers by regularly organizing training courses on new agricultural techniques.
By industry norms, we believe that our product development cycle of three to nine months is relatively short. Through our regular collection of market data, including the growth records of a variety of plants cultivated in different soil and climate conditions, and feedback from our end-users, we are able to conduct nationwide market analysis, ascertain new product needs, estimate demand and customer demographics and develop new products that are tailored to current market needs.
Although we utilize television advertisements and mass media, the majority of our marketing efforts are conducted through joint activities with our distributors. Our sales and marketing staff works with and trains distributors and retail clients through lectures and interactive meetings. We emphasize the technological components of our products to end-users to help them understand the differences in products and how to effectively use them. Word-of-mouth advertising and sample trials of new products in new areas are also essential components of our marketing efforts. In addition, we have established nationwide telephone hotlines to answer customer questions and have constructed an SMS text message platform to have real-time interaction with our customers.
Our best-selling fertilizers, based on revenues for the fiscal year ended June 30, 2011, are listed below:
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Volume
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Revenues
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Percent of
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Ranking
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Product Names
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(Tons)
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(USD)
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Fertilizer Sales
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1
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Organic/Inorganic Compound Fertilizer(sulfur-based) NPK≥40%
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59,995
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$ |
24,062,396
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13.9
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% | ||||||||
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2
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Organic/Inorganic Compound Fertilizer(sulfur-based) NPK≥45%
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53,527
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$ |
22,772,570
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13.2
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% | ||||||||
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3
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Compound Fertilizer NPK≥40%
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49,402
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$ |
15,015,039
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8.7
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% | ||||||||
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4
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Organic/Inorganic Compound Fertilizer(sulfur-based) NPK≥48%
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20,888
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$ |
8,888,475
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5.1
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% | ||||||||
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5
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Organic/Inorganic Compound Fertilizer(sulfur-based) NPK≥46%
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16,951
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$ |
7,451,679
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4.3
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% | ||||||||
Fertilizer Products
The fertilizer product market in China is highly fragmented. Our primary sales strategy is to establish contractual relationships with qualified distributors throughout the country, who, in turn, will distribute our products to wholesalers and retailers, and ultimately, the farmers.
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As of June 30, 2011, we sold our products through a carefully constructed network of about 797 distributors covering 22 provinces, 4 autonomous regions and 3 central government-controlled municipalities in China. We developed 74 new distributors during the fiscal year ended June 30, 2011.
The distributors sell our products to the smaller, local wholesale and retail outlets who then sell to the end-users, typically farmers. We do not grant provincial or regional exclusivity because there is currently no single distributor sufficiently strong enough to warrant exclusivity. We enter into non-exclusive written distribution agreements with chosen distributors that demonstrate their ability in local business experience and sufficient regional sales networks. The distribution agreements do not dictate distribution quantity because changes in local market condition and weather changes can dramatically affect sales quotas.
For the fiscal year ended June 30, 2011, sales to our top five distributors accounted for approximately 29.7% of our fertilizer product revenue. Two distributors accounted for over 5% of our fertilizer sales in fiscal year 2011 with Sinoagri Holding Company Limited accounting for approximately 18.3% and Beijing Baofengnian Agricultural Material Co. Ltd accounting for 5.3% of the total fertilizer sales. As we do not have a significant concentration of customers, we believe that the loss of any one customer would not have any significant effect on our business.
Agricultural Products
We distribute our agricultural products through several networks depending on the type of product. Our top-grade flowers are mainly distributed through our fertilizer distribution network. Our green vegetables and fruits are mainly distributed to a variety of wholesale markets and supermarkets in Xi’an, while our multi-colored seedlings are distributed to the seedling centers and planting companies in China with which we have had long-term cooperation. The following is a list of our top five customers in terms of revenues for our agricultural products for the fiscal year ended June 30, 2011. These customers accounted for approximately 50.6% of the total revenues from Jintai’s agricultural products.
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Ranking
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Customer Name
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Amount (USD)
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Percentage
of
Jintai's sales
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1
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Tianxi Yuanyi Co.
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$
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996,291
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14.6
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%
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2
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Baoji Qinfeng Flower Co., Ltd.
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$
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660,266
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9.7
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%
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3
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Dafeng Potted Flower Co., Ltd
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$
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636,556
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9.3
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%
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4
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Xi’an Qingmei Flower Co., Ltd
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$
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605,696
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8.9
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%
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5
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Chengdu Huadu Gardening Company
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$
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552,102
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8.1
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%
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Retail Stores and Authorized Retailers
We have successfully implemented two marketing programs in Shaanxi, Hebei, Anhui, Jiangsu and Guangzhou provinces. These marketing programs consist of the: (i) establishment of Company directly-owned retail stores to sell fertilizer products produced by Jinong and Gufeng through the Company’s designated sales personnel (the “Pilot Program”) and (ii) selection of qualified retailers from the Company's distributor base of retail customer to be designated "China Green Agriculture Authorized Retailers". Under the Pilot Program, we currently have 15 directly-owned stores operating in Shaanxi Province, with each store having an assigned territory in order not to compete with any of the Company's existing distributors. Since the launch of the Pilot Program in January 2010, we have worked closely with our existing distributors to designate over 3,671 retailers as “China Green Agriculture Retailers” for fiscal year ended June 30, 2011. We have entered into agreements with these retailers to prominently display "China Green Agriculture Authorized Retailer" on their exhibits, and have well-positioned standardized shelf and product displays in their retail stores. In addition, we provide the retailers with educational materials on proper product use, and billboard ads with our product logo to target farmers.
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Research and Development
We currently conduct the bulk of our research and development activities through Jintai, with Yuxing providing certain research and development work as well. Through these subsidiaries, we cultivate high-quality flowers, green vegetables and fruits in our own greenhouses and sell them to various end-users, including airlines, hotels and restaurants. Jintai and Yuxing operate advanced research and development facilities that: (i) provide testing and an experimental data collection base for the function and feature of new fertilizers produced by Jinong by simulating the growing conditions and development stages of a variety of plants, such as flowers, vegetables and seedlings, which, in turn (ii) produce plants, flowers and vegetables that can be sold as commercial products to generate sales. In addition, our research and development capabilities allow us to develop products that are tailored to specific farming needs, including those required by different crops, humidity, weather and soil conditions. We act as a testing base for Northwest A&F University, an agriculture focused university in Shaanxi Province, and work together to develop fertilizer products with high potential for commercial success.
In January 2007, we invested approximately $10 million to purchase and construct advanced intelligent greenhouse facilities for Jintai to serve as our research and development base. We believe it has quickly become one of the leading green fertilizer research facilities in China. Flowers, fruits and vegetables that are grown for experimental testing of Jinong’s humic acid compound fertilizers are of high quality and value and are sold to local supermarkets and airline companies. We sold approximately $7,007,683 of these agricultural products during the fiscal year ended June 30, 2011.
During the fiscal year ended June 30, 2011, we applied approximately $10,107,079 of the proceeds from our public offerings in July 2009 and November/December 2009 (the “Public Offerings”) toward the partial payment of Yuxing’s pending research and development center, which includes the construction of 100 sunlight greenhouses and 6 “intelligent” greenhouses. Upon completion, we expect the research and development center to expand our output of high quality agricultural products for commercial sale while providing an advanced testing field for new fertilizer products. The new facility will continue to increase our capability to produce more products while shortening the new product development cycle, which allows us to get products to market quickly, thus increasing revenues and market share. In addition to developing new humic acid-based fertilizer products, we are planning to develop other agricultural derivatives from humic acid, such as humic-acid based organic pesticides, which can provide additional revenue sources and increase profitability.
During the fiscal year ended June 30, 2010 and 2009, we spent $12,956,621 and $0 on Yuxing’s research and development activities.
New Products
With our strong and advanced research and development capabilities, we have developed 454 products and continue to develop new products. During the fiscal year ended June 30, 2011, we developed 29 new products, which contributed $33,843,277 to our sales revenue for the period.
Among the new products we introduced in fiscal year 2011, there are several powder fertilizers, liquid fertilizers, compound fertilizers and blended fertilizers.
In addition to developing new fertilizer products, we are also developing soilless seeding and breeding of colored-leaf plants, rare flowers and new species of fruits and vegetables.
Intellectual Property
We hold the following trademarks registered with the PRC Trademark Offices of National Industrial and Commerce Administrative Bureau (the “PRC Trademark Offices”):
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Trademark
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Registration Number
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Valid Term
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Jinong
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No.3906984
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May 7, 2007 to May 6, 2017
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Mei Er An
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No. 1508004
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January 20, 2011 to January 20, 2021
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SPR HOP
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No. 3320282
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May 28, 2004 to May 27, 2014
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科霸
KEBA
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No. 760379
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August 14, 2005 to August 13, 2015
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天聚
缘
T.J.Y
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No. 3320283
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May 28, 2004 to May 27, 2014
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Huang Cheng Gen
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No. 5219720
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June 28, 2009 to June 27, 2019
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A registered trademark is protected in China for a term of 10 years, and renewable for another 10 year term under PRC trademark law, as long as the renewal application is submitted to the PRC Trademark Offices within six months prior to the expiration of the initial term.
Jinong has one patent for a fertilizer formulation and patent application for our proprietary production line and manufacturing processes as follows:
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Patent/Pending
Patent
Application
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Type of Patent
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Patent No.
/Application No.
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Inventor’s
Name and
Patent Holder
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Date of
Application
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Date of
Publication and
Term
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Patent:
Production facility of Humic Acid Products
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Utility Model
Patent
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Patent No.: ZL
2007 2
0031884.2
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Inventor: Tao Li
Patent Holder:
Jinong
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May 29, 2007
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May 14, 2008;
10 years
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|||||
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Patent
Application:
Method and recipe of the water soluble humic acid fertilizers
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Utility Model
Patent
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Application No.:
200710017334.x
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Applicant:
Jinong
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February 1,
2007
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November 24, 2010;
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The PRC Patent Law was adopted by the PRC National People's Congress in 1984 and was subsequently amended in 1992 and 2000. Under the PRC Patent Law, an invention patent is valid for a term of 20 years and a utility or design patent is valid for a term of 10 years. All of our registered patents are all utility patents. Any use of patent without consent or a proper license from the patent owner constitutes an infringement of patent rights.
In addition to trademark and patent protection law in China, we also rely on contractual confidentiality provisions to protect our intellectual property rights and brand. To help safeguard our intellectual property, our research and development personnel and executive officers are subject to confidentiality agreements. They are also subject to a non-compete covenant following the termination of employment with us and they agree that any work product belongs to us. Moreover, we also take steps to limit the number of people involved in the production process and, instead of disclosing fertilizer ingredients to production employees, we refer to the ingredients by numbers.
Competitive Strengths
We believe the following competitive advantages of our fertilizer products enable us to compete in the PRC fertilizer market.
Nation-wide sales network
. In the highly fragmented Chinese fertilizer market, we have established our own distribution channels with private distributors that sell our products to retail stores and farmers throughout China. We have over 797 distributors nationwide across 22 provinces, 4 autonomous regions and 3 central government-controlled municipalities in China. Most of our competitors, including larger competitors, do not have a sales team as large as ours that specializes in the sale of compound fertilizer products. Moreover, we expect the regional strengths of Gufeng’s distribution network to expand our sales coverage to certain cities and counties as well as foreign markets.
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Strong Research and Development
.
Our research and development is managed effectively. Typically, it takes only three to nine months from the decision to develop a new product to mass production, which ensures product flow and helps to maintain market share. Our strong research and development department is based at our intelligent greenhouse facilities. The advanced equipment and soil-free techniques in such facilities simulate the natural environment in different areas and control selected factors. As a result, most of Jinong’s experimental work is conducted in Jintai and Yuxing’s greenhouse facilities, thereby speeding up product development cycles, and cutting costs without sacrificing accuracy of results. During the fiscal year ended June 30, 2011, we generated approximately $7,007,683 revenue from sales of Jintai and Yuxing’s agricultural products, and we anticipate that this source of revenue will grow in the future. We are currently building 100 sunlight greenhouses and 6 intelligence greenhouses over an 88-acre parcel of land in connection with Yuxing's pending research and development center, which will expand output of high quality agricultural products for commercial sale while providing an advanced testing field for new fertilizer products. The new facility will continue to increase our capability to produce more products while shortening the new product development cycle, which allows us to release products to market quickly, thus increasing revenues and market share.
Gufeng and Tianjuyuan have a total of 30 employees in research and development. They have independently developed seven technologies:
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1)
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Drying fan for urea-based compound fertilizer. The drying fan for urea-based compound fertilizer is specially designed by our technical personnel through numerous tests on different fertilizer products.
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2)
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Heat balance control system for flexible compound fertilizer.
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3)
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Automatic control system for the anti-block of compound fertilize
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4)
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Water control technology for low nitrogen, low potassium and high phosphorus compound fertilizer
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5)
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Manufacturing technology for salt-alkaline resistance and soil improvement of compound fertilizer. The company had won the third prize for progress in science and technology in Pinggu District Beijing with this technology.
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6)
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Manufacturing technology for compound HA fertilizer with high density (NPK≥51%).
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7)
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Manufacturing technology for the sustained release of blending and compound fertilizer. This technology has passed the inspection and approval of expert panel of Beijing municipal committee.
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While we believe that our greenhouse facilities provide us with a competitive advantage over our competitors, our larger competitors may have better understanding in certain local markets where they have successfully marketed products over a period of time and have specifically formulated fertilizers for local plant, soil and climate conditions. To increase our competitiveness, we will seek to diversify our fertilizers to benefit a wider range of plants and soil conditions.
Well-known Brand
.
We believe that purchasing decisions of customers are often based on strong brand recognition. “Jinong” is a registered trademark and is well recognized by end users in our specialty humic acid fertilizers; however, certain large international fertilizer producers and traders who import fertilizers to China, such as Cuikang (Hong Kong) Co., Ltd., a distributor for Yara Phosyn Ltd., a British fertilizer company, have strong brand recognition and domestic customers generally perceive the quality of the imported products as higher or more stable than fertilizers currently produced in China. Gufeng sells its products under four brands, namely Keba, Meier’an, Huangchenggen and SPR HOP. Tianjuyuan’s products are marketed under the brands AGR GFJ and T.J.Y. The primary products sold under the Gufeng and Tianjuyuan brands, include blended fertilizer (high nitrogen) for corn, and organic /inorganic compound fertilizer (sulfur based) for vegetable.
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Automated Production Line and Process
. All of Jinong’s major production procedures are controlled by a centralized computer system only accessible by authorized personnel. Jinong’s production lines are fully automated to ensure that content in each product is measured exactly according to its recipe by linking the computer server with the electronic weights on each of the material input bins. In addition, spectral analysis is used to accurately check the composition of materials. During the fiscal year 2011, Jinong’s highly advanced production lines manufactured a multi-tiered line of 143 fertilizer products, and we believe that Jinong’s production lines are among the few advanced lines in our industry. We have patent protection for Jinong’s proprietary production lines, one of which has medical grade production equipment with precise quality control, and the other capable of producing liquid, powder and granular fertilizers. With the addition of Gufeng, we currently have an annual production capacity of 555,000 metric tons.
Competition
Fertilizer Products
Based on our internal estimates, there are approximately 2,000 organic fertilizer manufacturers in China with no discernable market leaders in the sector. We believe our competitors are currently comprised of approximately 80% numerous small-sized local manufacturers, 9% are large regional competitors such as China Agritech, Inc., 8% are international companies and 3% are larger national competitors such as Yongye International, Inc. We believe we are among the larger national fertilizer manufacturers.
Gufeng’s primary competitor is Yuntianhua Group Co., Ltd. (“Yuntianhua”), a large, state-owned fertilizer manufacturer based in Kunming, Yunnan Province. Yuntianhua manufactures, among other things, chemical fertilizer, organic chemical products and salting chemical products. Acetal Copolymer based, organic fertilizer is a Yuntianhua product that competes with Gufeng.
We have smaller competitors which are generally producers of amino acid compound fertilizers. The products of these producers are very price competitive. However, these companies often lack adequate quality control or process control technologies which produces inconsistent quality in their products.
The Chinese fertilizer market has been fully opened to foreign companies since China’s entry into the World Trade Organization in December 2006. Accordingly, the PRC government has increased its fertilizer import quota and, since January 2007, has reduced the import tariffs on foreign fertilizer to 1%. However, foreign fertilizers are generally more expensive than PRC manufactured fertilizers and are not customized to soil conditions presented by China’s diverse climate and terrains
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Agricultural Products
The competitive market faced by our agriculture products varies depending on the categories and market of our three main products.
Top-grade flowers: The main competitor to our flowers and flower seedlings is Sanyi Agriculture Technology Co., Ltd. in Gansu Province. We believe that our flower products have comparative advantages in terms of the advanced technologies they are based on, the superior species of the seedlings we select and the efficiency and stability of our products. In addition, unlike most of our competitors that lack adequate greenhouses, our greenhouse facilities enable us to produce flower seedlings year-round.
Green Vegetables and Fruits: Our competitors are primarily the vegetable planting centers and planters in Shaanxi, Shandong and Gansu provinces that produce vegetables such as cucumbers and peppers. Our competitive advantage, which distinguishes us from other competitors, are our advanced greenhouse facilities, which produce pollution-free green vegetables and fruits, with the aid of our green fertilizers that improve soil conditions and limit bacterial growth.
Multi-colored Seedlings: Our main competitors are Zhejiang Senhe Company and Chang’an Jiahe Seedling Co., Ltd. Our multi-colored seedlings, primarily red photinia serrulata, are pure in species and are
imported from other countries
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These seedlings have high survival rates and we sell them at fair market prices.
Employees
We have a total of 760 full-time employees, of which 174 are employed by Jinong, 79 are employed by Jintai, 21 are employed by Yuxing, 458 are employed by Gufeng and 28 are employed by Tianjuyuan.
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None of our employees are under collective bargaining agreements. We believe that we maintain a satisfactory working relationship with our employees and we have not experienced any significant labor disputes or any difficulty in retaining our employees or recruiting staff for our operations.
Government Regulation
Our business operations are subject to various laws, including environmental, health and safety laws, and regulation by governmental agencies on the provincial and state levels. Business and company registrations, along with the products, are certified on a regular basis and must be in compliance with the laws and regulations of the PRC and provincial and local governments and industry agencies, which are controlled and monitored through the issuance of licenses and certificates including the following:
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“Green” Certification
. Except for those manufactured by Gufeng and Tianjuyuan, all of our fertilizer products are certified by the CGFDC as green food production material. Our Green Food Production Material Certificate was issued to Jinong on March 30, 2009 and will expire in March 2012. The certificate is renewable with an application within 90 days prior to its expiration. Currently, the CGFDC provides two different certifications within the green food industry: namely, "Green Food Certification" which is granted to edible foods and "Green Food Production Material Certification" which is granted to production materials such as our fertilizer products that meet criteria such as standards that increase human safety and ecological protection of the environmental, in addition to promoting non-polluting product growth and the use of non-genetically modified raw materials. Prior to July 2007, the two categories mentioned above were combined into one category under which companies were issued a "Green Food Certificate." In an effort to improve social sustainable development and optimize the regulation of policy for the PRC green food industry, the CGFDC separated the certification system into two categories.
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Operating license
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Our operating license enables us to undertake research and development, production, sales and services of humic acid liquid fertilizer, sales of pesticides, and export and import of products, technology and equipment. The license (registration no. 610000100003655) is valid through August 8, 2057. Once the term has expired, the license is renewable. Gufeng and Tianjuyuan maintain valid operating licenses, which expire on August 1, 2013 and August 7, 2021, respectively.
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Fertilizer Registration
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Fertilizer registration is required for the production of fertilizer and issued by the Ministry of Agriculture of the PRC. The registration numbers held by Jinong are: Agriculture Fertilizer Numbers. 1085, 1083, 1084, 0467, 0865, 0896, 4081, 4082, 0992, 5471 and 5511. There are two kinds of registrations: interim registration and formal registration. The interim registration is valid for one year and applies to fertilizers in the stages of in-the-field testing and test selling. Our certificates No. 0865, No. 0896, No. 4081, No.4082, No.0992, No. 5471 and No. 5511 are interim fertilizer registration certificates. Fertilizers that have completed in-the-field testing and test selling must obtain formal registration, which, if granted, is valid for five years, and thereafter must be renewed every five years. Our formal fertilizer registration certificates are certificates No. 1083, No. 1084, No. 1085 and No. 0467. Gufeng and Tianjuyuan have 39 interim fertilizer certificates and 313 formal certificates that are current and valid for the production of their fertilizer products.
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Registration
No.
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Trademark
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Product
Name
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Main Technique Index
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Certificate
Issuance Date
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Expiration
Date
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1
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No. 1085
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Ji Nong
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Humic Acid Liquid Fertilizer
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Fe+Mn+Zn+B+Mo≥20 g/l;
Amino Acid
≥100 g/l
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April 23, 2008
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April, 2013
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2
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No. 1083
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Ji Nong
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Humic Acid Liquid Fertilizer
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N+P2O5+K2O≥200g/l;
Humic Acid≥40 g/l
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April 23,2008
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April, 2013
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3
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No. 1084
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Ji Nong
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Humic Acid Liquid Fertilizer
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N+P2O5+K2O≥350g/l;
Humic Acid≥30 g/l
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April 23,2008
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April , 2013
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4
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No.0 467
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Ji Nong
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Humic Acid Liquid Fertilizer
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N+P2O5+K2O≥23g/l;
Organic Matter≥80g/l
Cu+Fe+Mn+Zn+B+Mo≥60 g/l
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July 11, 2011
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October, 2015
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5
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No.0865
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Ji Nong
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Organic Fertilizer
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N+P2O5+ K2O≥10%;
Organic Matter≥30%
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April 6, 2011
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April , 2012*
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6
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No.0896
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Ji Nong
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Refined Organic Fertilizer
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N+P2O5+ K2O≥8%;
Organic Matter≥30%
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April 6, 2011
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April, 2012*
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7.
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No. 4081
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Ji Nong
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Humic Acid
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N+P
2
O
5
+K
2
O≥35.0%
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October 11,
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November, 2011*
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Liquid
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Humic Acid≥3.0%
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2010
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Fertilizer
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8.
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No. 4082
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Ji Nong
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Humic Acid
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Fe+Mn+Zn+B≥6.0%
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October 11,
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November, 2011*
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Liquid
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Humic Acid≥3.0%
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2010
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Fertilizer
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9.
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No. 0992
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Ji Nong
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Organic
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N+P
2
O
5
+K
2
O≥4.0%
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January 20,
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January, 2012*
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Fertilizer
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Organic Matter≥30%
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2011
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10.
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No. 5471
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Ji Nong
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Humic Acid
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N+K2O≥20.0%
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July 11,
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July, 2012*
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Liquid
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Humic Acid≥4.0%
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2011
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Fertilizer
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11.
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No. 5511
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Ji Nong
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Liquid
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N+P2O5+K2O≥50.0%
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July 11,
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July, 2012*
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Fertilizer
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Zn+B 0.5%-3.0%
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2011
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* Certificates No. 0865, No. 0896, No. 4081, No. 4082, No. 0992, No. 5471, and No. 5511 are interim fertilizer registration certificates with a one-year term. The Company will apply for formal certificates before the expiration date.
As of the date of this Report,
we believe we are in material compliance with all registrations and requirements for the issuance and maintenance of all licenses required to conduct our businesses and operations.
An investment in our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this Report before investing in our common stock. If any of the events anticipated by the risks described below occur, our results of operations and financial condition could be adversely affected which could result in a decline in the market price of our common stock, causing you to lose all or part of your investment.
Risks Related to our Business
We do not presently maintain business disruption insurance. Any disruption of the operations in our factories would damage our business.
Our operations could be interrupted by fire, flood, earthquake and other events beyond our control for which we do not carry adequate insurance. While we have property damage insurance and automobile insurance, we do not carry business disruption insurance, which is not readily available in China. Any disruption of the operations in our factories would have a significant negative impact on our ability to manufacture and deliver products, which would cause a potential diminution in sales, the cancellation of orders, damage to our reputation and potential lawsuits.
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We do not presently maintain product liability insurance, and our property and equipment insurance does not cover the full value of our property and equipment, which leaves us with exposure in the event of loss or damage to our properties or claims filed against us.
We currently do not carry any product liability or other similar insurance. We cannot assure you that we would not face liability in the event of the failure of any of our products. We cannot assure you that, especially as China’s domestic consumer economy and industrial economy continues to expand, product liability exposure and litigation will not become more commonplace in the PRC, or that we will not face product liability exposure or actual liability as we expand our sales into international markets, like the United States, where product liability claims are more prevalent.
Our proprietary fertilizer formula may become obsolete or be illegally disclosed to competitors, which could materially adversely affect the competitiveness of our future fertilizer products.
The production of our fertilizer products is based on our proprietary fertilizer formula. Our future success will depend upon our ability to address the increasingly sophisticated needs of our customers by supporting existing and emerging humic acid fertilizer products and by developing and introducing enhancements to our existing products and new products on a timely basis that keep pace with evolving industry standards and changing customer requirements. If our proprietary formula becomes obsolete as our competitors develop better products than ours, our future business and financial results could be adversely affected. In addition, although we have entered into confidentiality agreements with our key employees, we cannot assure you that if there is a breach of such agreement by an employee, we would not be adversely affected and lose any competitive advantage that we currently have with respect to our
proprietary fertilizer formula. If we are forced to take legal action to protect our proprietary formula, we will incur significant expense and further can not guarantee a favorable outcome.
If we fail to adequately protect or enforce our intellectual property rights, we may be exposed to intellectual property infringement and the value of our intellectual property rights could diminish.
Our success, competitive position and future revenues will depend in part on our ability to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties. .
Jinong is the holder of two registered patents. One patent is a fertilizer formulation called Method and Recipe of the Water Soluble Humic Acid Fertilizers. The other patent is called Production Facility of Humic Acid Productsand relates to our proprietary production line and manufacturing processes in the PRC. Gufeng and Tianjuyuan do not have patents but currently possess seven proprietary technologies. However, we cannot predict the degree and range of protection patents and confidentiality agreements with respect to proprietary technologies will afford us against competitors. Third parties may find ways to invalidate or otherwise circumvent our patents and proprietary technologies. Third parties may attempt to obtain patents claiming aspects similar to our patent applications. We cannot assure you that our current or potential competitors do not have, and will not obtain, patents that will prevent, limit or interfere with our ability to make, use or sell our products in the PRC.
If we need to initiate litigation or administrative proceedings, such actions may be costly and may divert management attention as well as expend other resources which could otherwise have been devoted to our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. In addition, historically, implementation of PRC intellectual property-related laws has been lacking, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries, which increases the risk that we may not be able to adequately protect our intellectual property. Moreover, litigation may be necessary in the future to enforce our intellectual property rights. Future litigation could result in substantial costs and diversion of our management’s attention and resources, and could disrupt our business, as well as have a material adverse effect on our financial condition and results of operations. Given the relative unpredictability of China’s legal system and potential difficulties enforcing a court judgment in China, there is no guarantee that we would be able to halt any unauthorized use of our intellectual property through litigation.
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If we infringe on the intellectual property rights of third parties, we could be prevented from selling products, forced to pay damages and compelled to defend against claims by third parties, which, if successful, could cause us to pay significant damage awards and incur other costs.
Our success also depends in large part on our ability to use and develop our technology and know-how without infringing the intellectual property rights of third parties. As litigation becomes more common in the PRC in resolving commercial disputes, we face a higher risk of being the subject of intellectual property infringement claims. The validity and scope of claims relating to humic acid fertilizer production technology and related devices and machine patents involve complex technical, legal and factual questions and analysis and, therefore, may be highly uncertain. The defense and prosecution of intellectual property suits, patent opposition proceedings and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability, including damage awards, to third parties, require us to seek licenses from third parties (which may not be available on commercially reasonable terms, if at all), to pay ongoing royalties, or to redesign our products or subject us to injunctions preventing the manufacture and sale of our products. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation.
The occurrence of any acts of God, war, terrorist attacks and other emergencies which are beyond our control may have a material adverse effect on our business operations and financial condition
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Acts of God, war, terrorist attacks and other emergencies which are beyond our control may have a material adverse effect on the economy and infrastructure in the PRC and on the livelihood of the Chinese population. Our business operations and financial condition may be materially and adversely affected should such events occur. We cannot give assurance that any acts of God such as floods, earthquakes, drought or any war, terrorist attack or other hostilities in any part of the PRC or even the world, potential or threatened, will not, directly or indirectly, have a material adverse effect on our business, financial condition and operating results.
The industry in which we do business is highly fragmented and competitive and we face competition from numerous fertilizer manufacturers in China and elsewhere.
We compete with numerous local Chinese fertilizer manufacturers. Although we may have greater resources than many of our competitors, most of which are small local fertilizer companies, it is possible that these competitors have better access in certain local markets to customers and prospects, an enhanced ability to customize products to a particular region or locality and more established local distribution channels within a small region. We also compete with a few large PRC national competitors, such as Yuntianhua Group Co., Ltd and Yongye International, Inc. Although we have advanced automated humic acid-based fertilizer production lines and green house supported research and development centers, we cannot assure you that such large competitors will not develop their own similar production or research and development facilities. Further, China’s access into the World Trade Organization could lead to increased foreign competition for us. International producers and traders import products into China that generally are of higher quality than those produced in the local Chinese market. If they are localized and become familiar enough of the type of fertilizer we produce, we may face additional competition. If we are not successful in our marketing and advertising efforts to increase awareness of our brands, our revenues could decline, which could have a material adverse effect on our business, financial condition, results of operations and share price.
Our major competitors may be able to endure downturns in our industrial sector more successfully than we are. In periods of reduced demand for our products, we can either choose to maintain market share by reducing our selling prices to meet competition or maintain selling prices, which would likely sacrifice market share. Sales and overall profitability would be reduced in either case. In addition, we cannot assure you that additional competitors will not enter our existing markets, or that we will be able to compete successfully against existing or new competitors.
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If we are unable to design, manufacture, and market fertilizer products in a timely and efficient manner, we may not remain as competitive
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Most of our fertilizer products are characterized by short product development cycles and target the unique climate and soil conditions where our customers are located. Accordingly, we devote a substantial amount of resources to product development. To compete successfully, we must develop and offer new and/or improved fertilizer products that are suitable to evolving customer needs. New fertilizers may be not widely proven. As a result, we may experience performance difficulties, which may result in delays, setbacks and cost overruns. Our inability to develop and offer new and/or improved fertilizer products or to achieve customer acceptance of these products could limit our ability to compete in the market or to grow revenues at desired rates of growth.
Disruptions in the supply of raw materials used in our products could cause us to be unable to meet customer demand in a timely manner, which could result in the loss of customers and net sales or could result in a lower profit margin for us.
Jinong is supplied with approximately 50 different types of raw materials, of which weathered coal is the primary one as it is the raw material from which humic acid is extracted and used to manufacture our products. Although there are numerous weathered coal suppliers available to us, we have been using Inner Mongolia Tianlibao Fertilizer Co., Ltd. (“Tianlibao”) as our main supplier of weathered coal because of the abundance and high quality of weathered coal in the Inner Mongolia Autonomous Region. . Our supply agreement with Tianlibao is renewed on a monthly basis. If Tianlibao does not intend to renew the supply agreement with us for any reason, or if there are any business interruptions at Tianlibao and we are unable to locate an alternative supply in a timely manner or on the same terms, we may not be able to meet customer demand of humic acid-based fertilizers in a timely manner or maintain our standards of quality for humic acid-based fertilizers, which may result in the loss of customers and net sales or we may not be able to keep our profit margin on our humic acid-based fertilizers.
Gufeng and Tianjuyuan are supplied with approximately fifty types of raw materials from a diversified pool of suppliers. Neither Gufeng nor Tianjuyuan are dependent on any single supplier for its raw materials; however, if we experience a significant increase in demand or if we need to replace any of these suppliers, we cannot be assured that the adequate supply of raw materials or a replacement supplier will be obtained in a timely manner to avoid any material adverse effect on our business operations and financial condition.
Any significant fluctuation in our production costs may have a material adverse effect on our operating results.
The prices for the raw materials and other inputs to manufacture our fertilizer products are subject to market forces largely beyond our control, including the price of weathered coal, our energy costs, mineral and non-mineral elements, and freight costs. The costs for these inputs may fluctuate significantly based upon changes in the economy and markets. Although we may pass any increase of such costs through to our customers, in the event we are unable to do so, we could incur significant losses and a diminution of our share price.
We may be subject to more stringent governmental regulation on our agricultural products.
The production and sale of our agricultural products in the PRC is regulated by the PRC and the Shaanxi Provincial Government. The legal and regulatory regime governing our industry is evolving, and we may become subject to different, including more stringent, requirements than those currently applicable to us. While we believe a more stringent standard will have a bigger impact on those manufacturers with poor quality products, we cannot assure you any regulatory change will not adversely affect our business.
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If we cannot renew our fertilizer registration certificates, we will be unable to sell some or all of our products. If we do not receive the formal fertilizer registration certificates for our new products, upon the expiration of the temporary registration certificates, we cannot continue to produce such new products.
All fertilizers produced in China must be registered with the PRC Ministry of Agriculture. No fertilizer can be manufactured without such registration. There are two kinds of registrations: interim registration and formal registration. The interim registration is valid for one year and applies to fertilizers in the stages of in-the-field testing and test selling. Fertilizers that have completed in-the-field testing and test selling must obtain formal registration, which is valid for five years, and thereafter must be renewed each five years.. Jinong has seven interim registration certificates, which have a one-year term, and four formal registration certificates. Gufeng and Tianjuyuan have 39 interim fertilizer certificates and 313 formal certificates that are current and valid for the production of their fertilizer products.. We will apply for formal certificates for each of our interim certificates before the applicable expiration date.
Our belief is that the PRC Ministry of Agriculture generally will grant an application for renewal in the absence of illegal activity by the applicant. However, there is no assurance that the PRC Ministry of Agriculture will grant renewal of our formal Fertilizer Registration Certificates. If we cannot obtain the necessary renewal, we will not be able to manufacture and sell our fertilizer products in China which will cause the termination of part or all of our commercial operations for fertilizer products. With respect to the transformation of the interim fertilizer registration certificates to formal fertilizer registration certificates, we believe that we can receive formal fertilizer registration certificates for our 46 interim fertilizer registration certificates in due course; however, if the government imposes additional burden on the application procedure or put temporary suspension on its certificate granting process due to certain unexpected incidents occurred in China, we cannot assure you that our formal fertilizer registration certificates can be obtained without delay or can be obtained at all in which case our production could be adversely affected.
We may not possess all the licenses required to operate our business, or may fail to maintain the licenses we currently hold. This could subject us to fines and other penalties, which could have a material adverse effect on our results of operations.
In addition to a fertilizer registration certificate, we are required to hold a variety of other permits, licenses and certificates to conduct our business in China. We may not possess or receive all the permits, licenses and certificates required for our business or for which application has been made. In addition, there may be circumstances under which the approvals, permits, licenses or certificates granted by the governmental agencies are subject to change without substantial advance notice. If we fail to obtain or to maintain such permits, licenses or certificates or renewals are granted with onerous conditions, we could be subject to fines and other penalties and be limited in the number or the quality of the products that we would be able to offer. As a result, our business, result of operations and financial condition could be materially and adversely affected.
Potential environmental liability could have a material adverse effect on our operations and financial condition.
Our manufacturing operations are subject to numerous laws, regulations, rules and specifications relating to the environment, including, among others, the Integrated Emission Standard of Air Pollutants GB 16297-1996 and the Standard of Environmental Noise of Urban Area GB 3096-93. Failure to comply with any laws and regulations and future changes to them may result in significant consequences to us, including civil and criminal penalties, liability for damages and negative publicity. Our business and operating results may be materially and adversely affected if we were to be held liable for violating existing environmental regulations or if we were to incur significant expenditures to comply with environmental regulations affecting our operations.
Our success depends on our management team and other key personnel, the loss of any of whom could disrupt our business operations.
We depend, to a large extent, on the abilities and participation of our current management team, but have a particular reliance upon Mr. Tao Li, our CEO, President and Chairman of the Board of Directors. The loss of the services of Mr. Li, for any reason, may have a material adverse effect on our business and prospects. We cannot assure you that the services of Mr. Li will continue to be available to us, or that we will be able to find a suitable replacement for him. We do not carry key man life insurance for our key personnel.
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The agricultural chemicals business is specialized and requires the employment of personnel with significant scientific and operational experience in the industry. Accordingly, we must attract, recruit and retain a sizeable workforce of technically and scientifically competent employees. Our ability to effectively implement our business strategy will depend upon, among other factors, the successful recruitment and retention of additional management and other key personnel that have the necessary scientific, technical and operational skills and experience with the fertilizer industry. These individuals are difficult to find in the PRC and we may not be able to retain such skilled employees. If we are unable to hire individuals with the requisite experience we may not be able to produce enough products to optimize profits, research and development initiatives may be delayed and we may encounter disruptions in production and research which will negatively impact our financial condition, results of operations and share price.
Mr. Tao Li, our Chairman, President and CEO may not devote all of his time to our business.
Our Chairman, President and CEO, Mr. Tao Li, also serves as Chairman of Xi’an Techteam Science & Technology Industry (Group) Co. Ltd., a company that is engaged in hi-tech application fields in China, and Chairman of Kingtone Wirelessinfo Solution Holding Ltd, a publicly-traded, China-based developer and provider of mobile enterprise solutions. This may give rise for Mr. Li in allocating his time to each business. While Mr. Li anticipates having sufficient time to devote to our business, a lack of adequate time spent by him on our business may adversely affect our business, financial condition, results of operations and share price.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential investors could lose confidence in our financial reporting, which could harm our business and have an adverse effect on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to annually furnish a report by our management on our internal control over financial reporting. Such report must contain, among other matters, an assessment by our principal executive officer and our principal financial officer on the effectiveness of our internal control over financial reporting, including a statement as to whether or not our internal control over financial reporting is effective as of the end of our fiscal year. This assessment must include disclosure of any material weakness in our internal control over financial reporting identified by management. In addition, under current SEC rules, we are required to obtain an attestation from our independent registered public accounting firm as to our internal control over financial reporting and include such report in our annual reports on Form 10-K filed with the SEC. Performing the system and process documentation and evaluation needed to comply with Section 404 is both costly and challenging. During the course of our testing we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act of 2002 for compliance with the requirements of Section 404. In addition, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. We engaged a consulting firm in 2009 to help us design and implement effective internal controls; however we cannot provide assurance that we will not fail to achieve and maintain an effective internal control environment on an ongoing basis, which may cause investors to lose confidence in our reported financial information and have a material adverse effect on the price of our common stock.
We are responsible for the indemnification of our officers and directors.
Our Bylaws provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against costs and expenses incurred by them in any litigation to which they become a party arising from their association with or activities on our behalf. Consequently, we may be required to expend substantial funds to satisfy these indemnity obligations.
Our inability to successfully integrate Gufeng or any other businesses we acquire could have adverse consequences on our business
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On July 2, 2010, we consummated the acquisition of Gufeng and Tianjuyuan, Beijing-based producers of compound fertilizer, blended fertilizer, organic compound fertilizer and mixed, organic-inorganic compound fertilizer. This acquisition and future acquisitions may result in greater administrative burdens and operating costs. We cannot assure you that we will be able to manage or integrate acquired companies or businesses successfully. The process of integrating Gufeng or other acquired businesses may be disruptive to our business and may cause an interruption of or a loss of momentum in our business as a result of the following factors, among others:
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loss of key employees or customers;
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possible inconsistencies in standards, controls, procedures and policies among the combined companies and the need to implement company-wide financial, accounting, information, production and other systems;
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failure to maintain the quality of products that the companies have historically provided;
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failure to upgrade existing production lines of Gufeng or effectively implement humic acid production technology into existing manufacturing process of Gufeng;
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effectively coordinating sales, marketing and distribution functions, including the cross-selling of products;
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the need to coordinate geographically diverse organizations, and
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the diversion of management's attention from our day-to-day business as a result of the need to deal with any disruptions and difficulties and the need to add management resources to do so.
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These disruptions and difficulties, if they occur, may cause us to fail to realize the cost savings, revenue enhancements and other benefits that we may expect from such acquisitions and may cause material adverse short- and long-term effects on our operating results and financial condition.
Our inability to effectively improve the financial performance of Gufeng may have a material adverse effect on our business, financial condition and results of operations.
Although Gufeng had sales revenues of $107,081,018 for its fiscal year ended June 30, 2011, Gufeng’s net income for such period was $11,422,057. This was primarily due to the lower profit margins on Gufeng’s products, inefficiencies in production and daily operations and negative working capital. In addition, rising transportation costs passed on by Gufeng’s distributors may further erode margins on Gufeng’s products. As Gufeng is based in Beijing, it is susceptible to rising costs of labor common in large cities such as Beijing, which may make it difficult for us to expand the workforce of Gufeng and Tianjuyuan to meet our production requirements and strategic goals.
Although we have made progress in terms of integrating Gufeng’s employees, products and distribution network into our business during the past 12 months, there is no assurance that we will be able to continue effectively to do so, which may result in a material adverse effect on our business, financial condition and results of operations.
We have not obtained the land use right over the premises on which certain facilities of Gufeng, our indirect, wholly-owned subsidiary, is located. As a result, the lack of a proper title certificate may jeopardize our right to use the premises and our possession of the buildings we built on such premises.
Through Tianjuyuan, we lease approximately 47,333 square meters (509,488 square feet) of land in the Ping Gu District of Beijing (the “Premises”). Under the lease dated February 16, 2004 with the village committee of Dong Gao Village and Zhen Nan Zhang Dai Village in the Beijing Ping Gu District (the “Lease”), Tianjuyuan leases the land at an annual rent of RMB35,500 (approximately $5,217). The term of the Lease is from February 1, 2004 to January 31, 2054. We were recently informed by our PRC counsel that the Lease is invalid and unenforceable pursuant to the PRC Land Administration Law and related regulations. Therefore, we are in the process of applying for the proper land use right certificate from the relevant government authorities in order to legitimize our right over the Premises. However, there can be no assurance that such land use right certificate will be granted to us. Until we obtain the land use right certificate, there exists a risk that the PRC government may declare the Lease invalid, evict our personnel from the Premises and tear down the buildings we built on the Premises. As of the date of this report, we have no knowledge of any pending or threatened governmental actions relating to the Premises.
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A severe or prolonged downturn in the global economy could materially and adversely affect our business and results of operations.
The global market and economic conditions during the years 2008 through 2010 were unprecedented and challenging, with recessions occurring in most major economies. Continued concerns about the systemic impact of potential long-term and wide-spread recession, energy costs, geopolitical issues, and the availability and cost of credit have contributed to increased market volatility and diminished expectations for economic growth around the world. The difficult economic outlook has negatively affected businesses and consumer confidence and contributed to volatility of unprecedented levels.
The PRC economy also faces challenges. The PRC government has implemented various measures recently to curb inflation. If economic growth slows or an economic downturn occurs, our business and results of operations may be materially and adversely affected.
Risks Related to Doing Business in the PRC
Substantially all of our assets and operations are located in the PRC, and substantially all of our revenue is sourced from the PRC. Accordingly our results of operations and financial position are subject to a significant degree to economic, political and legal developments in the PRC, including the following risks:
Changes in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and the profitability of such business.
The PRC’s economy is in a transition from a planned economy to a market oriented economy subject to five-year and annual plans adopted by the government that set national economic development goals (Source: President Hu’s Report at 17th Party Congress). Policies of the PRC government can have significant effects on economic conditions in China. The PRC government has confirmed that economic development will follow the model of a market economy, such as the United States. Under this direction, we believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries and business development in the PRC will follow market forces. While we believe that this trend will continue, we cannot assure you that this will be the case. Our interests may be adversely affected by changes in policies by the PRC government, including:
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changes in laws, regulations or their interpretation;
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confiscatory taxation;
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restrictions on currency conversion, imports or sources of supplies;
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expropriation or nationalization of private enterprises.
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Although the PRC government has been pursuing economic reform policies for more than two decades, we cannot assure you that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting the PRC's political, economic and social life.
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The PRC laws and regulations governing our current business operations are sometimes vague and uncertain. Any changes in such PRC laws and regulations may have a material and adverse effect on our business.
There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business, and the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. We and any future subsidiaries are considered foreign persons or foreign funded enterprises under PRC laws, and as a result, we are required to comply with PRC laws and regulations. These laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses.
We derive a substantial portion of our revenues from sales in the PRC and any downturn in the Chinese economy could have a material adverse effect on our business and financial condition.
All of our operations are conducted in the PRC and substantially all of our revenues are generated from sales in the PRC. We anticipate that revenues from sales of our products in the PRC will continue to represent a substantial proportion of our total revenues in the near future. Any significant decline in the condition of the PRC economy could, among other things, adversely affect consumer buying power and discourage consumption of our products, which in turn would have a material adverse effect on our revenues and profitability.
Inflation in the PRC could negatively affect our profitability and growth.
While the PRC economy has experienced rapid growth, it has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products do not rise at a rate that is sufficient to fully absorb inflation-driven increases in our costs of supplies, our profitability can be adversely affected.
According to the International Monetary Fund or IMF, the inflation rate in China fluctuated on an annual basis from a low rate of -1.4% in 1999 to the highest rate of 5.9% in 2008. The inflation rate was -0.7% and 3.3% in 2009 and 2010, respectively. These fluctuations and economic factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. In order to control inflation in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. The implementation of these and other similar policies can impede economic growth and thereby harm the market for our products.
Our subsidiaries are subject to restrictions on paying dividends and making other payments to our subsidiary, Green New Jersey; as a result, we might therefore, be unable to pay dividends to you.
We are a holding company incorporated in the State of Nevada and do not have any assets or conduct any business operations other than our investments in our subsidiaries, Green New Jersey, Jinong and Jintai, Gufeng and Tianjuyuan. As a result of our holding company structure, we rely entirely on dividends payments from our subsidiaries in PRC. PRC regulations currently permit payment of dividends only out of accumulated profits, as determined in accordance with PRC accounting standards and regulations. Our subsidiaries are also required to set aside a portion of its after-tax profits according to PRC accounting standards and regulations to fund certain reserve funds. We may experience difficulties such as lengthy processing time from the foreign exchange administrative bureau’s side and formality requirement on paperwork in completing the administrative procedures necessary to obtain and remit foreign currency. Furthermore, if any of our subsidiaries incurs debt on its own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments. If we or Green New Jersey are unable to receive any profits from the operations of our subsidiaries in the PRC, we may be unable to pay dividends on our common stock.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of Renminbi (“RMB”) into foreign currencies and, in certain cases, the remittance of currency out of the PRC. We receive substantially all of our revenues in RMB, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where RMB is to be converted into foreign currency and remitted out of PRC to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.
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The PRC government also may at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due.
The fluctuation of RMB may materially and adversely affect your investment.
The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC's political and economic conditions. As we rely entirely on revenues earned in the PRC, any significant revaluation of RMB may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into RMB for our operations, appreciation of the RMB against the U.S. dollar could lead the RMB equivalent of the U.S. dollars be reduced and therefore could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making dividend payments on our common stock or for other business purposes and the U.S. dollar appreciates against the RMB, the U.S. dollar equivalent of the RMB we convert would be reduced. In addition, the depreciation of significant U.S. dollar denominated assets could result in a charge to our income statement and a reduction in the value of these assets.
Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC domestic residents may subject our PRC resident beneficial owners to personal liability, limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
SAFE issued a public notice in October 2005 requiring PRC domestic residents to register with the local SAFE branch before establishing or controlling any company outside of China for the purpose of capital financing with assets or equities of PRC companies, referred to in the notice as an “offshore special purpose company.” PRC domestic residents who are stockholders of offshore special purpose companies and have completed round trip investments but did not make foreign exchange registrations for overseas investments before November 1, 2005 were retroactively required to register with the local SAFE branch before March 31, 2006. PRC resident stockholders are also required to amend their registrations with the local SAFE in certain circumstances. Internal implementing guidelines issued by SAFE, which became public in June 2007 (known as Notice 106), expanded the reach of Circular 75. After consultation with China counsel, we do not believe that any of our PRC domestic resident stockholders are subject to the SAFE registration requirement, however, we cannot provide any assurances that all of our stockholders who are PRC residents will not be required to make or obtain any applicable registrations or approvals required by these SAFE regulations in the future. The failure or inability of our PRC resident stockholders to comply with the registration procedures set forth therein may subject us to fines and legal sanctions, restrict our cross-border investment activities, or limit our PRC subsidiaries’ ability to distribute dividends or obtain foreign-exchange-dominated loans to our company.
As it is uncertain how the SAFE regulations will be interpreted or implemented, we cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our results of operations and financial condition. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the SAFE regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.
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We may be subject to fines and legal sanctions by SAFE or other PRC government authorities if we or our employees who are PRC citizens fail to comply with PRC regulations relating to employee stock options granted by offshore listed companies to PRC citizens.
On March 28, 2007, SAFE promulgated the Operating Procedures for Foreign Exchange Administration of Domestic Individuals Participating in Employee Stock Ownership Plans and Stock Option Plans of Offshore Listed Companies, or Circular 78. Under Circular 78, Chinese citizens who are granted share options by an offshore listed company are required, through a Chinese agent or Chinese subsidiary of the offshore listed company, to register with SAFE and complete certain other procedures, including applications for foreign exchange purchase quotas and opening special bank accounts. We and our Chinese employees who have been granted share options are subject to Circular 78. Failure to comply with these regulations may subject us or our Chinese employees to fines and legal sanctions imposed by SAFE or other PRC government authorities and may prevent us from further granting options under our share incentive plans to our employees. Such events could adversely affect our business operations.
The PRC’s labor law restricts our ability to reduce our workforce in the PRC in the event of an economic downturn and may increase our production costs
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In June 2007, the National People’s Congress of the PRC enacted new labor law legislation called the Labor Contract Law, which became effective on January 1, 2008. The legislation formalized workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions. Considered one of the strictest labor laws in the world, among other things, this new law provides for specific standards and procedures for the termination of an employment contract and places the burden of proof on the employer. In addition, the law requires the payment of a statutory severance pay upon the termination of an employment contract in most cases, including the case of the expiration of a fixed-term employment contract. Further, the law requires an employer to conclude an “employment contract without a fixed-term” with any employee who either has worked for the same employer for 10 consecutive years or more or has had two consecutive fixed-term contracts with the same employer. An “employment contract without a fixed term” can no longer be terminated on the ground of the expiration of the contract, although it can still be terminated pursuant to the standards and procedures set forth under the new law. Because of the lack of implementing rules for the new law and the precedents for the enforcement of such a law, the standards and procedures set forth under the law in relation to the termination of an employment contract have raised concerns among foreign investment enterprises in the PRC that such “employment contract without a fixed term” might in fact become a “lifetime, permanent employment contract.” Finally, under this law, downsizing of either more than 20 people or more than 10% of the workforce may occur only under specified circumstances, such as a restructuring undertaken pursuant to the PRC’s Enterprise Bankruptcy Law, or where a company suffers serious difficulties in production and/or business operations, or where there has been a material change in the objective economic circumstances relied upon by the parties at the time of the conclusion of the employment contract, thereby making the performance of such employment contract not possible. To date, there has been very little guidance and precedents as to how such specified circumstances for downsizing will be interpreted and enforced by the relevant PRC authorities. All of our employees working for us exclusively within the PRC are covered by the new law and thus, our ability to adjust the size of our operations when necessary in periods of recession or less severe economic downturns may be curtailed. Accordingly, if we face future periods of decline in business activity generally or adverse economic periods specific to our business, this new law can be expected to exacerbate the adverse effect of the economic environment on our results of operations and financial condition.
Our business and financial performance may be materially adversely affected if the PRC regulatory authorities determine that our acquisition of Jinong constitutes a Round-trip Investment without the PRC Ministry of Commerce (“MOFCOM”) approval.
On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Merger and Acquisition of Domestic Companies by Foreign Investors (the “2006 M&A Rules”), which became effective on September 8, 2006. According to the 2006 M&A Rules, a “Round-trip Investment” is defined as having taken place when a PRC business that is owned, directly or indirectly, by PRC individual(s) is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individual(s) and their PRC affiliates. Under the 2006 M&A Rules, any Round-trip Investment must be approved by the MOFCOM. The application of the 2006 M&A Rules with respect to the definition of Round-trip Investment remains unclear with no consensus currently existing among the leading PRC law firms regarding the definition, scope of the applicability of the MOFCOM approval.
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We, through Green New Jersey, acquired 100% capital stock of Jinong (the “Jinong Acquisition”), Jinong was a PRC business whose stockholders were two PRC individuals and a PRC entity, of which Mr. Tao Li, our current Chairman, President and CEO was the controlling stockholder holding 52% of its shares. The PRC regulatory authorities may take the view that the Jinong Acquisition could be part of a Round-trip Investment The PRC legal counsel of Jinong has opinioned that the Jinong Acquisition did not violate any PRC law, which would include the 2006 M&A Rules. We, however, cannot assure you that the PRC regulatory authorities, MOFCOM in particular, may take the same view as the PRC legal counsel. If the PRC regulatory authorities take the view that the Jinong Acquisition constitutes a Round-trip Investment under the 2006 M&A Rules, we cannot assure you we may be able to obtain the approval required from MOFCOM.
If the PRC regulatory authorities take the view that the Jinong Acquisition constitutes a Round-trip Investment without MOFCOM approval, they could invalidate our acquisition and ownership of Jinong. Additionally, the PRC regulatory authorities may take the view that the Jinong Acquisition constitutes a transaction which requires the prior approval of the China Securities Regulatory Commission, or CSRC, before MOFCOM approval is obtained. We believe that if this takes place, we may be able to find a way to re-establish control of Jinong’s business operations through a series of contractual arrangements rather than an outright purchase of Jinong. We cannot assure you that such contractual arrangements will be protected by PRC law or that we can receive as complete or effective economic benefit and overall control of Jinong’s business than if the Company had direct ownership of Jinong. In addition, we cannot assure you that such contractual arrangements can be successfully effected under PRC law. If we cannot obtain MOFCOM or CSRC approval if required by the PRC regulatory authorities to do so, and if we cannot put in place or enforce relevant contractual arrangements as an alternative and equivalent means of control of Jinong, our business and financial performance will be materially adversely affected.
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds we received from any offerings to make loans to our PRC subsidiaries or to make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
We are an offshore holding company conducting our operations in China through our PRC subsidiaries. In utilizing the proceeds we received from any offerings, we may make loans to our PRC subsidiaries, whether currently in existence or to be formed in the future, or make additional capital contributions to our PRC subsidiaries.
Any loans we make to our PRC subsidiaries cannot exceed statutory limits and must be registered with SAFE, or its local counterparts. Under applicable PRC law, the government authorities must approve a foreign-invested enterprise’s registered capital amount, which represents the total amount of capital contributions made by the stockholders that have registered with the registration authorities. In addition, the authorities must also approve the foreign-invested enterprise’s total investment, which is equal to the company’s registered capital plus the amount of stockholder loans it is permitted to borrow under the law. The ratio of registered capital to total investment cannot be lower than the minimum statutory requirement. If we make loans to our operating subsidiaries in China that does not exceed its current maximum amount of borrowings, we will have to register each loan with SAFE or its local counterpart for the issuance of a registration certificate of foreign debts. In practice, it could be time-consuming to complete such SAFE registration process. Alternatively or concurrently with the loans, we might make capital contributions to our operating subsidiaries in China and such capital contributions involve uncertainties of their own. Further, SAFE promulgated a new circular (known as Circular 142) in August 2008 with respect to the administration of conversion of foreign exchange capital contributions of a foreign invested enterprise. The circular clarifies that RMB converted from foreign exchange capital contributions can only be used for the activities within the approved business scope of such foreign invested enterprise and cannot be used for domestic equity investments unless otherwise permitted.
We cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiaries or with respect to future capital contributions by us to our PRC subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we receive from this offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.
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If we were deemed as a “resident enterprise” by PRC tax authorities, we could be subject to tax on our global income at the rate of 25% under the new Enterprise Income Tax Law (“New EIT Law”) in the PRC and our non-PRC shareholders could be subject to certain PRC taxes.
Under the New EIT Law and the implementing rules, both of which became effective January 1, 2008, an enterprise established outside of the PRC with “de facto management bodies” within the PRC may be considered a PRC “resident enterprise” and will be subject to the enterprise income tax at the rate of 25% on its global income as well as PRC enterprise income tax reporting obligations. The implementing rules of the New EIT Law define “de facto management” as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. If we were to be considered a “resident enterprise” by the PRC tax authorities, our global income would be taxable under the New EIT Law at the rate of 25% and, to the extent we were to generate a substantial amount of income outside of PRC in the future, we would be subject to additional taxes. In addition, the dividends we pay to our non-PRC enterprise shareholders and gains derived by such shareholders from the transfer of our shares may also be subject to PRC withholding tax at the rate up to 10%, if such income were regarded as China-sourced income. In addition, the recent circular mentioned above details that certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese group enterprises will be classified as “resident enterprises” if the following are located or resident in China: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, company seal, and minutes of board meetings and stockholders’ meetings; and half or more of the directors with voting rights or senior management. However, as of the date hereof, no final interpretation on the implementation of the “resident enterprise” designation is available. Moreover, any such designation, when made by PRC tax authorities, will be determined based on the facts and circumstances of individual cases. As a result, we cannot determine the likelihood or consequences of our being designated a “resident enterprise” as of the date hereof.
If the PRC tax authorities determine that we are a “resident enterprise,” we may be subject to enterprise income tax at a rate of 25% on our worldwide income and dividends paid by us to our non-PRC stockholders as well as capital gains recognized by them with respect to the sale of our stock may be subject to a PRC withholding tax. This will have an impact on our effective tax rate, a material adverse effect on our net income and results of operations, and may require us to withhold tax on our non-PRC stockholders.
Because our principal assets are located outside of the United States and because almost all of our directors and all our officers reside outside of the United States, it may be difficult for you to use the United States Federal securities laws to enforce your rights against us and our officers and most of our directors or to enforce judgments of United States courts against us or our officers and most of our directors in the PRC.
Almost all of our present officers and directors reside outside of the United States. In addition, our operating subsidiaries are located in the PRC and substantially all of their assets are located outside of the United States. It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the United States Federal securities laws against us and our officers and most of our directors in the courts of either the United States or the PRC and, even if civil judgments are obtained in courts of the United States, to enforce such judgments in PRC courts. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement against us or our officers and most of our directors of criminal penalties, under the United States Federal securities laws or otherwise.
Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are required to comply with the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions, and therefore may have a competitive advantage over us. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur in the PRC. If our competitors engage in these practices they may receive preferential treatment, giving our competitors an advantage in securing business, which would put us at a disadvantage. We can make no assurance that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
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We may have difficulty managing the risk associated with doing business in the Chinese fertilizer and feed sector.
In general, the fertilizer and feed sector in China is affected by a series of factors, including, but not limited to, natural, economic and social such as climate, market, technology, regulation, and globalization, which makes risk management difficult. Fertilizer and feed operations in China face similar risks as present in other countries, however, in the PRC these can either be mitigated or exacerbated due to governmental intervention through policy promulgation and implementation either in the fertilizer and feed sector itself or sectors which provide critical inputs to fertilizer and feed such as energy or outputs such as transportation. While not an exhaustive list, the following factors could significantly affect our ability to do business:
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food, feed, and energy demand including liquid fuels and crude oil;
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agricultural, financial, energy and renewable energy and trade policies;
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input and output pricing due to market factors and regulatory policies;
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production and crop progress due to adverse weather conditions, equipment deliveries, and water and irrigation conditions; and
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infrastructure conditions and policies.
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Currently, we do not hold and do not intend to purchase insurance policies to protect revenue in the case that the above conditions cause losses of revenue
Risks Related to an Investment in our Stock.
We have not paid any cash dividends and no cash dividends will be paid in the foreseeable future.
We do not anticipate paying cash dividends on our common stock in the foreseeable future and we may not have sufficient funds legally available to pay dividends. Even if the funds are legally available for distribution, we may nevertheless decide not to pay, or may be unable to pay, any dividends. We intend to retain all earnings for our company’s operations.
The market price for our common stock may be volatile and subject to wide fluctuations, which may adversely affect the price at which you can sell our shares.
The market price for our common stock may be volatile and subject to wide fluctuations in response to factors including the following:
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actual or anticipated fluctuations in our quarterly operations results;
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filing of a class action lawsuit against us and certain of our current and former officers;
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changes in financial estimates by securities research analysts;
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conditions in foreign or domestic fertilizer and agricultural markets;
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changes in the economic performance or market valuations of other companies in the same industry;
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announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments;
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addition or departure of key personnel;
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fluctuations of exchange rates between the RMB and the U.S. dollar;
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intellectual property litigation;
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general economic or political conditions in the PRC; and
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Other events or factors, many of which are beyond our control.
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In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our stock, regardless of our actual operating performance.
Our officers, directors and affiliates control us through their positions and stock ownership and their interests may differ from other stockholders.
Our Chairman, President and CEO, Mr. Tao Li, has the voting rights on 7,599,987, or 28.3%, of our issued and outstanding common stock. As a result, he is able to influence the outcome of stockholder votes on various matters, including the election of directors and extraordinary corporate transactions, including business combinations. The interests of Mr. Li may differ from other stockholders.
We may require additional financing in the future and our operations could be curtailed if we are unable to obtain required additional financing when needed.
We may need to obtain additional debt or equity financing to fund future capital expenditures. Additional equity may result in dilution to the holders of our outstanding shares of capital stock. Additional debt financing may include conditions that would restrict our freedom to operate our business, such as conditions that:
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limit our ability to pay dividends or require us to seek consent for the payment of dividends;
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increase our vulnerability to general adverse economic and industry conditions;
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require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes; and
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limit our flexibility in planning for, or reacting to, changes in our business and our industry.
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We cannot guarantee that we will be able to obtain any additional financing on terms that are acceptable to us, or at all.
Techniques employed by manipulative short sellers in Chinese small cap stocks may drive down the market price of our common stock.
Short selling is the practice of selling securities that the seller does not own but rather has, supposedly, borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is therefore in the short seller’s best interests for the price of the stock to decline, many short sellers (sometime known as “disclosed shorts”) publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short. While traditionally these disclosed shorts were limited in their ability to access mainstream business media or to otherwise create negative market rumors, the rise of the Internet and technological advancements regarding document creation, videotaping and publication by weblog (“blogging”) have allowed many disclosed shorts to publicly attack a company’s credibility, strategy and veracity by means of so-called research reports that mimic the type of investment analysis performed by large Wall Street firm and independent research analysts. These short attacks have, in the past, led to selling of shares in the market, on occasion in large scale and broad base. Issuers with business operations based in China and who have limited trading volumes and are susceptible to higher volatility levels than U.S. domestic large-cap stocks, can be particularly vulnerable to such short seller attacks.
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These short seller publications are not regulated by any governmental, self-regulatory organization or other official authority in the U.S., are not subject to the certification requirements imposed by the Securities and Exchange Commission in Regulation AC (Regulation Analyst Certification) and, accordingly, the opinions they express may be based on distortions of actual facts or, in some cases, fabrications of facts. In light of the limited risks involved in publishing such information, and the enormous profit that can be made from running just one successful short attack, unless the short sellers become subject to significant penalties, it is more likely than not that disclosed short sellers will continue to issue such reports.
While we intend to strongly defend our public filings against any such short seller attack, often times we are constrained, either by principles of freedom of speech, applicable state law (often called “Anti-SLAPP statutes”), or issues of commercial confidentiality, in the manner in which we can proceed against the relevant short seller. You should be aware that in light of the relative freedom to operate that such persons enjoy – oftentimes blogging from outside the U.S. with little or no assets or identity requirements – should we be targeted for such an attack, our stock will likely suffer from a temporary, or possibly long term, decline in market price should the rumors created not be dismissed by market participants.
In August and September of 2010, there were reports published by the International Financial Research & Analysis Group, Seeking Alpha website, analysts, and other web-based publishers that contained misleading statements about us. Although we have responded in two press releases dated September 13, 2010, it is likely that that there will be additional short seller attacks against Chinese companies. As a result, the price of our stock remains vulnerable to any further attacks in this regard.
A class action lawsuit and shareholder derivative lawsuits have been filed against us alleging violations of the federal securities laws and breach of fiduciary duties by certain of our current and former officers and directors, respectively, and the Commission is conducting an investigation. Any unfavorable outcomes of such proceedings could have a material adverse effect on our business.
A class action lawsuit was filed in the United States District Court for the District of Nevada on behalf of purchasers of our common stock between November 12, 2009 and September 1, 2010, alleging that we and certain of our current and former officers violated the federal securities laws. Several shareholder derivative suits have also been filed against certain of our current and former officers and directors alleging, among other things, breach of fiduciary duties by such officers and directors. In addition, the Commission is conducting an investigation of our prior reported financial statements, as well as the allegations in the complaints described above. See “Item 3. – Legal Proceedings” of Part I. It is possible that additional similar complaints and related derivative actions may be filed in the future. The expense of defending these litigations, and possible additional similar litigations or other proceedings, may be substantial and the time required to defend the actions could divert management’s attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows. In addition, an unfavorable outcome in any of such proceedings could have a material adverse effect on our business, results of operations and cash flows.
A recent SEC investor bulletin regarding reverse mergers may drive down the market price of our common stock.
On June 9, 2011, the SEC issued an investor bulletin in which it explained the process by which a company becomes a public company by means of a reverse merger, described the potential risks of investing in a reverse merger company and detailed recent enforcement actions taken by it against certain reverse merger companies. In particular the investor bulletin raised specific concerns with respect to foreign companies that access the U.S. markets through the reverse merger process, as we did. The SEC investor bulletin could lead investors in our common stock to sell their shares and may cause other investors not to invest in us, thus driving down the market price of our common stock or making it more difficult for us to raise funds in the future.
37
If our common stock were delisted and determined to be a “penny stock,” a broker-dealer may find it more difficult to trade our common stock and an investor may find it more difficult to acquire or dispose of our common stock in the secondary market.
If our common stock were removed from listing with the New York Stock Exchange, it may be subject to the so-called “penny stock” rules. The SEC has adopted regulations that define a “penny stock” to be any equity security that has a market price per share of less than $5.00, subject to certain exceptions, such as any securities listed on a national securities exchange. For any transaction involving a “penny stock,” unless exempt, the rules impose additional sales practice requirements on broker-dealers, subject to certain exceptions. If our common stock were delisted and determined to be a “penny stock,” a broker-dealer may find it more difficult to trade our common stock and an investor may find it more difficult to acquire or dispose of our common stock on the secondary market. Investors in penny stocks should be prepared for the possibility that they may lose their whole investment.
None.
There is no private ownership of land in China. All land is owned by the government of the PRC on behalf of all Chinese citizens or collectively owned by farmers.
Land use rights can be allocated for free, granted or transferred with consideration upon approval by the PRC State Land Administration Bureau or its authorized branches.
Our principal executive offices are located at 3rd floor, Borough A, Block A. No. 181, South Taibai Road, Xi’an, Shaanxi province, PRC 710065. The office space is approximately 360 square meters in area (3,875 square feet). It is leased from Xi’an Kingtone Information Technology Co., Ltd. (“Kingtone Information”), which is controlled by Mr. Li, our Chairman, President and CEO, for a term of two years from July 1, 2010 at an annual rent of $19,583 (RMB129,600), which is the market rate in that area.
Through Jinong, we own an approximately 6,500 square meters (69,965 square feet) production facility and an approximately 31,000 square meters (333,681 square feet) production facility, located in the Yang Ling Agriculture High-tech Demonstration Zone, on No. 6 Guhua 5 Road, Yangling, Xi’an, Shaanxi province, PRC 712100. The production facilities are located on approximately 47,000 square meters (505,904 square feet) of land, which also contains office buildings, warehouses and research laboratories. The production lines have a total annual production capacity of 55,000 metric tons and have a current utilization rate of 87%. We own the land use rights for the land on which Jinong’s manufacturing facilities are situated for a term of 50 years from 2001.
Jintai, Jinong’s wholly-owned subsidiary, is located in the Caotan Modern Agriculture Development Zone in the northern suburb area of Xi’an. Jintai has six intelligent greenhouses and six affiliated buildings, occupying approximately 137,000 square meters (1,474,656 square feet) of land. We lease the land used for Jintai’s operations from Xi’an Jinong Hi-tech Agriculture Demonstration Zone for 10 years from January 2008 with an annual rent of approximately $9,140.
Yuxing, Jinong’s wholly-owned subsidiary, has land use rights to over 353,000 square meters (3,799,660 square feet) of land located in Hu County, Xi’an, Shaanxi Province on which we have built 100 sunlight greenhouses as part of a research and development center currently under construction. We expect to finish completion of 12 “intelligent” greenhouses on this property by 2012.
Through Gufeng and Tianjuyuan, we own an additional 12,286 square meters (approximately 132,000 square feet) of manufacturing, office and warehouse space located on approximately 42,726 square meters (459,898 square feet) of land located in No. 6 Mafang Logistics Park, Pinggu, Beijing. In addition, the eight manufacturing facilities of Gufeng and Tianjuyuan collectively increased our total annual production capacity by another 500,000 metric tons. The collective utilization rate of these facilities is 58%.
Tianjuyuan leases approximately 47,333 square meters (509,488 square feet) of land in the Ping Gu District of Beijing. Under the lease dated February 16, 2004 with the village committee of Dong Gao Village and Zhen Nan Zhang Dai Village in the Beijing Ping Gu District, Tianjuyuan leases the land at an annual rent of RMB35,500 (approximately $5,217). The lease term is from February 1, 2004 to January 31, 2054. However, according to our PRC counsel, such lease is invalid and unenforceable pursuant to the PRC Land Administration Law and related regulations. Therefore, we are in the process of applying for the proper land use right certificate from the relevant government authority. There can be no assurance such land use right certificate will be granted to us.
38
The details on our properties and manufacturing facilities are described in the table below:
|
Facility Location
and Production
Segment
|
|
Address
|
|
Area (square meters
/ square feet)
|
|
Ownership Status and
Term
|
|
Xi’an – Fertilizers (Jinong)
|
Yang Ling Agriculture High-tech Demonstration Zone, No. 6 Guhua 5 Road, Yangling, Xi’an, Shaanxi province
|
30,947 sq. m.
(333,111 sq. ft.)
|
Land use right (Certificate #006012633) expires in January 2051
|
|||
|
Xi’an – Fertilizers (Jinong)
|
Yang Ling Agriculture High-tech Demonstration Zone, No. 6 Guhua 5 Road, Yangling, Xi’an, Shaanxi province
|
6,495 sq. m.
(69,911 sq. ft.)
|
Building Ownership Certificate (Certificate # 20050722)
|
|||
|
Xi’an – Agricultural Products (Jintai)
|
Caotan Modern Agriculture Development Zone, Middle Section of Shangji Road, Caotan, Xi’an, Shaanxi Province
|
137,000 sq. m.
(1,474,656 sq. ft.)
|
Lease from January 2008 to January 2018
|
|||
|
Xi’an – research and development center (Yuxing)
|
North Xin’anVillage, Weifeng, Hu County, Shaanxi Province
|
353,000 sq. m.
(3,799,660 sq. ft.)
|
Land use right (Certificate #006001700) expires in August 2059
|
|||
|
Beijing – fertilizers (Tianjuyuan & Gufeng)
|
South of Nanzhangdai Village, Donggaocun Town, Ping Gu District, Beijing
|
42,726 sq. m.
(459,898 sq. ft.)
|
Land use right (Certificate #2003189) expires in August 2053
*
|
|||
|
Beijing – fertilizers (Tianjuyuan & Gufeng)
|
South of Nanzhangdai Village, Donggaocun Town, Ping Gu District, Beijing
|
17,930 sq. m.
(192,997 sq. ft.)
|
Building Ownership Certificate# 33142
*
|
|||
|
Beijing – fertilizers (Tianjuyuan & Gufeng)
|
|
South of Nanzhangdai Village, Donggaocun Town, Ping Gu District, Beijing
|
|
47,333 sq. m.
(509,488 sq. ft.)
|
|
Lease from February 2004 to January 2054
|
*
Tianjuyuan entered into three loan agreements with China Agriculture Bank in 2010. In exchange, Tianjuyuan mortgaged its land use right and building ownership. We summarize the major information in the table below:
|
No.
|
|
Loan
Amount
|
|
Lending Institution
|
|
Contract
Period
|
|
Type of
Guarantee
|
|
Interest
Rate
|
|
Property under
Mortgage
|
|
1
|
RMB10.1 million ($1,562,470)
|
China Agriculture Bank - Beijing Ping Gu District Branch
|
May 23, 2011 to April 19, 2012
|
Mortgage
|
7.2565% (year)
|
Tianjuyuan’s land (Certificate #2003189) and building (Certificate #33142)
|
||||||
|
2
|
RMB8.4 million ($1,299,480)
|
China Agriculture Bank - Beijing Ping Gu District Branch
|
February 8, 2011 to February 1, 2012
|
Mortgage
|
7.2565% (year)
|
Tianjuyuan’s land (Certificate #2003189) and building (Certificate #33142)
|
||||||
|
3
|
|
RMB8 million ($1,237,600)
|
|
China Agriculture Bank - Beijing Ping Gu District Branch
|
|
April 12, 2011 to April 11, 2012
|
|
Mortgage
|
|
7.2565% (year)
|
|
Tianjuyuan’s land (Certificate # 2003189) and building (Certificate #33142)
|
39
On October 15, 2010, a class action lawsuit was filed against us and certain of our current and former officers in the United States District Court for the District of Nevada on behalf of purchasers of our common stock between November 12, 2009 and September 1, 2010. On April 27, 2011, the court appointed the lead plaintiff and lead plaintiff’s counsel. On June 13, 2011, lead plaintiff filed an amended complaint, which adds several additional defendants and expands the class period to include purchasers who purchased our common stock between May 12, 2009 and January 4, 2011. The amended complaint alleges that we and certain of our current and former officers and directors violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended, by making material misstatements and omissions in our financial statements, securities offering documents, and related disclosures during the class period. The plaintiffs claim that such allegedly misleading statements inflated the price of our common stock and seek monetary damages in an amount to be determined at trial. By stipulation of the parties, defendants’ response to the amended complaint is due October 7, 2011.
On December 10, 2010, a derivative complaint was filed by a shareholder, purportedly on our behalf, against certain of our current and former officers and directors in the First Judicial District Court of the State of Nevada in and for Carson City. The complaint alleges, among other things, various violations of state law by such officers and directors, including breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The plaintiff requests, among other remedies, restitution from such officers and directors and reform to our corporate governance and internal procedures.
On January 5, 2011, a second derivative complaint was filed by two shareholders, purportedly on our behalf, against, among others, certain of our current and former officers and directors, in the United States District Court, District of Columbia. By stipulation of the parties, this case has been transferred to the District Court for the District of Nevada. This complaint alleges, among other things, that such officers and directors breached their fiduciary duties by knowingly filing inaccurate and inconsistent financial statements and other filings with the Commission and by failing to correct such allegedly inaccurate financial disclosure. The plaintiffs request, among other remedies, damages in the amount sustained by the defendants’ alleged breach of fiduciary duties and other violations of law, and other equitable relief.
On January 12, 2011, two additional derivative complaints were filed by different shareholders, purportedly on our behalf, against certain of our current and former officers and directors, in the Eighth Judicial District Court, Clark County, Nevada. Each of the complaints alleges, among other things, that defendants breached their fiduciary duties by disseminating false and misleading information to shareholders via public filings and other communications, failing to maintain internal controls and procedures and failing to properly oversee and manage the company. Each of the complaints also alleges unjust enrichment, abuse of control, gross mismanagement and waste of corporate assets by the defendants. The plaintiffs request, among other remedies, damages caused by the breach of defendants’ fiduciary duties, restitution from such officers and directors and reform to our corporate governance and internal procedures. By stipulation, these two derivative actions have been transferred to the First Judicial District Court of the State of Nevada in and for Carson City and consolidated with the derivative action already pending in that court. By stipulation of the parties, all of the derivative actions are currently stayed.
We intend to vigorously defend each of these lawsuits.
40
In addition, the Commission is conducting an investigation of our prior reported financial statements, as well as the allegations in the complaints described above. We are cooperating with the Commission.
|
ITEM 5.
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
|
Market Information
We have two classes of equity securities: (i) common stock, par value $.001 per share, 26,845,859 shares of which were outstanding as of September 9, 2011, and (ii) preferred stock, par value $.001 per share, of which no shares were outstanding as of September 9, 2011. Since December 7, 2009, our common stock has been listed and traded on the NYSE under the symbol “CGA”. From March 9, 2009 to December 4, 2009, our common stock was listed and traded on the NYSE Amex Equities. From August 27, 2007 until March 9, 2009, our common stock was traded on the Over-the-Counter Bulletin Board.
Table I below sets forth the high and low bid prices for our common stock for the fiscal quarters ended September 30, 2008 and December 31, 2008 based on reports of transactions on the Over-the-Counter Bulletin Board. Such prices reflect inter-dealer prices, without retail markup, markdowns or commissions and may not necessarily represent actual transactions.
Table I
|
Quarter Ended
|
High Bid
|
Low Bid
|
||||||
|
09/30/2008
|
$
|
25.01
|
$
|
0.00
|
||||
|
12/31/2008
|
$
|
3.40
|
$
|
1.84
|
||||
Table II below sets forth the high and low sales prices for our common stock for each fiscal quarter from the quarter ended March 31, 2009 through the quarter ended June 30, 2011 based on reports of transactions on the NYSE Amex Equities and NYSE.
Table II
|
Quarter Ended
|
High
|
Low
|
||||||
|
03/31/2009
|
$
|
3.90
|
$
|
2.60
|
||||
|
06/30/2009
|
$
|
9.00
|
$
|
3.28
|
||||
|
09/30/2009
|
$
|
15.00
|
$
|
6.81
|
||||
|
12/31/2009
|
$
|
18.70
|
$
|
10.02
|
||||
|
03/31/2010
|
$
|
17.89
|
$
|
12.31
|
||||
|
06/30/2010
|
$
|
14.49
|
$
|
8.91
|
||||
|
09/30/2010
|
$
|
12.50
|
$
|
8.15
|
||||
|
12/31/2010
|
$
|
10.49
|
$
|
6.81
|
||||
|
03/31/2011
|
$
|
9.49
|
$
|
6.45
|
||||
|
06/30/2011
|
$
|
7.87
|
$
|
3.43
|
||||
On September 9, 2011, the last sale price for our common stock on the NYSE was $4.96 per share.
41
Holders
As of September 9, 2011, there were approximately 617 shareholders of record of our common stock. This does not reflect the number of persons or entities who held stock in nominee or "street" name through various brokerage firms.
Dividends
Our board of directors has not declared a dividend on our common stock during the last two fiscal years or the subsequent interim period.
The payment of dividends, if any, is at the discretion of the Board of Directors and is contingent on the Company's revenues and earnings, capital requirements, financial conditions and the ability of our operating subsidiaries to obtain approval to send monies out of the PRC. The PRC's national currency, the Yuan, is not a freely convertible currency. Pleaser read “
Our subsidiaries are subject to restrictions on paying dividends and making other payments to our subsidiary, Green New Jersey; as a result, we might therefore, be unable to pay dividends to you.
” under Item 1A “Risk Factors” of this Report.
Securities Authorized for Issuance Under Equity Compensation Plans
On October 27, 2009, our Board of Directors adopted the Company’s 2009 Equity Incentive Plan (the “Incentive Plan”). On December 11, 2009, our stockholders approved the Incentive Plan. The Incentive Plan gives us the ability to grant stock options, stock appreciation rights (SARs), restricted stock and other stock-based awards to our employees, consultants and to non-employee members of our advisory board or our Board of Directors or the board of directors of any of our subsidiaries.
As of June 30, 2011, there were outstanding options to purchase an aggregate of 195,291 shares of common stock granted under the Incentive Plan. Options granted in the future under the Incentive Plan are within the discretion of our board of directors or our compensation committee. The following table summarizes the number of shares of our common stock authorized for issuance under our equity compensation plans as of June 30, 2011.
Equity Compensation Plan Information
|
Plan category
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
|
|||||||||
|
Equity compensation plans approved by security holders
|
115,099 | $ | 14.67 | 1,797,406 | ||||||||
|
Equity compensation plans not approved by security holders
|
— | — | — | |||||||||
|
Total
|
115,099 | $ | 14.67 | 1,797,406 | ||||||||
Performance Graph
The following graph compares the cumulative total return on our common stock, the NYSE Composite Index and a peer group index consisting of companies reporting under the Standard Industrial Classification Code 2870 over the period commencing on August 7, 2008 (the first date on which there was any significant trading of our common stock after our registration statement on Form SB-2 was declared effective by the Commission) and ending on June 30, 2011.
42
COMPARISON OF CUMULATIVE TOTAL RETURN
Among China Green Agriculture, Inc., NYSE Composite Index and SIC Code Index (Agricultural Chemicals Sector)
The performance graph in this Item 5 is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, whether made before or after the date of this Report and irrespective of any general incorporation language in such filing.
Recent Sales of Unregistered Securities; Use of Proceeds from Unregistered Securities
Sales of unregistered securities by the Company have been previously disclosed in our Form 8-Ks and 10-Qs filed with the SEC.
Issuer Purchases of Equity Securities
None.
The following selected consolidated income statement data for the years ended June 30, 2011, 2010 and 2009 and the selected consolidated balance sheet data as of June 30, 2011 and 2010 have been derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. These consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this Report. Our selected consolidated income statement data for the year ended June 30, 2008 and 2007 and the selected consolidated balance sheet data as of June 30, 2009, 2008 and 2007 have been derived from our audited financial statements which are not included in this Annual Report on Form 10-K. The historical results presented below are not necessarily indicative of the results that may be expected in any future period.
43
|
For the year ended June 30,
|
||||||||||||||||||||
|
2011
|
2010
|
2009
|
2008
|
2007
|
||||||||||||||||
|
Revenue
|
$ | 179,717,966 | $ | 52,090,752 | $ | 35,207,997 | $ | 22,604,719 | $ | 15,184,343 | ||||||||||
|
Cost of goods sold
|
116,097,931 | 21,138,552 | 14,712,066 | 9,792,856 | 6,598,606 | |||||||||||||||
|
Gross profit
|
63,620,035 | 30,952,200 | 20,495,931 | 12,811,863 | 8,585,737 | |||||||||||||||
|
Operating expenses
|
21,508,604 | 6,025,579 | 3,405,918 | 3,494,946 | 1,011,686 | |||||||||||||||
|
Income from operations
|
42,111,431 | 24,926,621 | 17,090,013 | 9,316,917 | 7,574,051 | |||||||||||||||
|
Non-operating income (expense)
|
(160,186 | ) | 157,653 | (294,043 | ) | (845,916 | ) | (360,297 | ) | |||||||||||
|
Provision for income taxes
|
9,037,144 | 3,794,516 | 2,331,548 | 692,474 | 295,012 | |||||||||||||||
|
Net income
|
$ | 32,914,101 | $ | 21,289,758 | $ | 14,464,422 | $ | 7,778,527 | $ | 6,918,742 | ||||||||||
|
Weighted average shares outstanding:
|
||||||||||||||||||||
|
Basic
|
25,929,517 | 23,468,246 | 18,478,474 | 14,688,250 | 10,770,669 | |||||||||||||||
|
Diluted
|
25,929,517 | 23,468,246 | 18,532,591 | 14,695,626 | 10,770,669 | |||||||||||||||
|
Earnings (loss) per share:
|
||||||||||||||||||||
|
Basic
|
$ | 1.27 | $ | 0.91 | $ | 0.78 | $ | 0.53 | $ | 0.64 | ||||||||||
|
Diluted
|
$ | 1.27 | $ | 0.91 | $ | 0.78 | $ | 0.53 | $ | 0.64 | ||||||||||
|
As of June 30,
|
||||||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
|
Total current assets
|
$ | 118,881,464 | $ | 89,478,076 | $ | 33,593,958 | $ | 25,026,275 | $ | 4,136,059 | ||||||||||
|
Total assets
|
223,370,987 | 131,787,942 | 61,618,426 | 49,521,382 | 17,099,775 | |||||||||||||||
|
Total current liabilities
|
31,497,746 | 3,250,020 | 8,458,299 | 11,738,686 | 8,334,420 | |||||||||||||||
|
Total liabilites
|
31,497,746 | 3,250,020 | 8,458,299 | 11,738,686 | 8,334,420 | |||||||||||||||
|
Total shareholders' equity
|
$ | 191,873,241 | $ | 128,537,922 | $ | 32,640,872 | $ | 17,263,441 | $ | 8,765,355 | ||||||||||
The selected financial data presented in the above table is indicative of the Company's strategy of growing through acquisition. We acquired Gufeng and its wholly owned subsidiary Tianjuyuan on July 2, 2010. The below schedule further segments the above data providing the acquisition year impact on the consolidated balance sheet and the statement of operations. The reader should view the below information in combination with Note 16 - Segment Information included as part of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K as well as Item 1. “Business – Our History”.
44
|
As of June 30,
|
||||
|
2011
|
||||
|
Revenue
|
$ | 107,081,018 | ||
|
Cost of goods sold
|
85,670,990 | |||
|
Gross profit
|
21,410,028 | |||
|
Operating expenses
|
6,121,157 | |||
|
Income (loss) from operations
|
15,288,871 | |||
|
Non-operating income (expense)
|
(412,927 | ) | ||
|
Income tax expense
|
3,879,959 | |||
|
Net income (loss)
|
$ | 10,995,985 | ||
|
As of June 30,
|
||||
| 2011 | ||||
|
Total current assets
|
$ | 30,037,818 | ||
|
Total assets
|
75,919,198 | |||
|
Total current liabilities
|
35,118,933 | |||
|
Total liabilites
|
35,118,933 | |||
|
Total shareholders' equity
|
$ | 40,800,265 | ||
|
ITEM 7.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as the slow-down of the global financial markets and its impact on economic growth in general, the competition in the fertilizer industry and the impact of such competition on pricing, revenues and margins, the weather conditions in the areas where our customers are based, the cost of attracting and retaining highly skilled personnel, the prospects for future acquisitions, and the factors set forth elsewhere in this report, our actual results may differ materially from those anticipated in these forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will in fact occur. You should not place undue reliance on the forward-looking statements contained in this report.
The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by U.S. federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Further, the information about our intentions contained in this report is a statement of our intention as of the date of this report and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.
Unless the context indicates otherwise, as used in the following discussion, “Company”, “we,” “us,” and “our,” refer to (i) China Green Agriculture, Inc. (“Green Nevada”), a corporation incorporated in the State of Nevada; (ii) Green Agriculture Holding Corporation (“Green New Jersey”), a wholly-owned subsidiary of Green Nevada incorporated in the State of New Jersey; (iii) Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd. (“Jinong”), a wholly-owned subsidiary of Green New Jersey organized under the laws of the PRC; (iv) Xi’an Jintai Agriculture Technology Development Company (“Jintai”), wholly-owned subsidiary of Jinong in the PRC, (v) Xi’an Hu County Yuxing Agriculture Technology Development Co., Ltd. (“Yuxing”), a wholly-owned subsidiary of Jinong in the PRC; (vi) Beijing Gufeng Chemical Products Co., Ltd., a wholly-owned subsidiary of Jinong in the PRC (“Gufeng”), and (vii) Beijing Tianjuyuan Fertilizer Co., Ltd., Gufeng’s wholly-owned subsidiary in the PRC (“Tianjuyuan”).
Unless the context otherwise requires, all references to (i) “PRC” and “China” are to the People’s Republic of China; (ii) “U.S. dollar,” “$” and “US$” are to United States dollars; and (iii) “RMB”, “Yuan” and Renminbi are to the currency of the PRC or China.
45
Overview
We are engaged in the research, development, production and sale of various types of fertilizers and agricultural products in the PRC through our wholly-owned Chinese subsidiaries, Jinong, Jintai, Yuxing, Gufeng and Tianjuyuan. Our primary business is fertilizer products, specifically humic-acid based compound fertilizer produced by Jinong and compound fertilizer, blended fertilizer, organic compound fertilizer, slow-release fertilizers, highly-concentrated water-soluble fertilizers and mixed organic-inorganic compound fertilizer produced by Gufeng and Tianjuyuan. In addition, through Jintai and Yuxing, we develop and produce agricultural products, such as top-grade fruits, vegetables, flowers and colored seedlings. For financial reporting purposes, our operations are organized into four business segments: fertilizer products (Jinong), fertilizer products (Gufeng and Tianjuyuan), agricultural products (Jintai) and research and development (Yuxing).
Jintai and Yuxing also serve as a research and development base for our fertilizer products. The fertilizer business conducted by Jinong and Gufeng generated approximately 96.1%, 88.0% and 82.1% of our total revenues in the fiscal year ended June 30, 2011, 2010 and 2009, respectively. It should be noted that our consolidated results for the 2010 and 2009 periods do not include the results of Gufeng and its subsidiary, Tianjuyuan, which were acquired on July 2, 2010.
Fertilizer Products
As of June 30, 2011, we had developed and produced a total of 454 different fertilizer products, of which 143 and 311 were developed and produced by Jinong and Gufeng (including its subsidiary Tianjuyuan), respectively.
For the fiscal year ended June 30, 2011, we sold approximately 337,769 metric tons of fertilizer products, as compared to 22,834 metric tons and 15,042 metric tons for the fiscal year ended June 30, 2010 and 2009, respectively, which did not include sales of products by Gufeng. For the fiscal year ended June 30, 2011, Jinong sold approximately 48,038 metric tons of fertilizer products, as compared to 22,834 and 15,042 metric tons for the fiscal year ended June 30, 2010 and 2009, respectively, Gufeng sold approximately 289,731 metric tons of fertilizer products for the fiscal year ended June 30, 2011. Our sales of fertilizer products to five provinces accounted for approximately 38.9% of our fertilizer revenue for the fiscal year ended June 30, 2011. Specifically, the provinces and their respective percentage contribution to our fertilizer revenues were Hebei (10.4%), Beijing (8.5%), Liaoning (7.6%), Jilin (6.9%) and Heilongjiang (5.5%).
As of June 30, 2011, we had a total of 797 distributors covering 22 provinces, four autonomous regions and three central government-controlled municipalities in China. Jinong had 627 distributors in China. Jinong’s sales are not dependent on any single distributor or any group of distributors. Its top five distributors accounted for 2.2% of Jinong’s fertilizer revenues for the fiscal year ended June 30, 2011. Gufeng had 170 distributors, including some large state-owned enterprises. Gufeng’s top five distributors accounted for 48.1% of its revenues for the fiscal year ended June 30, 2011, of which Sinoagri Holding Company Limited accounted for 29.6% of Gufeng’s revenue for the fiscal year ended June 30, 2011.
Agricultural Products
Through Jintai, 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 Jintai’s and Yuxing’s greenhouse facilities to conduct research and development activities for our fertilizer products. The three PRC provinces that accounted for 99.5% of our agricultural products revenue for the fiscal year ended June 30, 2011 were Shaanxi (87.9%), Sichuan (8.1%) and, Shanxi (3.5%).
46
Recent Developments
New Products
During the three months ended June 30, 2011, Jinong launched seven new humic-acid based liquid and powder fertilizer products. Jinong’s new products generated approximately $594,523, or 3.1% of Jinong’s fertilizer revenues for the three months ended June 30, 2011. Jinong also added 19 new distributors for the three months ended June 30, 2011. Jinong’s new distributors accounted for approximately $331,477, or 1.8% of Jinong’s fertilizer revenues for the three months ended June 30, 2011. During the three months ended June 30, 2011, Gufeng launched one new product that organic-inorganic compound fertilizers. This new product generated approximately $24,062,396, or 60.4%, of Gufeng’s fertilizer revenues for the three months ended June 30, 2011. Gufeng also added seven new distributors during the three months ended June 30, 2011, which accounted for approximately $9,642,269, or 24.2%, of Gufeng’s fertilizer revenues.
Strategic Alliance Agreement with the China Humic Acid Industry Association
As disclosed in a press release dated March 2, 2011, on February 27, 2011, we signed a Strategic Alliance Agreement with the China Humic Acid Industry Association ("CHAIA" or the "Association"), pursuant to which we will work extensively with the Association in the design of the Humic Acid-based Granular Compound Fertilizer Protocol (the "Protocol") and in establishing the National Engineering Research Center of Humic Acid-based Fertilizers of China (the "Engineering Center"). CHAIA is a nationwide non-profit organization sponsored by the Chinese government that functions as the humic acid industry's self-regulatory body. With dozens of corporate members, the Association aims to regulate and thus improve the humic acid market in China. By the end of 2011, the Association plans to release the Protocol, which will be the first ever in the Chinese fertilizer industry to standardize the ingredients and the formulas used in fertilizer products, thus establishing the product quality of humic acid-based granular fertilizers. The Protocol is largely expected to regulate the production and distribution of humic acid granular fertilizers among manufacturers and hopefully eliminate misuse of the humic acid label. We are also currently working with the Association to advocate approval for the Engineering Center by the PRC central government. The mandate of the Engineering Center would mainly include conducting humic acid-related research, discovering new uses for humic acid in the fertilizer industry and experimenting and developing new humic acid-based fertilizer products for various farming uses.
Ten-Year Growth Plan
As disclosed in a press release dated March 2, 2011, on February 28, 2011, our Board of Directors approved our ten-year corporate growth plan (the "Growth Plan") for the period from 2011 to 2020. The Growth Plan underpins our goal of becoming a leader in the overall fertilizer industry in China by 2020. It is the result of one year of intensive research and analysis covering market research, peer analysis, government information and projections, and evolved over many internal review meetings involving all managers responsible for key parts of our business.
After careful review, our management and Board of Directors concluded that we should work towards the following revenue targets over the next ten years:
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·
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at least $150 million for fiscal year 2011;
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·
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at least $750 million for fiscal year 2015; and
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·
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at least $3 billion for fiscal year 2020.
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The Growth Plan lays out several strategies and business objectives in order for us to achieve the aforementioned revenue goals. Our management is expected to implement the following strategies; however, our Board of Directors reserves the right to revise such strategies at any time based on changing circumstances:
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·
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Establish the Engineering Center;
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·
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Participate in the design of the Protocol;
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Expand market share by broadening our geographic distribution network and increasing brand awareness;
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Reduce future manufacturing costs by securing raw material supplies; and
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Further utilize our research and development platform.
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47
Results of Operations
The fiscal year ended June 30, 2011 compared to the fiscal year ended June 30, 2010.
The following table shows the operating results of the Company on a consolidated basis for the fiscal years ended June 30, 2011 and 2010.
Note, however, that our consolidated results for the fiscal year ended June 30, 2010 do not include the results of Gufeng and its subsidiary, Tianjuyuan, which were acquired on July 2, 2010.
|
For the Years Ended June 30,
|
||||||||
|
2011
|
2010
|
|||||||
|
Net sales
|
$ | 179,717,966 | $ | 52,090,752 | ||||
|
Jinong
|
65,629,265 | 45,816,377 | ||||||
|
Gufeng
|
107,081,018 | - | ||||||
|
Jintai
|
6,826,933 | 6,274,375 | ||||||
|
Yuxing
|
180,750 | - | ||||||
|
Cost of goods sold
|
116,097,931 | 21,138,552 | ||||||
|
Jinong
|
26,449,117 | 17,700,532 | ||||||
|
Gufeng
|
85,670,990 | - | ||||||
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Jintai
|
3,841,391 | 3,438,020 | ||||||
|
Yuxing
|
136,433 | - | ||||||
|
Gross profit
|
63,620,035 | 30,952,200 | ||||||
|
Selling expenses
|
7,121,905 | 2,203,345 | ||||||
|
General and administrative expenses
|
14,386,699 | 3,822,234 | ||||||
|
Income from operations
|
42,111,431 | 24,926,621 | ||||||
|
Total other income (expense)
|
(160,186 | ) | 157,653 | |||||
|
Income before income taxes
|
41,951,245 | 25,084,274 | ||||||
|
Provision for income taxes
|
9,037,144 | 3,794,516 | ||||||
|
Net income
|
32,941,101 | 21,289,758 | ||||||
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Jinong
|
29,139,457 | 21,502,252 | ||||||
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Gufeng
|
10,995,985 | - | ||||||
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Jintai
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(96,244 | ) | 2,640,233 | |||||
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Yuxing
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(293,914 | ) | (181,304 | ) | ||||
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Parent
|
(6,831,182 | ) | (2,671,423 | ) | ||||
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Basic net earnings per share
|
$ | 1.27 | $ | 0.91 | ||||
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Basic weighted average shares outstanding
|
25,929,517 | 23,468,246 | ||||||
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Diluted weighted average shares outstanding
|
25,929,517 | 23,468,246 | ||||||
48
Net Sales
Total net sales for the fiscal year ended June 30, 2011 were $179,717,966, an increase of $127,627,214, or 245.0%, from $52,090,752 for the fiscal year ended June 30, 2010. This increase was largely due to the inclusion of Gufeng’s net sales, which contributed $107,081,018, or 59.6%, of our total net sales. Our total net sales without including Gufeng’s net sales for the fiscal year ended June 30, 2011 were $72,636,948, an increase of $20,546,196, or 39.4%, from $52.1 million for the fiscal year ended June 30, 2010.
For the fiscal year ended June 30, 2011, Jinong’s net sales increased $19,812,888, or 43.2%, to $65,629,265 from $45,816,377 from the fiscal year ended June 30, 2010. Sales volume increased 110.4% to 48,038 metric tons for the fiscal year ended June 30, 2011 from 22,835 metric tons for the fiscal year ended June 30, 2010. This increase was mainly attributable to greater sales of products including our liquid fertilizers, powder fertilizers, and particularly, the lower-margin granular fertilizers released since our 40,000 metric-ton production line began production in August 2009. In addition, Jinong launched more promotional activities to increase sales.
Net sales at Gufeng, which included one quarter of production on the new 200,000 metric ton line, for the fiscal year ended June 30, 2011, were $107.1 million, an increase of $47.2 million, or 78.9%, from $59.9 million for the fiscal year ended June 30, 2010.
Jintai’s net sales increased by $552,558, or 8.8%, to $6,826,933 for the fiscal year ended June 30, 2011 from $6,274,375 for the same period in 2010.
Yuxing achieved net sales of $180,750 during the fiscal year ended June 30, 2011. For fiscal year ended June 30, 2010, Yuxing segment had no revenues.
Cost of Goods Sold
Total cost of goods sold for the fiscal year ended June 30, 2011 was $116,097,931, an increase of $94,959,379, or 449.2%, from $21,138,551 for the fiscal year ended June 30, 2010. This significant increase was mainly due to the costs attributable to the production and sale of Gufeng’s products, which accounted for 73.8% of our cost of goods sold. The total cost of goods sold without including Gufeng’s cost of goods sold for the fiscal year ended June 30, 2011 was $30,426,941, an increase of $9,288,389, or 43.9% from $21,138,551 for the fiscal year ended June 30, 2010.
Cost of goods sold by Jinong for the fiscal year ended June 30, 2011 was $26,449,117, an increase of $8,748,585, or 49.4%, from $17,700,532 for the same period in 2010. As a percentage of total net sales, cost of goods sold by Jinong accounted for approximately 14.7% and 34.0% for the fiscal year ended June 30, 2011 and 2010, respectively. The increase in cost of goods sold was attributable to the increase in sales of lower-margin granular fertilizers and the increase in raw materials and packaging materials used as a result of our newly introduced powder and liquid fertilizer products.
Cost of goods sold by Gufeng for the fiscal year ended June 30, 2011 was $85,670,990 which accounted for 73.8% of total cost of goods sold.
Cost of goods sold by Jintai for the fiscal year ended June 30, 2011 was $3,841,391, an increase of $403,371, or 11.7%, from $3,438,020 for fiscal year 2010. The increase in the price of raw materials was the main reason for the increase in Jintai’s cost of goods sold.
Cost of goods sold by Yuxing was $136,433 for the fiscal year ended June 30, 2011. For fiscal year ended June 30, 2010, Yuxing segment had no cost of goods sold.
Gross Profit
Total gross profit for the fiscal year ended June 30, 2011 increased by $32,667,835, or 105.5%, to $63,620,035, as compared to $30,952,200 for the fiscal year ended June 30, 2010. Gross profit margin was approximately 35.4% and 59.4% for the fiscal year ended June 30, 2011 and 2010, respectively. The decrease in gross profit margin was primarily due to the recent acquisition of Gufeng, which mainly sells low-margin granular fertilizer products. The gross profit without including Gufeng’s gross profit was $42,210,007 with a gross profit margin of 58.1%.
49
Gross profit generated by Jinong increased by $11,064,303, or 39.4%, to $39,180,148 for the fiscal year ended June 30, 2011 from $28,115,845 for the fiscal year ended June 30 2010. Gross profit margin from Jinong’s sales was approximately 59.7% and 61.4% for the fiscal year ended June 30, 2011 and 2010, respectively. The main reason for the decrease in Jinong’s gross profit margin was primarily attributable to the strong sales of lower-margin granular fertilizers for the fiscal year ended June 30, 2011 compared with a year ago. In addition, the increase in the price of raw materials also contributed to the lower margin than before.
Gross profit generated by Gufeng was $21,410,028 with a gross profit margin of approximately 20.0% for the fiscal year ended June 30, 2011.
Gross profit from Jintai increased by $149,187, or 5.3%, for the fiscal year ended June 30, 2011, to $2,985,542, as compared to $2,836,355 for the fiscal year ended June 30, 2010. Gross profit margin from Jintai’s sales was approximately 43.7% and 45.2% for the fiscal years ended June 30, 2011 and 2010, respectively.
Gross profit from Yuxing was $44,317 with a gross profit margin of approximately 24.5% for the fiscal years ended June 30, 2011.
Selling Expenses
Our selling expenses consist primarily of salaries of sales personnel, advertising and promotion expenses, freight-out costs and related compensation. Selling expenses were $7,121,905, or 4.0%, of net sales for the fiscal year ended June 30, 2011 as compared to $2,203,345 or 4.2% of net sales for the fiscal year ended June 30, 2010, an increase of $4,918,560, or 223.2%. This increase was primarily due to the inclusion of Gufeng’s selling expenses for fiscal year 2011. The selling expenses of Gufeng were $ 2,834,005, or 2.6% of Gufeng’s net sales. The total selling expenses for the fiscal year ended June 30, 2011 without including Gufeng’s selling expenses was $4,287,900, or 5.9% of net sales excluding Gufeng’s net sales. The selling expenses of Jinong for the fiscal year ended June 30, 2011 were $4,254,198, or 6.5% of Jinong’s net sales, compared to selling expenses of $2,176,881, or 4.8% of Jinong’s net sales in fiscal year 2010. Most of this increase was due to Jinong’s expanded marketing efforts such as promotional materials and the increase in shipping costs.
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 due to pending litigations. General and administrative expenses were $14,386,699, or 8.0% of net sales, for the fiscal year ended June 30, 2011, as compared to $ 3,822,234, or 7.3%, of net sales for the fiscal year ended June 30 2010, an increase of $10,564,465. This increase was primarily the result of the inclusion of Gufeng’s general and administrative expenses, stock compensation expenses, Jintai’s photinia fraseri seedlings becoming obsolete and additional legal and investor relations fees incurred in connection with certain pending litigations. The general and administrative expenses of Gufeng were $3,287,152 for the fiscal year ended June 30, 2011. In addition, the non-cash stock compensation expense was $3,605,235 for the fiscal year ended June 30, 2011.
Total Other Income (Expenses)
Total other income (expense) consisted of income from subsidies received from the PRC government, interest income, interest expenses and bank charges. Total other expense for the fiscal year ended June 30, 2011 was $160,186, as compared to total other income of $157,653 for the fiscal year ended June 30, 2010, an increase in expense of $317,839, or 201.6%. The increase was mainly attributable to the $466,912 interest expense from Gufeng’s outstanding short-term loans.
Income Taxes
Jinong is subject to a preferred tax rate of 15% as a result of its business being classified as a High-Tech project under the PRC Enterprise Income Tax Law (“EIT”) that became effective on January 1, 2008. Jinong incurred income tax expenses of $5,157,184 for the fiscal year ended June 30, 2011, as compared to $3,794,515 for the fiscal year ended June 30, 2010, an increase of $1,362,669, or 35.9%, which was primarily attributable to Jinong’s increased operating income.
Gufeng, subject to a tax rate of 25%, incurred income tax expenses of $3,879,959 for the fiscal year ended June 30, 2011.
50
Jintai and Yuxing are currently exempted under PRC regulations from paying income tax.
Net Income
Net income for the fiscal year ended June 30, 2011 was $32,914,101, an increase of $11,624,343, or 54.6%, compared to $21,289,758 for the fiscal year ended June 30, 2010. The increase was attributable to the increase in gross profit. Net income as a percentage of total net sales was approximately 18.2% and 40.9% for the fiscal year ended June 30, 2011 and 2010, respectively. Net income generated by Jinong increased by $7,637,205, or 35.5%, to $29,139,457 for the fiscal year ended June 30, 2011 from $21,502,252 for the fiscal year ended June 30, 2010. The increase in Jinong’s net income was primarily due to the strong sales of Jinong’s fertilizer products during the fiscal year and also to the increase in Jinong’s gross profit. Net income generated by Gufeng was $10,995,985 for the fiscal year ended June 30, 2011. Net income generated by Jintai decreased by $2,736,477, or 103.6%, to a net loss of $96,244 for the fiscal year ended June 30, 2011 from $2,640,233 for the fiscal year ended June 30, 2010.
The fiscal year ended June 30, 2010 compared to the fiscal year ended June 30, 2009.
The following table shows the operating results of the Company on a consolidated basis for the fiscal years ended June 30, 2010 and 2009.
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For the Years Ended June 30,
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||||||||
|
2010
|
2009
|
|||||||
|
Net sales
|
$ | 52,090,752 | $ | 35,207,997 | ||||
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Jinong
|
45,816,377 | 28,889,131 | ||||||
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Gufeng
|
- | - | ||||||
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Jintai
|
6,274,375 | 6,318,866 | ||||||
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Yuxing
|
- | - | ||||||
|
Cost of goods sold
|
21,138,552 | 14,712,066 | ||||||
|
Jinong
|
17,700,532 | 11,173,236 | ||||||
|
Gufeng
|
- | - | ||||||
|
Jintai
|
3,438,020 | 3,538,830 | ||||||
|
Yuxing
|
- | - | ||||||
|
Gross profit
|
30,952,200 | 20,495,931 | ||||||
|
Selling expenses
|
2,203,345 | 1,412,101 | ||||||
|
General and administrative expenses
|
3,822,234 | 1,993,817 | ||||||
|
Income from operations
|
24,926,621 | 17,090,013 | ||||||
|
Total other income (expense)
|
157,653 | (294,043 | ) | |||||
|
Income before income taxes
|
25,084,274 | 16,795,970 | ||||||
|
Provision for income taxes
|
3,794,516 | 2,331,548 | ||||||
|
Net income
|
21,289,758 | 14,464,422 | ||||||
|
Jinong
|
21,502,252 | 13,411,090 | ||||||
|
Gufeng
|
- | - | ||||||
|
Jintai
|
2,640,233 | 2,446,238 | ||||||
|
Yuxing
|
(181,304 | ) | - | |||||
|
Parent
|
(2,671,423 | ) | (1,392,885 | ) | ||||
|
Basic net earnings per share
|
$ | 0.91 | $ | 0.78 | ||||
|
Basic weighted average shares outstanding
|
23,468,246 | 18,478,474 | ||||||
|
Diluted weighted average shares outstanding
|
23,468,246 | 18,532,591 | ||||||
Net Sales
Our net sales for the fiscal year ended June 30, 2010 were $52,090,752, an increase of $16,882,755, or 48.0%, from $35,207,997 for the fiscal year ended June 30, 2009.
51
Jinong’s net sales, which accounted for 88.0% of our total net sales, were driven by sales of humic acid-based compound fertilizers. For the fiscal year ended June 30, 2010, Jinong’s net sales increased by $16,927,245, or 58.6%, to $45,816,377 from $28,889,131 for the fiscal year ended June 30, 2009. Sales volume increased 51.8% to 22,835 metric tons for the fiscal year ended June 30, 2010 from 15,042 metric tons for the fiscal year ended June 30, 2009. This increase was mainly attributable to expansion in production capacity and the introduction of five new powder and granular fertilizer products, which accounted for 35% of the increase in net sales. Sales for the liquid-based fertilizer group also increased in both volume and amount, and in particular, the sales for functional fertilizer products contributed 32% of the increase in net sales.
Jintai’s net sales, which include sales of agricultural products, namely top-grade fruits, vegetables, flowers and colored seedlings by grown using our existing and new fertilizers, decreased by $44,491, or 0.7%, to $6,274,375 for the fiscal year ended June 30, 2010 from $6,318,866 for the same period in 2009. As its greenhouse facility reached its full capacity in fiscal year 2010, we did not expect any growth from Jintai in the near future unless we change dramatically our product mix and grow significantly more higher-end agricultural produce. We are trying to grow gradually more higher-margin products such as butterfly orchids and red-leaf flowers and discontinue some lower margin products such as colored pepper and egg plant. Therefore, we do expect a flat growth in revenues with a slight better margin going forward.
Cost of Goods Sold
Total cost of goods sold for the fiscal year ended June 30, 2010 was $21,138,551, an increase of $6,426,485, or 43.7%, from $14,712,066 for the fiscal year ended June 30, 2009.
Cost of goods sold by Jinong for the fiscal year ended June 30, 2010 was $17,700,532, an increase of $6,527,295, or 58.4%, from $11,173,236 for fiscal year 2009. As a percentage of total net sales, cost of goods sold by Jinong accounted for approximately 34.0% and 31.7% for the fiscal years ended June 30, 2010 and 2009, respectively. The increase in cost of goods sold was primarily attributable to the increase in raw materials and packaging materials as a result of our newly introduced powder and granular fertilizer products.
Cost of goods sold by Jintai for the fiscal year ended June 30, 2010 was $3,438,020, a decrease of $100,810, or 2.8%, from $3,538,830 for fiscal year 2009. As a percentage of total net sales, cost of goods sold by Jintai accounted for approximately 6.6% and 10.1% for the fiscal year ended June 30, 2010 and 2009, respectively. The increase in direct materials such as seedlings was largely offset by the decrease in amortization and utility expenses.
Gross Profit
Gross profit for the fiscal year ended June 30, 2010 increased by $10,456,270, or 51.0%, to $30,952,201, as compared to $20,495,931 for the fiscal year ended June 30, 2009. Gross profit margin was approximately 59.4% and 58.2% for the fiscal year ended June 30, 2010 and 2009, respectively.
Gross profit generated by Jinong increased by $10,399,950, or 58.7%, to $28,115,845 for the fiscal year ended June 30, 2010 from $17,715,895 for the fiscal year ended June 30, 2009. Gross profit margin from Jinong’s sales were approximately 61.4% and 61.3% for the fiscal year ended June 30, 2010 and 2009, respectively. The increase in gross profit margin was mainly due to the introduction of our powder based fertilizer products, comprising 8.6% of our fertilizer revenues in fiscal year 2010, which have a higher profit margin as compared to those of the liquid-based fertilizer products we sold last year.
Gross profit from Jintai increased by $56,320, or 2.0%, for the fiscal year ended June 30, 2010, to $2,836,355, as compared to $2,780,036 for the fiscal year ended June 30, 2009. Gross profit margin from Jintai’s sales was approximately 45.2% and 44.0% for the fiscal year ended June 30, 2010 and 2009, respectively. The increase in gross profit margin was primarily due to the increased sales in higher margin flowers compared to a year ago and discontinued production of less profitable products such as tomato, bitter melon and eggplant.
52
Selling Expenses
Our selling expenses consist primarily of salaries of sales personnel, advertising and promotion expenses, freight charges and related compensation. Selling expenses were $2,203,345, or 4.2%, of net sales for the fiscal year ended June 30, 2010 as compared to $1,412,101, or 4.0%, of net sales for the fiscal year ended June 30, 2009, an increase of $791,244, or 56.0%. The increase was primarily attributable to the increase in shipping costs and marketing expenses due to our recently introduced granular based fertilizer products and new branding strategy with “authorized distributors/retailers”.
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. General and administrative expenses were $3,822,234, or 7.3%, of net sales, for the fiscal year ended June 30, 2010, as compared to $1,993,817, or 5.7%, of net sales for the fiscal year ended June 30, 2009, an increase of $1,828,417. The increase was mainly attributable to increased salaries and a non-cash stock compensation expense of $1,695,449 as a result of our issuance of options and restricted stock to our directors, officers and employees under our 2009 Equity Incentive Plan.
Total Other Income (Expenses)
Total other income (expenses) consisted of income from subsidies received from the PRC government, interest income, interest expenses and bank charges. Total other income for the fiscal year ended June 30, 2010 was $157,653, as compared to total other expenses of $294,043 for the fiscal year ended June 30, 2009, an increase of $451,696. The increase was mainly attributable to the increase in interest income from the proceeds of the equity financings in 2009 and the decrease in interest expenses due to repayment of our outstanding short-term loans.
Income Taxes
Jinong is subject to a preferred tax rate of 15% as a result of its business being classified as a High-Tech project under the PRC Enterprise Income Tax Law (“EIT”) that became effective on January 1, 2008. Jinong incurred income tax expenses of $3,794,515 for the fiscal year ended June 30, 2010, as compared to $2,331,548 for fiscal 2009, an increase of $1,462,967, or 62.7%, which was primarily attributable to our increased operating income.
Jintai has been exempt from paying income tax since its formation as it produces products which fall into the tax exemption list set out in the EIT. This exemption is expected to last as long as the applicable provisions of the EIT do not change.
Net Income
Net income for the fiscal year ended June 30, 2010 was $21,289,758, an increase of $6,825,337, or 47.2%, compared $14,464,422 for the fiscal year ended June 30, 2009. The increase was attributable to the increase in gross profit. Net income as a percentage of total net sales was approximately 40.9% and 41.1% for the fiscal year ended June 30, 2010 and 2009, respectively.
Discussion of Segment Profitability Measures
As of June 30, 2011, we were engaged in the following businesses: the production and sale of fertilizers through Jinong, Gufeng and Tianjuyuan, and the production and sale of high-quality agricultural products and research and development on new fertilizer products by Jintai. Upon the completion of its research and development center, Yuxing’s main business will be to conduct research and development on new fertilizer products and sell high-quality agricultural products. For financial reporting purposes, our operations were organized into four business segments: fertilizer products (Jinong), fertilizer products (Gufeng and Tianjuyuan), agricultural products (Jintai) and research and development (Yuxing). Each of the segments has its own annual budget with regard to development, production and sales.
53
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 June 30, 2011, cash and cash equivalents were $65,606,413, an increase of $3,270,976 and $44,539,990, or 5.2% and 250.3%, respectively, from $62,335,437 and 17,795,447 as of June 30, 2010 and 2009, respectively.
We intend to use some of the remaining net proceeds from the Public Offerings (approximately $8.5 million), as well as other working capital if required, to acquire new businesses, upgrade production lines and complete Yuxing’s new greenhouse facilities for agriculture products located on 88 acres of land in Hu County, 18 kilometers southeast of Xi’an city. We believe that we have sufficient cash on hand and positive projected cash flow from operations to support our business growth for the next twelve months to the extent we do not have further significant acquisitions or expansions. However, if events or circumstances occur and we do not meet our operating plan as expected, we may be required to seek additional capital and/or to reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives. Notwithstanding the foregoing, we may seek additional financing as necessary for expansion purposes and when we believe market conditions are most advantageous, which may include additional debt and/or equity financings. There can be no assurance that any additional financing will be available on acceptable terms, if at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.
The following table sets forth a summary of our cash flows for the periods indicated:
|
Fiscal Year Ended June 30,
|
||||||||||||
|
2011
|
2010
|
2009
|
||||||||||
|
Net cash provided by operating activities
|
$ | 33,647,469 | $ | 12,232,035 | $ | 7,184,086 | ||||||
|
Net cash used in investing activities
|
(32,966,702 | ) | (16,524,693 | ) | (5,097,721 | ) | ||||||
|
Net cash provided by financing activities
|
- | 48,451,548 | (926,957 | ) | ||||||||
|
Effect of exchange rate change on cash and cash equivalents
|
2,590,209 | 381,100 | 23,623 | |||||||||
|
Net increase in cash and cash equivalents
|
3,270,976 | 44,539,990 | 1,183,031 | |||||||||
|
Cash and cash equivalents, beginning balance
|
62,335,437 | 17,795,447 | 16,612,416 | |||||||||
|
Cash and cash equivalents, ending balance
|
$ | 65,606,413 | $ | 62,335,437 | $ | 17,795,447 | ||||||
Operating Activities
Net cash provided by operating activities was $33,647,469 for the fiscal year ended June 30, 2011, an increase of $21,415,434 and $5,047,949, or 175.1% and 70.3%, respectively, from the $12,232,035 and $7,184,086 net cash provided by operating activities for fiscal years 2010 and 2009, respectively. The increase was mainly due to an increase in net income slightly supplemented by a decrease in working capital accounts.
Investing Activities
Net cash used in investing activities in the fiscal year ended June 30, 2011 was $32,966,702, which represents $22,740,058 used to purchase equipment and $6,720,539 used to acquire Gufeng. The net cash used in investing activities for fiscal year 2010 was $16,524,693, which represents $10,719,653 used to purchase the land use right for Yuxing’s new greenhouse facility and a $14,092,793 increase in property and equipment, $8,287,753 of which was transferred from construction in progress. The net cash used in investing activities for fiscal year 2009 was $5,097,721, most of which was a $4,485,059 increase in construction in progress.
Financing Activities
Net cash provided by financing activities in the fiscal year ended June 30, 2011 totaled $0. The net cash provided by financing activities for the same period in 2010 and 2009 was $48,451,548 and $926,957, mainly due to the Public Offerings.
54
At June 30, 2011, 2010 and 2009, our loans payable were as follows:
|
30-Jun-11
|
June 30, 2010* |
June 30, 2009*
|
||||||||||
|
Short term loans payable:
|
$ | 4,099,550 | $ | - | $ | 3,170,290 | ||||||
|
Total
|
$ | 4,099,550 | $ | - | $ | 3,170,290 | ||||||
*Excludes Gufeng, which was acquired in July 2010.
None of our officers, directors or shareholders has made commitments to us for financing in the form of advances, loans or credit lines.
Accounts Receivable
We had accounts receivable of $17,517,625 as of June 30, 2011, as compared to $15,571,888 and $8,167,715 as of June 30, 2010 and 2009, respectively, an increase of $1,954,737 and $7,404,173, or 12.5% and 90.7%, respectively. The increase in 2011 was primarily due to the acquisition of Gufeng in accounts receivable on the date of acquisition and the increase in fertilizer sales in fiscal year 2011. The increase in 2010 was primarily due to extended credit terms to distributors due to down turn in economy.
Our allowance for doubtful accounts was $337,801 as of June 30, 2011, as compared to $193,403 and $119,178 as of June 30, 2010 and 2009, respectively, an increase of $144,398 and $74,225, or 74.7% and 62.3%, respectively. The increase in the allowance for doubtful accounts was due to an increase in receivables.
Inventories
We had an inventory of $23,732,404 as of June 30, 2011, as compared to $11,262,647 and $7,162,249 as of June 30, 2010 and 2009, an increase of $12,469,757 and $4,100,398, or 110.7% and 57.3%. This increase was mainly due to the acquisition of Gufeng, which had an inventory of $9,954,495 as of June 30, 2011. Inventories increased in the other subsidiaries to meet the increased demand for both of our fertilizer products and agricultural products. Inventories in other subsidiaries were $13,777,909 as of June 30, 2011.
Accounts Payable
We had accounts payable of $5,981,703 as of June 30, 2011 as compared to $328,124 and $926,883 as of June 30, 2010 and 2009, representing an increase (decrease) of $5,653,579 and ($598,759), or 1,723.0% and (64.6%), of which $4,006,895 was attributable to Gufeng. The remaining increase in accounts payable is due to increased inventories purchased on credit.
Advances to Suppliers
We had advances to suppliers of $11,487,896 as of June 30, 2011 as compared to $221,280 and $95,255 as of June 30, 2010 and 2009, respectively, representing an increase of $11,266,616 and $126,025, or 5,091.6% and 132.3%, respectively. The amount of Advances to Suppliers is mainly due to Gufeng. Gufeng’s compound fertilizer business is seasonal, which may result in carrying significant amounts of inventory and seasonal variations in working capital. To ensure our ability to deliver compound fertilizer to the distributor timely prior to the planting season, we need to have sufficient raw material in stock to feed the production. To build up the inventory, we typically make advance payment to the supplier to secure the supply of raw material of basic fertilizer. Our inability to predict future seasonal fertilizer demand accurately may result in excess inventory or product shortages.
Unearned Revenue
We had unearned revenue of $11,059,313 as of June 30, 2011 as compared to $41,645 and $24,000 as of June 30, 2010 and 2009, respectively, representing an increase of $11,017,668 and $17,645, or 26,456.2% and 73.5%, respectively. This increase was mainly due to the acquisition of Gufeng, which had unearned revenues of $10,253,589 as of June 30, 2011.
55
Tax Payable
We had taxes payable of $7,004,865 as of June 30, 2011 as compared to $2,304,382 and $2,887,828 as of June 30, 2010 and 2009, respectively, representing an increase (decrease) of $4,845,891 and ($583,446), or 210.3% and (20.2%), respectively. This increase was mainly due to the acquisition of Gufeng, which had taxes payable of $4,159,717 as of June 30, 2011.
Contractual Obligations
At June 30, 2011, our contractual obligations are as follows:
|
Payments Due by Period
|
||||||||||||||||||||
|
Less Than
|
One to
|
Three to
|
More Than
|
|||||||||||||||||
|
One Year
|
Three Years
|
Five Years
|
Five Years
|
Total
|
||||||||||||||||
|
Short term loans
|
$ | 4,099,550 | $ | - | $ | - | $ | - | $ | 4,099,550 | ||||||||||
|
Operating lease obligations
|
34,375 | 34,481 | 29,586 | 210,911 | 309,353 | |||||||||||||||
|
Total
|
$ | 4,133,925 | $ | 34,481 | $ | 29,586 | $ | 210,911 | $ | 4,408,903 | ||||||||||
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See Note 2 to our consolidated financial statements, “Basis of Presentation and Summary of Significant Accounting Policies.” We believe that the following paragraphs reflect the more critical accounting policies that currently affect our financial condition and results of operations:
Use of estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amount of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those estimates.
Revenue recognition
Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, we have no other significant obligations and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
Our revenue consists of invoiced value of goods, net of a value-added tax (VAT). No product return or sales discount allowance is made as products delivered and accepted by customers are normally not returnable and sales discounts are normally not granted after products are delivered.
Cash and cash equivalents
For statement of cash flows purposes, we consider all cash on hand and in banks, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents.
56
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 that is outstanding for more than three months will be accounted as allowance for bad debts.
Segment reporting
FASB ASC 280, (previously SFAS No. 131,
Segment Reporting
) requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
During the year ended June 30, 2011, we were organized into four main business segments: fertilizer production (Jinong), fertilizer production (Gufeng and Tianjuyuan), agricultural products production (Jintai) and future research and development center (Yuxing).
Disclosures About Market Risk
We may be exposed to changes in financial market conditions in the normal course of business. Market risk generally represents the risk that losses may occur as a result of movements in interest rates and equity prices. We currently do not use financial instruments in the normal course of business that are subject to changes in financial market conditions.
Currency Fluctuations and Foreign Currency Risk
Substantially all of our revenues and expenses are denominated in RMB. However, we use the U.S. dollar for financial reporting purposes. Conversion of RMB into foreign currencies is regulated by the People’s Bank of China through a unified floating exchange rate system. Although the PRC government has stated its intention to support the value of RMB, there can be no assurance that such exchange rate will not again become volatile or that RMB will not devalue significantly against the U.S. dollar. Exchange rate fluctuations may adversely affect the value, in U.S. dollar terms, of our net assets and income derived from our operations in the PRC.
Our reporting currency is the U.S. dollar. Except for the U.S. holding companies, all of our consolidated revenues, consolidated costs and expenses, and our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. dollars and RMB. If the RMB depreciates against the U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and shareholders’ equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of shareholders’ equity. As of June 30, 2011, our accumulated other comprehensive income was $10.9 million. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk. The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July 2005, the Renminbi has not been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in the Renminbi exchange rate and lessen intervention in the foreign exchange market.
57
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 June 30, 2011 and June 30, 2010 was $4.1 million and $0, respectively. We are exposed to interest rate risk primarily with respect to our short-term bank loans. Although the interest rates, which are based on the banks’ prime rates with respect to our short-term loans are fixed for the terms of the loans, the terms are typically three to twelve months for short-term bank loans and interest rates are subject to change upon renewal. There were no material changes in interest rates for short-term bank loans renewed during the three months ended June 30, 2011. The original loan term on average is one year, and the remaining average life of the short term-loans is nine months.
Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.
Credit Risk
We have not experienced significant credit risk, as most of our customers are long-term customers with superior payment records. Our receivables are monitored regularly by our credit managers.
Inflation Risk
Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.
|
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
Balance sheets, as of June 30, 2011 and 2010, and statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2011, 2010, and 2009, together with the related notes and the reports of independent registered public accounting firms, are set forth on the “F” pages of this report.
|
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
None.
|
ITEM 9A.
|
CONTROLS AND PROCEDURES
|
Disclosure Controls and Procedures
At the conclusion of the fiscal year ended June 30, 2011 we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective and adequately designed to ensure that the information required to be disclosed by us in the reports we submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms and that such information was accumulated and communicated to our Chief Executive Officer and Chief Financial Officer, in a manner that allowed for timely decisions regarding required disclosure.
58
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected in a timely manner. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. In addition, the design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Therefore, any current evaluation of controls cannot and should not be projected to future periods.
Management assessed our internal control over financial reporting as of the year ended June 30, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the report entitled "Internal Control-Integrated Framework." The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Based on this assessment using the COSO criteria, management has identified the following material weaknesses related to our consistent and timely performance and review of accounting reconciliations, and journal entries. Specifically, deficiencies were noted in the following areas: a) inconsistent performance of account reconciliations and analysis for several significant accounts on a timely basis; and b) inadequate controls over the identification and accounting for non-routine transactions. As a result, adjustments were required in fixed assets and deprecation, accrued liabilities and related income statement accounts in our consolidated financial statements included in this Annual Report on Form 10-K. The combined effect of the significant deficiencies and adjustments noted was determined to be a material weakness in relation to the preparation of such consolidated financial statements.
As a result of the existence of these material weaknesses, our chief executive officer and our chief financial officer have concluded that we did not maintain effective control over financial reporting as of June 30, 2011, based on the criteria in Internal Control — Integrated Framework.
To remediate the material weakness described above, as previously reported in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, we engaged third party accounting consultants to assist us with the timely and accurate preparation, review and completion of our financial statements. Additionally, as previously disclosed in our Quarterly Report for the quarter ended December 31, 2010, we engaged Ernst & Young (China) Advisory Limited (“Ernst & Young”) to review our practices and advise us on potential improvements in our internal controls over financial reporting and compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. Ernst & Young has helped us establish improved internal controls over financial reporting which we now follow.
59
We are continuing to work with our third party accounting consultants and Ernst & Young to implement new measures to address the internal control deficiencies described above and will continue to evaluate and may in the future implement additional measures, including the following:
|
·
|
We have improved our internal control environment by establishing policies and procedures of transaction level and entity.
|
|
·
|
We have implemented a financial closing process check list including major book closure steps to perform consolidation and reviews.
|
|
·
|
We plan to strengthen our financial team by employing more qualified accountants to enhance the quality of our financial reporting preparation.
|
The effectiveness of our internal control over financial reporting as of June 30, 2011 has been audited by Kabani & Company, Inc., an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
Except for the continuing improvement efforts described above, there were no changes in our internal control over financial reporting that occurred during our fourth fiscal quarter ended June 30, 2011 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
China Green Agriculture, Inc. and its subsidiaries
We have audited China Green Agriculture, Inc. and its subsidiaries’ (the “Company”) internal control over financial reporting as of June 30, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
60
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. The Company had significant deficiencies related to consistent and timely performance and review of accounting reconciliations, and journal entries. Specifically, deficiencies were noted in the following areas: a) inconsistent performance of account reconciliations and analysis for several significant accounts on a timely basis; and b) inadequate controls over the identification and accounting for non-routine transactions. As a result, adjustments were required in fixed assets and deprecation, accrued liabilities and related income statement accounts in the consolidated financial statements. The combined effect of the significant deficiencies and adjustments noted was determined to be a material weakness in relation to the preparation of financial statements. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the June 30, 2011 financial statements, and this report does not affect our report dated September 12, 2011 on those financial statements.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, China Green Agriculture, Inc. and its subsidiaries has not maintained effective internal control over financial reporting as of June 30, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets and the related statements of income, stockholders’ equity and comprehensive income, and cash flows of China Green Agriculture, Inc. and its subsidiaries, and our report dated September 12, 2011 expressed an unqualified opinion.
/s/ KABANI & COMPANY, INC
CERTIFIED PUBLIC ACCOUNTANTS
Los Angeles, CA
September 12, 2011
None.
61
|
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by this Item is incorporated herein by reference to the section entitled “Directors and Executive Officers and Corporate Governance” of our 2011 Proxy Statement.
|
ITEM 11.
|
EXECUTIVE COMPENSATION
|
The information required by this Item is incorporated herein by reference to the section entitled “Executive Compensation” of our 2011 Proxy Statement.
|
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
|
The information required by this Item is incorporated herein by reference to the section entitled “Security Ownership of Certain Beneficial Owners and Management and Related Matters” of our 2011 Proxy Statement.
|
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
The information required by this Item is incorporated herein by reference to the section entitled “Certain Relationship of Certain Beneficial Owners and Management and Related Matters” of our 2011 Proxy Statement.
|
ITEM 14.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
The information required by this Item is incorporated herein by reference to the section entitled "Principal Accounting Fees and Services" of our 2011 Proxy Statement.
|
ITEM 15.
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
(a) (1) The following documents are filed as part of this report:
Financial Statements
The following financial statements of China Green Agriculture, Inc. and Reports of Independent Registered Public Accounting Firms are presented in the “F” pages of this report:
|
Report of Independent Registered Public Accounting Firm
|
F- 1
|
|
|
Consolidated Balance Sheets - as of June 30, 2011 and 2010
|
F- 2
|
|
|
Consolidated Statements of Income and Other Comprehensive Income - for the Years ended June 30, 2011 and 2010
|
F- 3
|
|
|
Consolidated Statements of Shareholders’ Equity - for the Years ended June 30, 2011 and 2010
|
F- 4
|
|
|
Consolidated Statements of Cash Flows - for the Years ended June 30, 2011 and 2010
|
F- 5
|
|
|
Notes to Consolidated Financial Statements
|
F-6 - F- 27
|
62
(a) (2) The following financial statement schedule is filed as part of this report:
Schedule II: Valuation and Qualifying Accounts
Allowance for Doubtful Accounts: Accounts Receivable
|
Balance at
|
Charged to
|
Deduction
|
Balance at
|
|||||||||||||
|
Beginning
|
Costs and
|
From
|
End
|
|||||||||||||
|
For the Years Ended June 30,
|
of Year
|
Expenses
|
Reserves
|
of Year
|
||||||||||||
|
2009
|
$ | - | $ | 119,178 | $ | - | $ | 119,178 | ||||||||
|
2010
|
$ | 119,178 | $ | 74,224. | $ | - | $ | 193,402 | ||||||||
|
2011
|
$ | 193,402 | $ | 144,398 | $ | - | $ | 337,801 | ||||||||
Allowance for Doubtful Accounts: Advance to Suppliers
|
Balance at
|
Charged to
|
Deduction
|
Balance at
|
|||||||||||||
|
Beginning
|
Costs and
|
From
|
End
|
|||||||||||||
|
For the Years Ended June 30,
|
of Year
|
Expenses
|
Reserves
|
of Year
|
||||||||||||
|
2009
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
2010
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
2011
|
$ | - | $ | 549,570 | $ | - | $ | 549,570 | ||||||||
(b) Exhibits
See the Exhibit Index following the signature page of this report, which Index is incorporated herein by reference.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: September 12, 2011
|
By:
|
/s/ Tao Li
|
|
Tao Li, President and CEO
|
||
|
(principal executive officer)
|
||
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
September 12, 2011
|
/s/ Tao Li
|
|
|
Tao Li, Chairman of the Board of Directors, President and CEO (principal executive officer)
|
||
|
|
||
|
September 12, 2011
|
/s/ Ken Ren
|
|
|
Ken Ren, Chief Financial Officer
|
||
|
(principal financial officer and principal
|
||
|
accounting officer)
|
||
|
September 12, 2011
|
/s/ Yu Hao
|
|
|
Yu Hao, Director
|
||
|
|
||
|
September 12, 2011
|
/s/ Lianfu Liu
|
|
|
Lianfu Liu, Director
|
||
|
September 12, 2011
|
/s/ Yizhao Zhang
|
|
|
Yizhao Zhang, Director
|
||
|
September 12, 2011
|
/s/ Robert B. Fields
|
|
|
Robert B. Fields, Director
|
S-1
China Green Agriculture, Inc.
Exhibit Index to Annual Report on Form 10-K
For the Year Ended June 30, 2011
|
3.1
|
Articles of Incorporation (incorporated herein by reference to the Company’s Quarterly Report on Form 10-QSB, for the quarter ended September 30, 2007, filed with the SEC on November 9, 2007, Exhibit 3.1).
|
|
3.2
|
Certificate of Change filed with the Secretary of State of the State of Nevada on December 18, 2007 (incorporated herein by reference to the Company’s Current Report on Form 8-K filed with the SEC on January 2, 2008, Exhibit 4.2).
|
|
3.3
|
Certificate of Correction (incorporated herein by reference to the Company’s Registration Statement on Form S-1 filed with the SEC on February 8, 2008, Exhibit 4.1).
|
|
3.4
|
Articles of Merger (incorporated herein by reference to the Company’s Current Report on Form 8-K, filed February 5, 2008, Exhibit 3.1).
|
|
3.5
|
Bylaws (incorporated herein by reference to the Company’s Quarterly Report on Form 10-QSB, for the quarter ended September 30, 2007, filed with the SEC on November 9, 2007, Exhibit 3.2).
|
|
4.1
|
Specimen Common Stock Certificate (incorporated herein by reference to the Company’s Registration Statement on Form S-3 filed with the SEC on June 8, 2009, Exhibit 4.1).
|
|
10.1
|
Employment Agreement, dated January 16, 2008, by and between Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd. and Mr. Tao Li (incorporated herein by reference to the Company’s Annual Report on Form 10-K filed with the SEC on September 7, 2010).
|
|
10.2
|
Employment Agreement, dated June 21, 2010, by and between the Company and Mr. Ken Ren (Incorporated herein by reference to our Current Report on Form 8-K filed with the SEC on June 25, 2010)
|
|
10.3
|
Share Transfer Agreement, dated July 1, 2010, by and between Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd., Qing Xin Jiang and Qiong Jia (Incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on July 7, 2010).
|
|
10.4
|
Supplementary Agreement, dated July 1, 2010, by and between Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd., Qing Xin Jiang and Qiong Jia (Incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on July 7, 2010).
|
|
10.5
|
Employment Agreement, dated July 1, 2010, by and between Beijing Gufeng Chemical Products Co., Ltd. and Qing Xin Jiang.
|
|
10.6
|
Non-Competition Agreement, dated July 1, 2010 by and between Beijing Gufeng Chemical Products Co., Ltd. and Mr. Qing Xin Jiang.
|
|
10.7
|
Non-Competition Agreement, dated July 1, 2010 by and between Beijing Gufeng Chemical Products Co., Ltd. and Ms Qiong Jia.
|
|
10.8
|
Form of Restricted Stock Grant Agreement (Incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on January 11, 2010).
|
|
10.9
|
Form of Non-Qualified Stock Option Grant Agreement (Incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on January 11, 2010).
|
|
10.10
|
Offer Letter dated March 28, 2011 between China Green Agriculture, Inc. and Yizhao Zhang. (Incorporated herein by reference to the Quarterly Report on Form 10-Q filed with the SEC on May 10, 2011)
|
E-1
|
10.11
|
Offer Letter dated March 28, 2011 between China Green Agriculture, Inc. and Lianfu Liu. (Incorporated herein by reference to the Quarterly Report on Form 10-Q filed with the SEC on May 10, 2011)
|
|
10.12
|
Offer Letter dated February 8, 2011 between China Green Agriculture, Inc. and Robert B. Fields. (Incorporated herein by reference to the Quarterly Report on Form 10-Q filed with the SEC on May 10, 2011)
|
|
10.13
|
Project Construction Contract dated August 10, 2010 between Xi’an Hu County Yuxing Agriculture Science & Technology Co., Ltd. and Xi’an Kingtone Information Technology Co., Ltd. (Incorporated herein by reference to the Quarterly Report on Form 10-Q filed with the SEC on November 12, 2010)
|
|
10.14
|
Lease Agreement dated September 30, 2010 between Shaanxi TechTeam Jinong Humid Acid Product Co., Ltd. and Xi’an Kingtone Information Technology Co., Ltd. (Incorporated herein by reference to the Quarterly Report on Form 10-Q filed with the SEC on November 12, 2010)
|
|
14.1
|
Amended and Restated Code of Ethics. (Incorporated herein by reference to the Quarterly Report on Form 10-Q filed with the SEC on November 12, 2010)
|
|
21.1
|
List of Subsidiaries of the Company.
|
|
23.1
|
Consent of Kabani & Company, Inc., Independent Registered Public Accounting Firm.
|
|
31.1
|
Certification of CEO pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification of CFO pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
E-2
Contents
|
Page
|
||
|
Report of Independent Registered Public Accounting Firms
|
||
|
Report of Kabani & Company, Inc.
|
F-1
|
|
|
Financial Statements:
|
||
|
Consolidated Balance Sheets as of June 30, 2011 and 2010
|
F-2
|
|
|
Consolidated Statements of Income and Other Comprehensive Income for the years ended June 30, 2011, 2010 and 2009
|
F-3
|
|
|
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2011, 2010 and 2009
|
F-4
|
|
|
Consolidated Statements of Cash Flows for the years ended June 30, 2011, 2010 and 2009
|
F-5
|
|
|
Notes to Consolidated Financial Statements
|
|
F-6
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
China Green Agriculture Inc. and its subsidiaries
We have audited the accompanying consolidated balance sheets of China Green Agriculture, Inc. and its subsidiaries (the “Company”) as of June 30, 2011 and 2010, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 2011. Our audits also included the financial statement schedule listed in the Index at Item 15(a) 2. The Company’s management is responsible for these financial statements and schedules. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Green Agriculture, Inc. and its subsidiaries as of June 30, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2011 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), China Green Agriculture, Inc. and subsidiaries’ internal control over financial reporting as of June 30, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 12 expressed an adverse opinion.
/s/ KABANI & COMPANY, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Los Angeles, CA
September 12, 2011
F-1
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
AS OF JUNE 30, 2011 AND 2010
|
As of June 30,
|
||||||||
|
2011
|
2010
|
|||||||
|
ASSETS
|
||||||||
|
Current Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 65,606,413 | $ | 62,335,437 | ||||
|
Accounts receivable, net
|
17,517,625 | 15,571,888 | ||||||
|
Inventories
|
23,732,404 | 11,262,647 | ||||||
|
Other current assets
|
537,126 | 86,824 | ||||||
|
Advances to suppliers
|
11,487,896 | 221,280 | ||||||
|
Total Current Assets
|
118,881,464 | 89,478,076 | ||||||
|
Plant, Property and Equipment, Net
|
66,211,441 | 29,368,515 | ||||||
|
Construction In Progress
|
4,662,039 | 257,077 | ||||||
|
Other Assets - Non Current
|
150,169 | 1,098,704 | ||||||
|
Intangible Assets, Net
|
28,508,629 | 11,585,570 | ||||||
|
Goodwill
|
4,957,245 | - | ||||||
|
Total Assets
|
$ | 223,370,987 | $ | 131,787,942 | ||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current Liabilities
|
||||||||
|
Accounts payable
|
$ | 5,981,703 | $ | 328,124 | ||||
|
Unearned revenue
|
11,059,313 | 41,645 | ||||||
|
Accrued expenses and other payables
|
3,282,353 | 507,705 | ||||||
|
Amount due to related parties
|
69,962 | 68,164 | ||||||
|
Taxes payable
|
7,004,865 | 2,304,382 | ||||||
|
Short term loans
|
4,099,550 | - | ||||||
|
Total Current Liabilities
|
31,497,746 | 3,250,020 | ||||||
|
Commitment and Contingencies
|
||||||||
|
Stockholders' Equity
|
||||||||
|
Preferred Stock, $.001 par value, 20,000,000 shares authorized, Zero shares issued and outstanding
|
- | - | ||||||
|
Common stock, $.001 par value, 115,197,165 shares authorized, 26,845,860 and 24,572,329, shares issued and outstanding as of June 30, 2011 and 2010, respectively
|
26,846 | 24,573 | ||||||
|
Additional paid-in capital
|
98,627,482 | 75,755,682 | ||||||
|
Statutory reserve
|
10,027,721 | 5,864,648 | ||||||
|
Retained earnings
|
72,287,436 | 43,536,408 | ||||||
|
Accumulated other comprehensive income
|
10,903,756 | 3,356,611 | ||||||
|
Total Stockholders' Equity
|
191,873,241 | 128,537,922 | ||||||
|
Total Liabilities and Stockholders' Equity
|
$ | 223,370,987 | $ | 131,787,942 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-2
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED JUNE 30, 2011, 2010, AND 2009
|
For the Years Ended June 30,
|
||||||||||||
|
2011
|
2010
|
2009
|
||||||||||
|
Sales
|
||||||||||||
|
Jinong
|
$ | 65,629,265 | $ | 45,816,377 | $ | 28,889,131 | ||||||
|
Gufeng
|
107,081,018 | - | - | |||||||||
|
Jintai
|
6,826,933 | 6,274,375 | 6,318,866 | |||||||||
|
Yuxing
|
180,750 | - | - | |||||||||
|
Net sales
|
179,717,966 | 52,090,752 | 35,207,997 | |||||||||
|
Cost of goods sold
|
||||||||||||
|
Jinong
|
26,449,117 | 17,700,532 | 11,173,236 | |||||||||
|
Gufeng
|
85,670,990 | - | - | |||||||||
|
Jintai
|
3,841,391 | 3,438,020 | 3,538,830 | |||||||||
|
Yuxing
|
136,433 | - | - | |||||||||
|
Cost of goods sold
|
116,097,931 | 21,138,552 | 14,712,066 | |||||||||
|
Gross profit
|
63,620,035 | 30,952,200 | 20,495,931 | |||||||||
|
Operating expenses
|
||||||||||||
|
Selling expenses
|
7,121,905 | 2,203,345 | 1,412,101 | |||||||||
|
General and administrative expenses
|
14,386,699 | 3,822,234 | 1,993,817 | |||||||||
|
Total operating expenses
|
21,508,604 | 6,025,579 | 3,405,918 | |||||||||
|
Income from operations
|
42,111,431 | 24,926,621 | 17,090,013 | |||||||||
|
Other income (expense)
|
||||||||||||
|
Other income (expense)
|
23,999 | (5,321 | ) | 3,455 | ||||||||
|
Interest income
|
282,727 | 275,449 | 334,948 | |||||||||
|
Interest expense
|
(466,912 | ) | (112,475 | ) | (632,446 | ) | ||||||
|
Total other income (expense)
|
(160,186 | ) | 157,653 | (294,043 | ) | |||||||
|
Income before income taxes
|
41,951,245 | 25,084,274 | 16,795,970 | |||||||||
|
Provision for income taxes
|
9,037,144 | 3,794,516 | 2,331,548 | |||||||||
|
Net income
|
32,914,101 | 21,289,758 | 14,464,422 | |||||||||
|
Other comprehensive income
|
||||||||||||
|
Foreign currency translation gain
|
7,547,145 | 899,481 | 52,711 | |||||||||
|
Comprehensive income
|
$ | 40,461,246 | $ | 22,189,239 | $ | 14,517,133 | ||||||
|
Basic weighted average shares outstanding
|
25,929,517 | 23,468,246 | 18,478,474 | |||||||||
|
Basic net earnings per share
|
$ | 1.27 | $ | 0.91 | $ | 0.78 | ||||||
|
Diluted weighted average shares outstanding
|
25,929,517 | 23,468,246 | 18,532,591 | |||||||||
|
Diluted net earnings per share
|
1.27 | 0.91 | 0.78 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2011, 2010 AND 2009
|
Additional
|
Accumulated Other
|
Total
|
||||||||||||||||||||||||||
|
Number
|
Common
|
Paid In
|
Statutory
|
Retained
|
Comprehensive
|
Stockholders'
|
||||||||||||||||||||||
|
Of Shares
|
Stock
|
Capital
|
Reserve
|
Earnings
|
Income
|
Equity
|
||||||||||||||||||||||
|
BALANCE, JUNE 30, 2008
|
12,068,086 | 12,069 | 1,200,077 | 1,882,797 | 11,764,079 | 2,404,419 | 17,263,441 | |||||||||||||||||||||
|
Net income for the year ended June 30, 2009
|
- | - | - | - | 14,464,422 | - | 14,464,422 | |||||||||||||||||||||
|
Stock options compensation
|
- | - | 155,804 | - | - | - | 155,804 | |||||||||||||||||||||
|
Issuance of stock for liquidated damages
|
213,483 | 213 | 704,281 | - | - | - | 704,494 | |||||||||||||||||||||
|
Transfer to statutory reserve
|
- | - | - | 1,585,733 | (1,585,733 | ) | - | - | ||||||||||||||||||||
|
Accumulative other comprehensive loss
|
- | - | - | - | - | 52,711 | 52,711 | |||||||||||||||||||||
|
BALANCE, JUNE 30, 2009
|
12,281,569 | 12,282 | 2,060,162 | 3,468,530 | 24,642,768 | 2,457,130 | 32,640,872 | |||||||||||||||||||||
|
Net income for the year ended June 30, 2010
|
- | - | - | - | 21,289,758 | - | 21,289,758 | |||||||||||||||||||||
|
Reclass PIPE shares subject to redemption
|
6,313,617 | 6,314 | 20,512,941 | - | - | - | 20,519,255 | |||||||||||||||||||||
|
Stock issued in relation to fund raising
|
5,627,564 | 5,628 | 51,487,207 | - | - | - | 51,492,835 | |||||||||||||||||||||
|
Issuance of stock options for compensation
|
272,161 | 272 | 1,695,449 | - | - | - | 1,695,721 | |||||||||||||||||||||
|
Exercised of stock options-cashless
|
77,418 | 77 | (77 | ) | - | - | - | - | ||||||||||||||||||||
|
Transfer to statutory reserve
|
- | - | - | 2,396,118 | (2,396,118 | ) | - | - | ||||||||||||||||||||
|
Accumulative other comprehensive loss
|
- | - | - | - | - | 899,481 | 899,481 | |||||||||||||||||||||
|
BALANCE, JUNE 30, 2010
|
24,572,329 | 24,573 | 75,755,682 | 5,864,648 | 43,536,408 | 3,356,611 | 128,537,922 | |||||||||||||||||||||
|
Net income for the year ended ended June 30, 2011
|
- | - | - | - | 32,914,101 | - | 32,914,101 | |||||||||||||||||||||
|
Stock issued in relation to Acquisition
|
2,275,931 | 2,275 | 19,297,619 | - | - | - | 19,299,894 | |||||||||||||||||||||
|
Stock-based compensation
|
- | - | 3,605,235 | - | - | - | 3,605,235 | |||||||||||||||||||||
|
Forefeiture of shares issued for services
|
(2,400 | ) | (2 | ) | (31,054 | ) | - | - | - | (31,056 | ) | |||||||||||||||||
|
Transfer to statutory reserve
|
- | - | - | 4,163,073 | (4,163,073 | ) | - | - | ||||||||||||||||||||
|
Accumulative other comprehensive loss
|
- | - | - | - | - | 7,547,145 | 7,547,145 | |||||||||||||||||||||
|
BALANCE, JUNE 30, 2011
|
26,845,860 | $ | 26,846 | $ | 98,627,482 | $ | 10,027,721 | $ | 72,287,436 | $ | 10,903,756 | $ | 191,873,241 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED JUNE 30, 2011, 2010, AND 2009
|
For the Years Ended June 30,
|
||||||||||||
|
2011
|
2010
|
2009
|
||||||||||
|
Cash flows from operating activities
|
||||||||||||
|
Net income
|
$ | 32,914,101 | $ | 21,289,758 | $ | 14,464,422 | ||||||
|
Adjustments to reconcile net income to net cash
provided by operating activities
|
||||||||||||
|
Issuance of equity for compensation
|
3,605,235 | 1,695,449 | 155,804 | |||||||||
|
Cancelation of previously issued shares for services
|
(31,056 | ) | - | - | ||||||||
|
Depreciation
|
4,161,068 | 2,310,596 | 1,494,489 | |||||||||
|
Amortization
|
1,587,190 | 287,521 | 108,525 | |||||||||
|
Decrease / (Increase) in current assets, net of effects from acquisitions:
|
||||||||||||
|
Accounts receivable
|
(838,962 | ) | (7,278,914 | ) | (4,570,071 | ) | ||||||
|
Other receivables
|
(414,302 | ) | 50,286 | (13,234 | ) | |||||||
|
Inventories
|
6,765,750 | (4,006,562 | ) | (3,166,338 | ) | |||||||
|
Advances to suppliers
|
(9,390,123 | ) | (124,298 | ) | 418,072 | |||||||
|
Other assets
|
(146,674 | ) | (44,648 | ) | 10,875 | |||||||
|
(Decrease) / Increase in current liabilities, net of effects from acquisitions:
|
||||||||||||
|
Accounts payable
|
(494,063 | ) | (602,750 | ) | 693,897 | |||||||
|
Unearned revenue
|
(8,875,835 | ) | 17,304 | (65,037 | ) | |||||||
|
Tax payables
|
4,467,368 | (606,318 | ) | (2,996,862 | ) | |||||||
|
Other payables and accrued expenses
|
337,772 | (755,389 | ) | 649,544 | ||||||||
|
Net cash provided by operating activities
|
33,647,469 | 12,232,035 | 7,184,086 | |||||||||
|
Cash flows from investing activities
|
||||||||||||
|
Purchase of plant, property, and equipment
|
(22,740,118 | ) | (14,092,793 | ) | (612,662 | ) | ||||||
|
Purchase of intangible assets
|
- | (10,719,653 | ) | - | ||||||||
|
Acquisition of Gufeng, net of cash acquired
|
(6,720,539 | ) | - | - | ||||||||
|
Amounts (increase) decrease in construction in progress
|
(3,506,045 | ) | 8,287,753 | (4,485,059 | ) | |||||||
|
Net cash used in investing activities
|
(32,966,702 | ) | (16,524,693 | ) | (5,097,721 | ) | ||||||
|
Cash flows from financing activities
|
||||||||||||
|
Repayment of loan
|
(2,253,000 | ) | (3,178,477 | ) | (1,036,770 | ) | ||||||
|
Proceeds from loans
|
2,253,000 | - | - | |||||||||
|
Shares issuance cost
|
- | (2,232,302 | ) | - | ||||||||
|
Proceeds from issuance of shares
|
- | 53,778,748 | - | |||||||||
|
Restricted cash
|
- | 83,579 | 109,813 | |||||||||
|
Net cash provided by (used in) financing activities
|
- | 48,451,548 | (926,957 | ) | ||||||||
|
Effect of exchange rate change on cash and cash equivalents
|
2,590,209 | 381,100 | 23,623 | |||||||||
|
Net increase in cash and cash equivalents
|
3,270,976 | 44,539,990 | 1,183,031 | |||||||||
|
Cash and cash equivalents, beginning balance
|
62,335,437 | 17,795,447 | 16,612,416 | |||||||||
|
Cash and cash equivalents, ending balance
|
$ | 65,606,413 | $ | 62,335,437 | $ | 17,795,447 | ||||||
|
Supplement disclosure of cash flow information
|
||||||||||||
|
Interest expense paid
|
$ | 562,778 | $ | 112,475 | $ | 188,798 | ||||||
|
Income taxes paid
|
$ | 4,623,700 | $ | 3,081,886 | $ | 2,112,985 | ||||||
|
Issuance of 2,275,931 shares for acquisition of Gufeng
|
$ | 19,299,894 | $ | - | $ | - | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
China Green Agriculture, Inc. (the “Company”), 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. The Company was incorporated in 1987, but entered its current lines of business in December 2007.
The Company’s corporate structure as of June 30, 2011 is set forth in the diagram below:
Principle of consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Green New Jersey, Jinong, Jintai, Yuxing, Gufeng and Tianjuyuan. All significant inter-company accounts and transactions have been eliminated in consolidation.
Use of estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amount of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those results.
Subsequent Events
The Company evaluates events subsequent to the end of the fiscal quarter through the date the financial statements are filed with the Commission for recognition or disclosure in the consolidated financial statements. Events that provide additional evidence about material conditions that existed at the date of the balance sheet are evaluated for recognition in the consolidated financial statements. Events that provide evidence about conditions that did not exist at the date of the balance sheet but occurred after the balance sheet date are evaluated for disclosure in the notes to the consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Peoples 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 balance in such accounts as of June 30, 2011 was $64,642,264. There is no insurance securing these deposits in China. In addition, the Company also had $964,149 in cash in two banks in the United States as of June 30, 2011, with $500,000 secured by the U.S. Federal Deposit Insurance Corporation. Cash overdraft as of balance sheet date will be reflected as liabilities in the balance sheet. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.
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 June 30, 2011 and 2010, the Company had accounts receivable of $
17,517,625
and $15,571,888, net of allowance for doubtful accounts of $337,801 and $193,403, 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.
Property, plant and equipment
Property, plant and equipment are recorded at cost. Gains or losses on disposals are reflected as gain or loss in the year of disposal. The cost of improvements that extend the life of plant, property, and equipment are capitalized. These capitalized costs may include structural improvements, equipment, and fixtures. All ordinary repair and maintenance costs are expensed as incurred.
Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets:
|
Estimated Useful Life
|
|
|
Building
|
10-25 years
|
|
Agricultural assets
|
8 years
|
|
Machinery and equipment
|
5-15 years
|
|
Vehicles
|
3-5 years
|
Construction in Progress
Construction in progress represents the costs incurred in connection with the construction of buildings or new additions to the Company’s plant facilities. Costs classified to construction in progress include all costs of obtaining the asset and bringing it to the location and condition necessary for its intended use. No depreciation is provided for construction in progress until such time as the assets are completed and are placed into service. Interest incurred during construction is capitalized into construction in progress. All other interest is expensed as incurred.
Interest capitalized was $130,764 and $0 for the years ended June 30, 2011 and 2010 respectively.
The accompanying notes are an integral part of these consolidated financial statements.
F-7
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-Lived Assets
The Company tests long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
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. The Company has not recorded impairment of intangible assets as of June 30, 2011, 2010 and 2009, respectively.
Goodwill
Goodwill represents the excess of purchase price over the underlying net assets of businesses acquired. Under accounting requirements, goodwill is not amortized but is subject to annual impairment tests. As of June 30, 2011, the Company performed the required impairment review which resulted in no impairment adjustment.
Summary of changes in
goodwill by reporting segments is as follows:
|
Foreign
|
||||||||||||||||
|
Balance at
|
currency
|
Balance at
|
||||||||||||||
|
Entity
|
June 30, 2010
|
Acquisitions
|
adjustment
|
June 30, 2011
|
||||||||||||
|
Gufeng
|
$ | - | $ | 4,723,322 | $ | 233,923 | $ | 4,957,245 | ||||||||
Fair Value Measurement and Disclosures
Our accounting for Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
Level one — Quoted market prices in active markets for identical assets or liabilities;
Level two — Inputs other than level one inputs that are either directly or indirectly observable; and
Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The Company had no assets and liabilities measured at fair value at June 30, 2011.
The carrying values of cash and cash equivalents, trade and other receivables, trade and other payables approximate their fair values due to the short maturities of these instruments.
The accompanying notes are an integral part of these consolidated financial statements.
F-8
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue recognition
Sales revenue is recognized on the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. As of June 30, 2011 and 2010, the Company had unearned revenues of $
11,059,313
and $41,645, respectively.
The Company's 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.
Stock-Based Compensation
The costs of all employee stock options, as well as other equity-based compensation arrangements, are reflected in the consolidated financial statements based on the estimated fair value of the awards on the grant date. That cost is recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period). Stock compensation for stock granted to non-employees is determined as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably measured.
Income taxes
The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigations based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the year incurred. No significant penalties or interest relating to income taxes have been incurred during the years ended June 30, 2011, 2010 and 2009. GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.
Foreign currency translation
The reporting currency of the Company is the US dollar. The functional currency of the Company and Green New Jersey is the US dollar. The functional currency of the Chinese subsidiaries is the Chinese Yuan or Renminbi (“RMB”). For the subsidiaries whose functional currencies are other than the US dollar, all asset and liability accounts were translated at the exchange rate on the balance sheet date; stockholder's equity is translated at the historical rates and items in the cash flow statements are translated at the average rate in each applicable period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity. The resulting translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
The accompanying notes are an integral part of these consolidated financial statements.
F-9
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment reporting
The Company utilizes the "management approach" model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
As of June 30, 2011, the Company, through its subsidiaries is engaged into four main business segments based on location and product:
Jinong (fertilizer production), Gufeng (fertilizer production), Jintai (agricultural products production) and Yuxing (research and development center that is currently under construction).
Fair values of financial instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The Company's financial instruments primarily consist of cash and cash equivalents, accounts receivable, other receivables, advances to suppliers, accounts payable, other payables, tax payable, and related party advances and borrowings.
As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheet. This is attributed to the short maturities of the instruments and that interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective balance sheet dates.
Statement of cash flows
The Company's cash flows from operations are calculated based on the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.
Earnings per share
Basic earnings per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.
The components of basic and diluted earnings per share consist of the following:
|
For the Years Ended June 30,
|
||||||||||||
|
2011
|
2010
|
2009
|
||||||||||
|
Net Income for Basic Earnings Per Share
|
$ | 32,914,101 | $ | 21,289,758 | $ | 14,464,422 | ||||||
|
Basic Weighted Average Number of Shares
|
25,929,517 | 23,468,246 | 18,478,474 | |||||||||
|
Net Income per Share – Basic
|
1.27 | 0.91 | 0.78 | |||||||||
|
Net Income for Diluted Earnings Per Share
|
32,914,101 | 21,289,758 | 14,464,422 | |||||||||
|
Diluted Weighted Average Number of Shares
|
25,929,517 | 23,468,246 | 18,532,591 | |||||||||
|
Net Income per Share – Diluted
|
$ | 1.27 | $ | 0.91 | $ | 0.78 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-10
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent accounting pronouncements
In December 2010, the FASB issued updated guidance on when and how to perform certain steps of the periodic goodwill impairment test for public entities that may have reporting units with zero or negative carrying amounts. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010, with early adoption prohibited. The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.
In December 2010, the FASB also issued guidance to clarify the reporting of pro forma financial information related to business combinations of public entities and to expand certain supplemental pro forma disclosures. This guidance is effective prospectively for business combinations that occur on or after the beginning of the fiscal year beginning on or after December 15, 2010, with early adoption permitted. It is applicable to the Company’s fiscal year beginning July 1, 2011. The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.
In May 2011, the FASB issued guidance to amend certain measurement and disclosure requirements related to fair value measurements to improve consistency with international reporting standards. This guidance is effective prospectively for public entities for interim and annual reporting periods beginning after December 15, 2011, with early adoption by public entities prohibited. The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.
In June 2011, the FASB issued new guidance on the presentation of comprehensive income that will require a company to present components of net income and other comprehensive income in one continuous statement or in two separate, but consecutive statements. There are no changes to the components that are recognized in net income or other comprehensive income under current GAAP. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, with early adoption permitted. The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.
Beijing Gufeng Chemical Products Co., Ltd. (“Gufeng”) was founded in 1993. Its wholly-owned subsidiary Beijing Tianjuyuan Fertilizer Co., Ltd. (“Tianjuyuan”) was founded in 2001 and was acquired by Gufeng on May 4, 2010. Both companies are based in Beijing, and registered to produce compound fertilizer, blended fertilizer, organic compound fertilizer and mixed, organic-inorganic compound fertilizer and sell their products throughout China and abroad.
On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan by purchasing all of Gufeng’s outstanding equity interests and delivering acquisition consideration of approximately $8.8 million cash and approximately 1.4 million shares of the Company’s common stock (valued at approximately $11.6 million) to the former shareholders of Gufeng or their designees (the “Gufeng Shareholders”). Additionally, the Company may be required to deliver up to an additional 0.9 million shares of common stock, which are being held in escrow (the “Escrowed Shares”), to be released based upon achievement of following conditions:
1) If Gufeng achieved certain sales revenue targets for its fiscal year ending June 30, 2011 (the “Sales Target”), 341,390 of the Escrowed Shares would be released from escrow to the Gufeng Shareholders, which is subject to adjustment based on a three-tier system. If Gufeng achieved at least 80% of the Sales Target, then 227,593 of the Escrowed Shares would be released from escrow to the Gufeng Shareholder, and if Gufeng achieves at least 60% of the Sales Target, then 113,797 of the Escrowed Shares would be released from escrow to the Gufeng Shareholders. Gufeng had revenues of $107,081,108 for the year ended June 30, 2011 which met the Sales Target; therefore, 341,390 shares are to be released from escrow.
2) If Gufeng achieved certain net profit after tax targets for its fiscal year ending June 30, 2011 (the “Profit Target”), 341,390 of the Escrowed Shares would be released from escrow to the Gufeng Shareholders, which is subject to adjustment based on a three-tier system. If Gufeng achieved at least 80% of the Profit Target, then 227,593 of the Escrowed Shares would be released from escrow to the Gufeng Shareholders, and if Gufeng achieved at least 60% of the Profit Target, then 113,797 of the Escrowed Shares would be released from escrow to the Gufeng Shareholders. Gufeng met the Profit Target for the year ended June 30, 2011; therefore, 341,390 shares are to be released from escrow.
The accompanying notes are an integral part of these consolidated financial statements.
F-11
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3) If Gufeng obtained a land use right with respect to certain real property located in China, along with ownership of the buildings thereon, then 227,593 of the Escrowed Shares would be released from escrow to the Gufeng Shareholders. As of June 30, 2011, Gufent had obtained the land use rights per the agreement; therefore, 227,593 shares are to be released from escrow.
The Company recognized a liability based on the acquisition date fair value of the acquisition-related contingent consideration based on the probability of the achievement of the targets. Based on the Company’s estimation, an initial liability of $2.9 million (341,390 shares) was recorded with adjustments made at each quarter end during the period ended June 30, 2011. The total shares to be released from escrow and due to the Gufeng shareholders at June 30, 2011 are 910,373 with a value of $7,719,963, which is recorded as “Stock issued in relation to Acquisition” on the accompanying consolidated statement of stockholders’ equity.
The following table summarizes the fair values of the assets acquired and liabilities assumed from the acquisition of Gufeng. Since the acquisition and the initial preliminary purchase price allocation, net adjustments of $10.0 million were made to the fair values of the assets acquired and liabilities assumed with a corresponding adjustment to goodwill. These adjustments are summarized in the table presented below.
|
($ in millions)
|
||||
|
Purchase Price
|
$ | 28.1 | ||
|
Fair Value of Assets Acquired:
|
||||
|
Cash and cash equivalents
|
2.3 | |||
|
Inventories
|
18.0 | |||
|
Other current assets
|
4.5 | |||
|
Fixed assets
|
16.3 | |||
|
Intangible assets
|
17.1 | |||
|
Total Assets Acquired
|
$ | 58.2 | ||
|
Fair Value of Liabilities Assumed:
|
||||
|
Trade payables
|
$ | 9.6 | ||
|
Short-term loans
|
4.0 | |||
|
Deferred revenue
|
19.1 | |||
|
Other current liabilities
|
2.1 | |||
|
Total Liabilities Assumed
|
$ | 34.8 | ||
|
Goodwill (1)
|
$ | 4.7 | ||
The following table summarizes the preliminary fair value of amortizable and indefinite-lived intangible assets as of their respective acquisition dates:
|
Gufeng at July 2, 2010
|
||||||||
|
Estimated useful life
|
||||||||
|
($ in millions)
|
Fair Value
|
(in years)
|
||||||
|
Amortizable intangible assets:
|
||||||||
|
Customer relationships
|
$ | 9.6 | 10 | |||||
|
Proprietary technologies
|
1.3 | 6 | ||||||
|
Non-compete agreement
|
0.2 | 5 | ||||||
|
Indefinite-lived intangibles:
|
||||||||
|
Trademarks
|
6 | |||||||
|
Total intangible assets acquired
|
$ | 17.1 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-12
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Condensed Combined Financial Information
The following unaudited pro forma condensed combined comparative financial information presents the results of operations of the Company as they may have appeared if the acquisition of Gufeng had been completed on July 1, 2009.
|
For the Years ended June 30,
|
||||||||
|
($ in millions, except per share data)
|
2011
|
2010
|
||||||
|
Net Sales
|
$ | 179.7 | $ | 112.0 | ||||
|
Net Income
|
$ | 32.9 | $ | 24.8 | ||||
|
Basic earnings per share
|
$ | 1.27 | $ | 0.96 | ||||
|
Diluted earnings per share
|
$ | 1.27 | $ | 0.96 | ||||
Acquisition related expenses consist of integration related professional services, certain business combination adjustments after the measurement period or purchase price allocation period has ended, and certain other operating expenses, net.
Pretax charges approximating $0.2 million were recorded for acquisition and integration related costs in the period ended June 30, 2011. These charges were recorded as general and administrative expenses. As the acquisition took place on July 2, 2010, the Company’s statement of income for the period ended June 30, 2011 included the operations of the Company and Gufeng.
Inventories consist of the following:
|
As of June 30,
|
||||||||
|
2011
|
2010
|
|||||||
|
Raw materials
|
$ | 5,990,640 | $ | 314,268 | ||||
|
Supplies and packing materials
|
530,644 | 113,146 | ||||||
|
Work in progress
|
105,702 | 10,686,324 | ||||||
|
Finished goods
|
17,105,418 | 148,909 | ||||||
|
Total
|
$ | 23,732,404 | $ | 11,262,647 | ||||
Property, plant and equipment consist of the following:
|
As of June 30,
|
||||||||
|
2011
|
2010
|
|||||||
|
Building and improvements
|
$ | 44,032,549 | $ | 11,719,363 | ||||
|
Auto
|
1,491,849 | 117,295 | ||||||
|
Machinery and equipment
|
32,862,361 | 21,628,525 | ||||||
|
Agriculture assets
|
1,607,333 | 1,528,898 | ||||||
|
Total property, plant and equipment
|
79,994,092 | 34,994,081 | ||||||
|
Less: accumulated depreciation
|
(13,782,651 | ) | (5,625,566 | ) | ||||
|
Total
|
$ | 66,211,441 | $ | 29,368,515 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-13
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expenses for the years ended June 30, 2011, 2010 and 2009 were $4,161,068, $2,310,596 and $1,494,489, respectively.
Agriculture assets consist of reproductive trees that are expected to be commercially productive for a period of eight years.
As of June 30, 2011 and 2010, construction in progress, representing construction for a new product line and other buildings amounted to $
4,662,039
and $257,077, respectively.
Intangible assets consist of the following:
|
June 30,
|
June 30,
|
|||||||
|
2011
|
2010
|
|||||||
|
Land use rights, net
|
$ | 11,814,149 | $ | 11,495,058 | ||||
|
Technology patent, net
|
1,188,969 | 90,512 | ||||||
|
Customer relationships, net
|
9,045,858 | - | ||||||
|
Non-compete agreement
|
163,363 | - | ||||||
|
Trademarks
|
6,296,290 | - | ||||||
|
Total
|
$ | 28,508,629 | $ | 11,585,570 | ||||
LAND USE RIGHT
On September 25, 2009, Yuxing was granted a land use right for approximately 88 acres (353,000 square meters or 3.8 million square feet) by the People’s Government and Land & Resources Bureau of Hu County, Xi’an, Shaanxi Province. The fair value of the related intangible asset was determined to be the respective cost of RMB 73,184,895 (or $11,102,149). The intangible asset is being amortized over the grant period of 50 years using the straight line method.
On August 13, 2003, Tianjuyuan was granted a certificate of Land Use Right for a parcel of land of approximately 11 acres (42,726 square meters or 459,898 square feet) at Ping Gu District, Beijing. The purchase cost was recorded at RMB 1,045,950 (or $158,670). The intangible asset is being amortized over the grant period of 50 years.
On August 16, 2001, Jinong received a land use right as a contribution from a shareholder, which was granted by the People’s Government and Land & Resources Bureau of Yanling District, Shaanxi Province. The fair value of the related intangible asset at the time of the contribution was determined to be RMB 7,285,099 (or $1,105,150). The intangible asset is being amortized over the grant period of 50 years.
The accompanying notes are an integral part of these consolidated financial statements.
F-14
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
As of June 30,
|
||||||||
|
2011
|
2010
|
|||||||
|
Land use rights
|
$ | 12,452,801 | $ | 11,866,105 | ||||
|
Less: accumulated amortization
|
(638,652 | ) | (371,047 | ) | ||||
|
Total land use rights, net
|
$ | 11,814,149 | $ | 11,495,058 | ||||
TECHNOLOGY PATENT
On August 16, 2001, Jinong was issued a technology patent related to a proprietary formula used in the production of humid acid. The fair value of the related intangible asset was determined to be the respective cost of RMB 5,875,068 (or $891,248) and is being amortized over the patent period of 10 years using the straight line method.
On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The preliminary fair value on the acquired technology patent was estimated to be RMB 9,200,000 (or $1,375,084) and is amortized over the remaining useful life of six years using the straight line method. See Note 3.
|
As of June 30,
|
||||||||
|
2011
|
2010
|
|||||||
|
Technology know-how
|
$ | 2,332,113 | $ | 866,338 | ||||
|
Less: accumulated amortization
|
(1,143,144 | ) | (775,826 | ) | ||||
|
Total technology know-how, net
|
$ | 1,188,969 | $ | 90,512 | ||||
CUSTOMER RELATIONSHIP
On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The preliminary fair value on the acquired customer relationships was estimated to be RMB 65,000,000 (or $9,715,268) and is amortized over the remaining useful life of ten years using the straight line method. See Note 3.
|
As of June 30,
|
||||||||
|
2011
|
2010
|
|||||||
|
Customer relationships
|
$ | 10,096,418 | $ | - | ||||
|
Less: accumulated amortization
|
(1,050,560 | ) | - | |||||
|
Total customer relationships, net
|
$ | 9,045,858 | $ | - | ||||
NON-COMPETE AGREEMENT
On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The preliminary fair value on the acquired non-compete agreement was estimated to be RMB 1,320,000 (or $197,295) and is amortized over the remaining useful life of five years using the straight line method. See Note 3.
|
June 30,
|
June 30,
|
|||||||
|
2011
|
2010
|
|||||||
|
Non-compete agreement
|
$ | 204,204 | $ | - | ||||
|
Less: accumulated amortization
|
(40,841 | ) | - | |||||
|
Total non-compete agreement, net
|
$ | 163,363 | $ | - | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-15
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TRADEMARKS
On July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The preliminary fair value on the acquired trademarks was estimated to be RMB 40,700,000 (or $6,083,252) and is subject to an annual impairment test. See Note 3.
Total amortization expenses of intangible assets for the years ended June 30, 2011, 2010 and 2009 amounted to $1,587,190, 287,521 and $108,525, respectively.
AMORTIZATION EXPENSE
Estimated amortization expenses of intangible assets for the next five (5) years after June 30, 2011, are as follows:
|
Year Ends
|
Expense ($)
|
|||
|
June 30, 2012
|
1,313,165 | |||
|
June 30, 2013
|
1,310,229 | |||
|
June 30, 2014
|
1,310,229 | |||
|
June 30, 2015
|
1,310,229 | |||
|
June 30, 2016
|
1,269,389 | |||
As of June 30, 2011 and 2010, the amount due to related parties were $
69,962
and $68,164, respectively. These amounts represent unsecured, non-interest bearing loans that are due on demand. These loans are not subject to written agreements.
|
As of June 30,
|
||||||||
|
2011
|
2010
|
|||||||
|
Payroll payable
|
$ | 248,686 | $ | 8,848 | ||||
|
Welfare payable
|
164,223 | 164,051 | ||||||
|
Accrued expenses
|
1,666,753 | 334,806 | ||||||
|
Other payable
|
1,202,691 | - | ||||||
|
Total
|
$ | 3,282,353 | $ | 507,705 | ||||
The short-term loans payable consist of three loans which mature on dates ranging from February 1, 2012 through April 19, 2012 with interest rates of 7.26%. The loans are collateralized by the Company’s land use rights.
The interest expense from short-term loans were $466,912, $112,475 and $424,510 for the years ended June 30, 2011, 2010 and 2009, respectively.
Enterprise Income Tax
Effective January 1, 2008, the new Enterprise Income Tax (“EIT”) law of the PRC replaced the existing tax laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”). The new 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, and accordingly, it made provision for income taxes for the years ended June 30, 2011, 2010, and 2009 of $5,157,185, $
3,794,515
and $
2,331,548
, 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 $
3,879,959 for the
year ended June 30, 2011. Jintai has been exempt from paying income tax since its formation as it produces products which fall into the tax exemption list set out in the EIT. This exemption is expected to last as long as the applicable provisions of the EIT do not change.
The accompanying notes are an integral part of these consolidated financial statements.
F-16
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Value-Added Tax
All of the Company’s fertilizer products that are produced and sold in the PRC were subject to a Chinese Value-Added Tax (VAT) of 13% of the gross sales price. On April 29, 2008, the PRC State of Administration of Taxation (SAT) released Notice #56, “
Exemption of VAT for Organic Fertilizer Products
”, which allows certain fertilizer products to be exempt from VAT beginning June 1, 2008. The Company submitted the application for exemption in May 2009, which was granted effective September 1, 2009, continuing through December 31, 2015. The VAT exemption applies to all agricultural products sold by Jintai, and all but a nominal amount of agricultural products sold by Jinong.
Income Taxes and Related Payables
Taxes payable consist of the following:
|
As of June 30,
|
||||||||
|
2011
|
2010
|
|||||||
|
VAT provision (credit)
|
$ | 40,495 | $ | (24,655 | ) | |||
|
Income tax payable
|
6,593,876 | 2,020,253 | ||||||
|
Other levies
|
370,494 | 308,784 | ||||||
|
Total
|
$ | 7,004,865 | $ | 2,304,382 | ||||
Income Taxes in the Consolidated Statements of Income and Comprehensive Income
The provision for income taxes consists of the following:
|
For the Years Ended June 30,
|
||||||||||||
|
2011
|
2010
|
2009
|
||||||||||
|
Current tax -foreign
|
$ | 9,037,144 | $ | 3,794,515 | $ | 2,331,548 | ||||||
|
Deferred tax
|
- | - | - | |||||||||
|
Total
|
$ | 9,037,144 | $ | 3,794,515 | $ | 2,331,548 | ||||||
Tax Rate Reconciliation
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 years ended June 30, 2011, 2010 and 2009 for the following reasons:
The accompanying notes are an integral part of these consolidated financial statements.
F-17
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
FY 2011
|
||||||||||||||||||||||||
|
China
|
United States
|
|||||||||||||||||||||||
|
15% - 25%
|
34%
|
Total
|
||||||||||||||||||||||
|
Pretax income (loss)
|
$ | 48,782,427 | $ | (6,831,182 | ) | $ | 41,951,245 | |||||||||||||||||
|
Expected income tax expense (benefit)
|
12,195,607 | 25.0 | % | (2,322,602 | ) | 34.0 | % | 9,873,005 | ||||||||||||||||
|
High-tech income benefits on Jinong
|
(3,416,976 | ) | (7.0 | )% | - | - | (3,416,976 | ) | ||||||||||||||||
|
Losses from subsidiaries in which no benefit is recognized
|
258,513 | 0.5 | % | - | - | 258,513 | ||||||||||||||||||
|
Change in valuation allowance on deferred tax asset from US tax benefit
|
- | 2,322,602 | (34.0 | )% | 2,322,602 | |||||||||||||||||||
|
Actual tax expense
|
$ | 9,037,144 | 18.5 | % | $ | - | - | % | $ | 9,037,144 | 21.5 | % | ||||||||||||
|
FY 2010
|
||||||||||||||||||||||||
|
China
|
United States
|
|||||||||||||||||||||||
|
15% - 25%
|
34%
|
Total
|
||||||||||||||||||||||
|
Pretax income (loss)
|
$ | 27,755,696 | $ | (2,671,463 | ) | $ | 25,084,233 | |||||||||||||||||
|
Expected income tax expense (benefit)
|
4,163,354 | 15.0 | % | (908,297 | ) | 34.0 | % | 3,255,057 | ||||||||||||||||
|
Income tax benefit of nontaxable income on Jintai
|
(396,035 | ) | (1.4 | )% | - | - | (396,035 | ) | ||||||||||||||||
|
Income tax benefit of nontaxable income on Yuxing
|
27,196 | 0.1 | % | - | - | 27,196 | ||||||||||||||||||
|
Change in valuation allowance on deferred tax asset from US tax benefit
|
- | 908,297 | (34.0 | )% | 908,297 | |||||||||||||||||||
|
Actual tax expense
|
$ | 3,794,515 | 13.7 | % | $ | - | - | % | 3,794,515 | 15.1 | % | |||||||||||||
|
FY 2009
|
||||||||||||||||||||||||
|
China
|
United States
|
|||||||||||||||||||||||
|
15% - 25%
|
34%
|
Total
|
||||||||||||||||||||||
|
Pretax income (loss)
|
$ | 18,188,877 | $ | (1,392,907 | ) | $ | 16,795,970 | |||||||||||||||||
|
Expected income tax expense (benefit)
|
2,728,332 | 15.0 | % | (473,588 | ) | 34.0 | % | 2,254,744 | ||||||||||||||||
|
High-tech income benefits on Jinong
|
(29,848 | ) | (0.2 | )% | (29,848 | ) | ||||||||||||||||||
|
Income tax benefit of nontaxable income on Jintai
|
(366,936 | ) | (2.0 | )% | (366,936 | ) | ||||||||||||||||||
|
Change in valuation allowance on deferred tax asset from US tax benefit
|
473,588 | (34.0 | )% | 473,588 | ||||||||||||||||||||
|
Actual tax expense
|
$ | 2,331,548 | 12.8 | % | $ | - | - | % | 2,331,548 | 13.9 | % | |||||||||||||
The Company’s U.S. entities have not been audited by the Internal Revenue Service and tax years June 30, 2011, 2010, 2009 and 2008 are still open and could be subject to audit.
Reclassification of Temporary Equity
On December 26, 2007 the Company issued 6,313,617 shares (the “Shares”) of common stock to 31 accredited investors (the “Investors”) at $3.25 per share in a private placement (the “Private Placement”). The Securities Purchase Agreement (“SPA”) set forth a contingency which gave the Investors the right to redeem the Shares in the event the Share Exchange was forced to be unwound as a result of any material adverse effect due to PRC governmental actions. As a result of the redemption feature, the Company recorded the Private Placement as temporary equity. In July 2009, the Investors and the Company entered into a Waiver and Consent pursuant to which the Investors consented to waive all their rights associated with the liquidated damages under Section 4.16 of SPA. As a result, such temporary equity was no longer necessary for the purposes of the Company’s balance sheet as of June 30, 2010.
Common Stock
The Company issued 4,025,000 shares of common stock at a public offering price of $7.15 per share in an underwritten offering and received total gross proceeds of approximately $28.8 million on July 24, 2009. The shares were sold under the Company's previously filed shelf registration statement, which was declared effective by the Commission on June 12, 2009 (the “Shelf S-3”). The Company uses the net proceeds to expand its production facilities through the construction of new greenhouse at Yuxing.
The accompanying notes are an integral part of these consolidated financial statements.
F-18
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company completed the sale of 1,282,052 shares of common stock at a public offering price of $15.60 per share on November 25, 2009 in a registered direct offering for gross proceeds of approximately $20 million. On December 16, 2009, the placement agent exercised rights to place up to 320,512 additional shares of common stock at a price of $15.60 per share, for additional gross proceeds of $4,999,987. The shares were sold under the Shelf S-3.
On January 3, 2010, the Company made a one-time grant of an aggregate of 120,000 shares of restricted common stock of the Company to certain members of management and officers under the 2009 Equity Incentive Plan of the Company. Pursuant to the terms of the grant, one-third of the shares vested on February 2, 2010, one-third of the shares vested on December 31, 2010 because the Company achieved certain financial performance targets for the fiscal year ended June 30, 2010 and the remaining one-third of the shares will vest on December 31, 2011 if certain financial performance targets are achieved for the fiscal year ending June 30, 2011. Additionally, the Company made a one-time grant of an aggregate of 22,961 shares of performance-based restricted common stock to certain officers, which vests in three equal installments on September 30, 2010, 2011 and 2012 because the Company achieved certain financial performance targets for the fiscal year ended June 30, 2010.
On February 10, 2010, the Company made a one-time grant of an aggregate of 50,700 shares of restricted common stock to certain independent directors and key employees under the 2009 Equity Incentive Plan. Pursuant to the terms of the grant, one-third of the shares vested on March 10, 2010, one-third of the shares vested on December 31, 2010 and the remaining one-third of the shares will vest on December 31, 2011 if certain financial targets are achieved. Additionally, the Company also granted to certain independent directors and key employees an aggregate of 70,500 shares of performance-based restricted common stock, which automatically vests in three equal installments on September 30, 2010, 2011 and 2012 because the Company achieved both net sales and income from operations targets for the fiscal year ended June 30, 2010.
On February 10, 2010, the Company issued a total of 8,000 shares of restricted common stock under its 2009 Equity Incentive Plan to a consultant pursuant to the terms of a service agreement, half of which was vested on August 9, 2010 and half of which was forfeited due to the disengagement of the service on September 15, 2010.
On July 2, 1010, the Company issued a total of 2,275,931 shares of common stock to Gufeng’s previous shareholders or their designees. Of the shares being issued in the acquisition, 40% will be held in escrow pending satisfaction of certain conditions such as make good targets set for Gufeng for the fiscal year ended June 30, 2011. See Note 3.
On March 31, 2011, the Company issued a total of 96,000 shares of restricted common stock of the Company to certain directors and executive officers under its 2009 Equity Incentive Plan. Pursuant to the terms of the grant, 8,000 shares of restricted common stock will be vested on April 30, 2011, 44,000 shares vest on June 2, 2011, and 44,000 shares vest on December 31,2011.
Preferred Stock
Under the Company’s articles of incorporation, the board of directors has the authority, without further action by stockholders, to designate up to 20,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges, qualifications and restrictions granted to or imposed upon the preferred stock, including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preference and sinking fund terms, any or all of which may be greater than the rights of the common stock. If the Company sells preferred stock under its registration statement on Form S-3, it will fix the rights, preferences, privileges, qualifications and restrictions of the preferred stock of each series in the certificate of designation relating to that series and will file the certificate of designation that describes the terms of the series of preferred stock the Company offers before the issuance of the related series of preferred stock.
As of June 30, 2011, the Company had 20,000,000 shares of preferred stock authorized, with a par value of $.001 per share, of which no shares are issued or outstanding.
The accompanying notes are an integral part of these consolidated financial statements.
F-19
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 17, 2009, some directors, officers and employees exercised options to purchase an aggregate of 84,500 shares of common stock in a cashless manner and received 61,239 shares of common stock as a result of the cashless exercise.
On January 3, 2010, the Company made a one-time grant of options to purchase an aggregate of 150,000 shares of common stock to certain officers and directors under the 2009 Equity Incentive Plan at an exercise price of $14.70 per share, the closing price of common stock on the previous trading day. Pursuant to the terms of the grant, one-third of the options vested on February 2, 2010, one-third of the options vested on December 31, 2010 because the Company achieved certain financial performance targets for the fiscal year ended June 30, 2010 and the remaining one-third of the options will vest on December 31, 2011 if certain financial performance targets are achieved for the fiscal year ending June 30, 2011.
On January 3, 2010, the Company also made a grant of performance-based options to purchase an aggregate of 45,291 shares of common stock to certain officers and directors under the 2009 Equity Incentive Plan at an exercise price of $14.70 per share, the closing price of the common stock on the previous trading day. Pursuant to the terms of the grant, the options automatically vest in three equal installments on September 30, 2010, 2011 and 2012 because the Company achieved certain financial performance targets for the fiscal year ended June 30, 2010.
On February 3, 2010, one independent director resigned and all his vested and unvested options were forfeited pursuant to his grant agreement with the Company.
On February 7, 2010, the Company appointed a new independent director and issued to him performance-based options to purchase 10,000 shares of common stock under the 2009 Equity Incentive Plan at an exercise price of $14.02 per share, the closing price of the common stock on the previous trading day. Pursuant to the terms of the grant, one-third of the options vested on March 8, 2010, one-third of the options will vested on December 31, 2010 because the Company achieved certain financial performance targets for the fiscal year ended June 30, 2010 and the remaining one-third of the options will vest on December 31, 2011 if certain financial performance targets are achieved for the fiscal year ending June 30, 2011.
On March 31, 2011, per compensation board resolution, the Company
forfeited all those outstanding unvested call options granted to current officers and directors and former officers on March, 1 2010 and February 7, 2010 according to the
2009 Equity Incentive Plan
.
The Company’s calculations are made using the Black-Scholes option-pricing model with the following weighted average assumptions: expected life of 2 years; 75.2%-75.6% stock price volatility; risk-free interest rate of 1.63% and no dividends during the expected term. The weighted-average fair value of options granted was $0, $4.37, and $3.29 for the years ended June 30, 2011, 2010, and 2009, respectively. Stock compensation expense is recognized based on awards expected to vest. During the years ended June 30, 2011, 2010 and 2009, the Company recognized stock-based compensation expense of $
3,605,235, $1,695,449 and $155,804
, respectively.
|
Weighted
|
||||||||||||
|
Average
|
||||||||||||
|
Number
|
Exercise
|
Aggregate
|
||||||||||
|
of Shares
|
Price
|
Intrinsic Value
|
||||||||||
|
Outstanding, June 30, 2009
|
121,500 | $ | 4.49 | $ | 437,810 | |||||||
|
Granted
|
205,291 | $ | 14.67 | |||||||||
|
Forfeited/Canceled
|
(22,000 | ) | $ | 9.95 | ||||||||
|
Exercised
|
(109,500 | ) | $ | 4.32 | ||||||||
|
Outstanding, June 30, 2010
|
195,291 | $ | 14.67 | $ | - | |||||||
|
Granted
|
- | - | ||||||||||
|
Forfeited/Canceled
|
(80,192 | ) | $ | 14.67 | ||||||||
|
Exercised
|
- | - | ||||||||||
|
Outstanding, June 30, 2011
|
115,099 | $ | 14.66 | $ | - | |||||||
|
Exercisable, June 30, 2011
|
115,099 | $ | 14.66 | $ | - | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-20
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the options outstanding and exercisable as of June 30, 2011:
|
Options Outstanding and Exercisable
|
||||||||||||
|
Weighted
|
||||||||||||
| Number |
Weighted
|
Average
|
||||||||||
|
Outstanding and
|
Average
|
Remaining
|
||||||||||
|
Range of
|
exercisable as of
|
Exercise
|
Contractual Life
|
|||||||||
|
Exercise Price
|
June 30, 2011
|
Price
|
(Years)
|
|||||||||
|
14.02-14.70
|
115,099
|
14.67
|
0.75
|
|||||||||
Market Concentration
All of the Company's revenue-generating operations are conducted in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC's economy.
The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among other things , the political, economic and legal environments and foreign currency exchange. The Company's results may be adversely affected by, among other things, changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation.
Vendor and Customer Concentration
There was one vendor from which the Company purchased 11.5% of its raw materials for the year ended June 30, 2011. Accounts payable to this vender amounted to $11,275,026 as of June 30, 2011.
One vendor accounted for approximately 12.40% of the Company’s total purchases for the year ended June 30, 2010. There was no accounts payable to this vendor as of June 30, 2010.
One vendor accounted for approximately 11.4% of the Company’s total purchases of raw materials for the year ended June 30, 2009. There were no accounts payable to this vender as of June 30, 2009.
One customer accounted for 17.6% of the Company’s Sales for the year ended June 30, 2011. There were no customers which accounted for more than 10% of the Company’s Sales for the years ended June 30, 2010 and 2009.
Litigation
On October 15, 2010, a class action lawsuit was filed against the Company and certain of its current and former officers in the United States District Court for the District of Nevada on behalf of purchasers of the Company’s common stock between November 12, 2009 and September 1, 2010. On April 27, 2011, the court appointed the lead plaintiff and lead plaintiff’s counsel. On June 13, 2011, lead plaintiff filed an amended complaint, which adds several additional defendants and expands the class period to include purchasers who purchased our common stock between May 12, 2009 and January 4, 2011. The amended complaint alleges that the Company and certain of its current and former officers and directors violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended, by making material misstatements and omissions in the Company’s financial statements, securities offering documents, and related disclosures during the class period. The plaintiffs claim that such allegedly misleading statements inflated the price of the Company’s common stock and seek monetary damages in an amount to be determined at trial. By stipulation of the parties, defendants’ response to the amended complaint is due October 7, 2011.
The accompanying notes are an integral part of these consolidated financial statements.
F-21
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 10, 2010, a derivative complaint was filed by a shareholder, purportedly on the Company’s behalf, against certain of the Company’s current and former officers and directors in the First Judicial District Court of the State of Nevada in and for Carson City. The complaint alleges, among other things, various violations of state law by such officers and directors, including breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The plaintiff requests, among other remedies, restitution from such officers and directors and reform to the Company’s corporate governance and internal procedures.
On January 5, 2011, a second derivative complaint was filed by two shareholders, purportedly on the Company’s behalf, against, among others, certain of the Company’s current and former officers and directors, in the United States District Court, District of Columbia. By stipulation of the parties, this case has been transferred to the District Court for the District of Nevada. This complaint alleges, among other things, that such officers and directors breached their fiduciary duties by knowingly filing inaccurate and inconsistent financial statements and other filings with the Commission and by failing to correct such allegedly inaccurate financial disclosure. The plaintiffs request, among other remedies, damages in the amount sustained by the defendants’ alleged breach of fiduciary duties and other violations of law, and other equitable relief.
On January 12, 2011, two additional derivative complaints were filed by different shareholders, purportedly on the Company’s behalf, against certain of the Company’s current and former officers and directors, in the Eighth Judicial District Court, Clark County, Nevada. Each of the complaints alleges, among other things, that defendants breached their fiduciary duties by disseminating false and misleading information to shareholders via public filings and other communications, failing to maintain internal controls and procedures and failing to properly oversee and manage the Company. Each of the complaints also alleges unjust enrichment, abuse of control, gross mismanagement and waste of corporate assets by the defendants. The plaintiffs request, among other remedies, damages caused by the breach of defendants’ fiduciary duties, restitution from such officers and directors and reform to the Company’s corporate governance and internal procedures. By stipulation, these two derivative actions have been transferred to the First Judicial District Court of the State of Nevada in and for Carson City and consolidated with the derivative action already pending in that court. By stipulation of the parties, all of the derivative actions are currently stayed.
The Company intends to vigorously defend each of these lawsuits.
In addition, the Commission is conducting an investigation of the Company’s prior reported financial statements, as well as the allegations in the complaints described above. The Company is cooperating with the Commission.
T
he Company is currently unable to reasonably estimate the amount or range of possible losses that will result from the ultimate resolution of these matters. As such, as of June 30, 2011, the Company has not accrued any liability in connection with potential losses from legal proceedings.
The Company was organized into four main business segments based on location and product: Jinong (fertilizer production), Gufeng (fertilizer production), Jintai (agricultural products production) and Yuxing ( research and development center that is currently under construction). The following tables present a summary of our businesses’ and operating segments’ results.
The accompanying notes are an integral part of these consolidated financial statements.
F-22
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
For the Year Ended June 30,
|
||||||||||||
|
|
2011
|
2010
|
2009
|
|||||||||
|
Revenues from unaffiliated customers:
|
||||||||||||
|
Jinong
|
$ | 65,629,264 | $ | 45,816,377 | $ | 28,889,131 | ||||||
|
Gufeng
|
107,081,018 | - | - | |||||||||
|
Jintai
|
6,826,933 | 6,274,375 | 6,318,866 | |||||||||
|
Yuxing
|
180,750 | - | - | |||||||||
|
Consolidated
|
$ | 179,717,965 | $ | 52,090,752 | $ | 35,207,997 | ||||||
|
Operating income :
|
||||||||||||
|
Jinong
|
$ | 34,051,094 | $ | 25,160,683 | $ | 15,846,248 | ||||||
|
Gufeng
|
15,288,871 | - | - | |||||||||
|
Jintai
|
(96,343 | ) | 2,640,016 | 2,445,913 | ||||||||
|
Yuxing
|
(296,832 | ) | (181,313 | ) | - | |||||||
|
Reconciling item (1)
|
- | - | - | |||||||||
|
Reconciling item (2)
|
(3,230,124 | ) | (997,316 | ) | (1,046,344 | ) | ||||||
|
Reconciling item (2)--stock compensation
|
(3,605,235 | ) | (1,695,449 | ) | (155,804 | ) | ||||||
|
Consolidated
|
$ | 42,111,431 | $ | 24,926,621 | $ | 17,090,013 | ||||||
|
Net income:
|
||||||||||||
|
Jinong
|
$ | 29,139,457 | $ | 21,502,252 | $ | 13,411,090 | ||||||
|
Gufeng
|
10,995,984 | - | - | |||||||||
|
Jintai
|
(96,244 | ) | 2,640,233 | 2,446,238 | ||||||||
|
Yuxing
|
(293,914 | ) | (181,304 | ) | - | |||||||
|
Reconciling item (1)
|
4,178 | 21,342 | 7,867 | |||||||||
|
Reconciling item (2)
|
(6,835,360 | ) | (2,692,765 | ) | (1,400,733 | ) | ||||||
|
Consolidated
|
$ | 32,914,101 | $ | 21,289,758 | $ | 14,464,462 | ||||||
|
Depreciation and Amortization:
|
||||||||||||
|
Jinong
|
$ | 2,686,524 | $ | 2,299,483 | $ | 1,512,212 | ||||||
|
Gufeng
|
2,711,483 | - | - | |||||||||
|
Jintai
|
124,139 | 119,973 | 90,803 | |||||||||
|
Yuxing
|
226,112 | 178,661 | - | |||||||||
|
Consolidated
|
$ | 5,748,258 | $ | 2,598,117 | $ | 1,603,015 | ||||||
|
Interest expense:
|
||||||||||||
|
Jinong
|
$ | - | $ | 112,475 | $ | 433,822 | ||||||
|
Gufeng
|
466,912 | - | - | |||||||||
|
Reconciling item (2)
|
- | 198,624 | ||||||||||
|
Consolidated
|
$ | 466,912 | $ | 112,475 | $ | 632,446 | ||||||
|
Capital Expenditure:
|
||||||||||||
|
Jinong
|
$ | 6,492,775 | $ | 4,243,089 | $ | 5,097,721 | ||||||
|
Gufeng
|
8,229,092 | - | - | |||||||||
|
Jintai
|
3,291 | 180,686 | - | |||||||||
|
Yuxing
|
11,521,005 | 12,100,919 | - | |||||||||
|
Consolidated
|
$ | 26,246,163 | $ | 16,524,694 | $ | 5,097,721 | ||||||
|
Identifiable assets:
|
||||||||||||
|
Jinong
|
$ | 111,956,641 | $ | 103,519,520 | $ | 53,096,423 | ||||||
|
Gufeng
|
67,260,447 | - | - | |||||||||
|
Jintai
|
14,001,793 | 12,198,845 | 8,250,834 | |||||||||
|
Yuxing
|
24,354,406 | 12,748,003 | - | |||||||||
|
Reconciling item (1)
|
969,963 | 3,311,943 | 30,995 | |||||||||
|
Reconciling item (2)
|
4,827,737 | 9,631 | 240,174 | |||||||||
|
Consolidated
|
$ | 223,370,987 | $ | 131,787,942 | $ | 61,618,426 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-23
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
In July 2007, Jinong signed an office lease with the Group Company at a monthly rent of $954 (RMB 6,460) per month. On September 30, 2010, Jinong cancelled this lease agreement with the Group Company without penalty and signed a two year lease effective as of July 1, 2010 directly with Xi’an Kingtone Information Technology Co., Ltd. (“Kingtone Information”), who owns the property. Kingtone Information is a Variable Interest Entity (“VIE”) controlled by Kingtone Wirelessinfo Solution Holoding Ltd. (“Kingtone Wirelessinfo”), whose Chairman and majority shareholder is Mr. Tao Li, the Chairman, President and Chief Executive Officer of the Company. According to the new lease agreement, the monthly rent is $1,596 (RMB 10,800).
In January 2008, Jintai signed a ten year land lease with Xi’an Jinong Hi-tech Agriculture Demonstration Zone for a monthly rent of $768 (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 $437 (RMB 2,958).
Accordingly, the Company recorded an aggregate of $54,869, $20,494 and $20,346 as rent expenses for the years ended June 30, 2011, 2010 and 2009, respectively. Rent expenses for the 5 years after June 30, 2011 are as follows:
|
Years ending:
|
||||
|
June 30, 2012
|
$
|
34,375
|
||
|
June 30, 2013
|
19,688
|
|||
|
June 30, 2014
|
14,793
|
|||
|
June 30, 2015
|
14,793
|
|||
|
June 30, 2016
|
14,793
|
|
Quarterly Periods Ended
|
||||||||||||||||
|
September 30,
|
December 31,
|
March 31,
|
June 30,
|
|||||||||||||
|
2010
|
2010
|
2011
|
2011
|
|||||||||||||
|
Net Revenue
|
$ | 39,482,921 | $ | 35,311,738 | $ | 44,653,284 | $ | 60,270,023 | ||||||||
|
Gross Profit
|
$ | 13,139,327 | $ | 12,332,826 | $ | 17,039,509 | $ | 21,108,373 | ||||||||
|
Income (loss) from operation
|
$ | 9,625,155 | $ | 7,872,756 | $ | 12,124,854 | $ | 12,488,666 | ||||||||
|
Other income (expense)
|
$ | (123,627 | ) | $ | (27,843 | ) | $ | (140,650 | ) | $ | 131,934 | |||||
|
Net income (loss)
|
$ | 7,787,785 | $ | 6,229,492 | $ | 9,472,745 | $ | 9,424,079 | ||||||||
|
Earnings (loss) per shares - basic
|
$ | 0.30 | $ | 0.24 | $ | 0.37 | $ | 0.36 | ||||||||
|
Earnings (loss) per shares - diluted
|
$ | 0.30 | $ | 0.24 | $ | 0.35 | $ | 0.38 | ||||||||
|
Quarterly Periods Ended
|
||||||||||||||||
|
September 30,
|
December 31,
|
March 31,
|
June 30,
|
|||||||||||||
| 2009 | 2009 | 2010 | 2010 | |||||||||||||
|
Net Revenue
|
$ | 11,276,820 | $ | 11,172,116 | $ | 13,442,277 | $ | 16,199,539 | ||||||||
|
Gross Profit
|
$ | 6,958,958 | $ | 6,769,773 | $ | 8,110,561 | $ | 9,112,908 | ||||||||
|
Income from operation
|
$ | 6,209,108 | $ | 5,435,126 | $ | 6,208,366 | $ | 7,074,021 | ||||||||
|
Other income (expense)
|
$ | (31,077 | ) | $ | 7,908 | $ | 112,218 | $ | 68,604 | |||||||
|
Net income
|
$ | 5,247,274 | $ | 4,720,993 | $ | 5,332,798 | $ | 5,988,693 | ||||||||
|
Earnings per shares - basic
|
$ | 0.24 | $ | 0.20 | $ | 0.22 | $ | 0.25 | ||||||||
|
Earnings (loss) per shares - diluted
|
$ | 0.24 | $ | 0.20 | $ | 0.22 | $ | 0.25 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-24
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s operations are primarily conducted through its PRC subsidiaries, which can only pay dividends out of their retained earnings determined in accordance with the accounting standards and regulations in the PRC and after it has met the PRC requirements for appropriation to statutory reserves. In addition, the Company’s businesses and assets are primarily denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts. These currency exchange control procedures imposed by the PRC government authorities may restrict the ability of the Company’s PRC subsidiaries to transfer their net assets to the Parent Company through loans, advances or cash dividends.
The Company’s PRC subsidiaries net assets amounted to $177,652,723 as of June 30, 2011, and thus exceeded 25% of the Company’s consolidated net assets. Accordingly, condensed Parent Company financial statements have been prepared in accordance with Rule 5-04 and Rule 12-04 of SEC Regulation S-X, and are as follows.
Parent Company Financial Statements
PARENT COMPANY FINANCIAL INFORMATION OF CHINA GREEN AGRICULTURE, INC.
The accompanying notes are an integral part of these consolidated financial statements.
F-25
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Condensed Balance Sheets
|
As of June 30,
|
|||||||
|
2011
|
2010
|
|||||||
|
ASSETS
|
||||||||
|
Current Assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 964,149 | $ | 3,309,036 | ||||
|
Restricted cash
|
- | (2,907 | ) | |||||
|
Other current assets
|
8,575 | 15,445 | ||||||
|
Total Current Assets
|
972,724 | 3,321,574 | ||||||
|
Long-term equity investment
|
192,634,559 | 125,484,815 | ||||||
|
Total long term assets
|
192,634,559 | 125,484,815 | ||||||
|
Total Assets
|
$ | 193,607,283 | $ | 128,806,389 | ||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current Liabilities:
|
||||||||
|
Accounts payable
|
$ | 64,520 | $ | 64,520 | ||||
|
Amount due to related parties
|
38,343 | 38,343 | ||||||
|
Other payables and accrued expenses
|
1,631,179 | 165,604 | ||||||
|
Total Current Liabilities
|
1,734,042 | 268,467 | ||||||
|
Stockholders' Equities
|
||||||||
|
Common stock, $.001 par value, 115,197,165 shares authorized, 26,845,860 and 24,572,329, shares issued and outstanding as of June 30, 2011 and 2010, respectively
|
26,846 | 24,573 | ||||||
|
Additional paid in capital
|
98,627,482 | 75,755,682 | ||||||
|
Accumulated other comprehensive income
|
10,903,756 | 3,356,611 | ||||||
|
Retained earnings
|
82,315,157 | 49,401,056 | ||||||
|
Total Stockholders' Equity
|
191,873,241 | 128,537,922 | ||||||
|
Total Liabilities and Stockholders' Equity
|
$ | 193,607,283 | $ | 128,806,389 | ||||
PARENT COMPANY FINANCIAL INFORMATION OF CHINA GREEN AGRICULTURE, INC
|
Condensed Statements of Operations
|
Year ended June 30,
|
|||||||||||
|
2011
|
2010
|
2009
|
||||||||||
|
Revenue
|
$ | - | $ | - | $ | - | ||||||
|
General and administrative expenses
|
6,835,360 | 2,646,338 | 1,202,149 | |||||||||
|
Interest income (expense)
|
4,178 | 21,342 | (190,757 | ) | ||||||||
|
Equity investment in subsidiaries
|
39,745,283 | 23,914,754 | 15,857,328 | |||||||||
|
Net income
|
$ | 32,914,101 | $ | 21,289,758 | $ | 14,464,422 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-26
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Condensed Statements of Cash Flows
|
Year ended June 30,
|
|||||||||||
|
2011
|
2010
|
2009
|
||||||||||
|
Net cash provided by (used in) operating activities
|
$ | (2,341,980 | ) | $ | (1,156,400 | ) | (1,577,100 | ) | ||||
|
Net cash provided by (used in) investing activities
|
(6,720,539 | ) | 86,457 | 109,813 | ||||||||
|
Net cash provided by financing activities
|
6,717,632 | 4,350,480 | 699,798 | |||||||||
|
Cash and cash equivalents, beginning balance
|
3,309,036 | 28,499 | 795,988 | |||||||||
|
Cash and cash equivalents, ending balance
|
$ | 964,149 | $ | 3,309,036 | 28,499 | |||||||
Notes to Condensed Parent Company Financial Information
As of June 30, 2011 and 2010, there were no material contingencies, significant provisions for long-term obligations, or guarantees of the Company, except as separately disclosed in the Consolidated Financial Statements, if any. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
The accompanying notes are an integral part of these consolidated financial statements.
F-27
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. (removed and Reserved)Part IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RisksItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholders MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement SchedulesNote 1 Organization and Description Of BusinessNote 2 Basis Of Presentation and Summary Of Significant Accounting PoliciesNote 3 AcquisitionNote 4 InventoriesNote 5 - Property, Plant and EquipmentNote 6 Construction in ProgressNote 7 - Intangible AssetsNote 8 - Amount Due To Related PartiesNote 9 - Accrued Expenses and Other PayablesNote 10 - Loan PayablesNote 11 - Taxes PayableNote 13 Stockholders EquityNote 14 Stock OptionsNote 15 Significant Risks and Uncertainties Including Business and Credit Concentrations and LitigiationNote 16 Segment ReportingNote 17 - Commitments and LeasesNote 18 Selected Quarterly Data (unaudited)Note 19 Restricted Net Assets