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: $
39,916,798
as of December 31, 2015, based on the closing price $1.52 of the Company’s common stock on such
date.
The number of outstanding
shares of the registrant’s common stock on October 3, 2016, was 37,648,605.
PART
I
We, the Company, are primarily
engaged in the research, development, production and sale of various types of fertilizers and agricultural products in the People’s
Republic of China (“PRC”) through our wholly-owned Chinese subsidiaries, Jinong (fertilizer production), Gufeng (fertilizer
production), our VIE, Yuxing (agricultural products production), and another six VIE companies that we newly acquired in June
2016. Our primary business is of 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 Yuxing, we develop and
produce agricultural products, such as top-grade fruits, vegetables, flowers and colored seedlings.
On June 30, 2016, the Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition
agreements and a series of contractual agreements with the shareholders of the following six companies that are organized under
the laws of the PRC and would be deemed
as
variable interest entities (the “VIEs”): Shaanxi Lishijie Agrochemical Co., Ltd., Songyuan Jinyangguang Sannong Service
Co., Ltd., Shenqiu County Zhenbai Agriculture Co., Ltd., Weinan City Linwei District Wangtian Agricultural Materials Co., Ltd.,
Aksu Xindeguo Agricultural Materials Co., Ltd., and Xinjiang Xinyulei Eco-agriculture Science and Technology Co., Ltd. (collectively
hereafter referred to as “the VIE Companies.”)
Fertilizer production
was our core business and we generated approximately $260,378,357, $259,030,774, and $229,917,266, or 96.9%, 98.4 % and 98.4%
of our total revenues for the years ended June 30, 2016, 2015 and 2014, respectively. Our total annual production capacity was
555,000 metric tons as of June 30, 2016.
As
of June 30, 2016, we sold our products through a network of 1,904 regional distributors covering 27 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 40% of our fertilizer revenues for the fiscal year ended June 30, 2016, of which Sino-agri Holding
Company Limited accounted for 23.3% of the total fertilizer revenues.
As
of June 30, 2016, we developed 688 different fertilizer products. We conduct our research and development activities through Yuxing,
Jinong’s VIE, which tests new fertilizers and grow high quality flowers, vegetables and seedlings for commercial sale.
During
the fiscal years ended June 30, 2016, 2015 and 2014, our revenues were $268,785,020, $263,354,288 and $233,402,088, respectively,
and our net income were $25,925,734 $31,445,126 and $25,514,695, respectively.
Recent
Developments
Strategic
Acquisitions:
On
June 30, 2016, through Jinong, we entered into (i) Strategic Acquisition Agreements (the “SAA”), and (ii) Agreements
for Convertible Notes (the “ACN”), with the shareholders of the companies as identified below (the “Targets”).
Company
Name
|
|
Business
Scope
|
|
Cash
Payment for Acquisition
(RMB
[1]
)
|
|
|
Principal
of Notes for Acquisition
(RMB)
|
|
Shaanxi
Lishijie Agrochemical Co., Ltd.
|
|
Sales of
pesticides, agricultural chemicals, chemical fertilizers, agricultural materials; Manufacture and sales of mulches.
|
|
|
10,000,000
|
|
|
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Songyuan
Jinyangguang Sannong Service Co., Ltd.
|
|
Promotion
and consulting services regarding agricultural technologies; Retail sales of chemical fertilizers (including
compound fertilizers and organic fertilizers); Wholesale and retail sales of pesticides, agricultural machineries and accessories;
Collection of agricultural information; Development of saline-alkali soil; Promotion and development of high-efficiency agriculture
and
related information technology solutions
for agriculture, agricultural and biological engineering high technologies; E-commerce; Cultivation of freshwater fish, poultry,
fruits, flowers, vegetables, and seeds; Recycle and complex utilization of straw and stalk; Technology transfer and
training; Recycle of agricultural economic; Ecological industry planning.
|
|
|
8,000,000
|
|
|
|
12,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenqiu
County Zhenbai Agriculture Co., Ltd.
|
|
Cultivation
of crops; Storage, sales, preliminary processing and logistics distribution of agricultural by-products; Promotion and application
of agricultural technologies; Purchase and sales of agricultural materials; Electronic commerce.
|
|
|
3,000,000
|
|
|
|
12,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Weinan
City Linwei District Wangtian Agricultural Materials Co., Ltd.
|
|
Promotion
and application of new agricultural technologies; Professional prevention of plant diseases and insect pests; Sales of plant
protection products, plastic material, chemical fertilizers, pesticides, agricultural mulches, micronutrient fertilizers,
hormones, agricultural machineries and medicines, and gardening tools.
|
|
|
6,000,000
|
|
|
|
12,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Aksu
Xindeguo Agricultural Materials Co., Ltd.
|
|
Wholesale
and retail sales of pesticides; Sales of chemical fertilizers, packaged seeds, agricultural mulches, micronutrient
fertilizers, compound fertilizers, plant growth regulators, agricultural machineries, and water economizers; Consulting services
for agricultural technologies; Purchase and sales of agricultural by-products.
|
|
|
10,000,000
|
|
|
|
12,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Xinjiang
Xinyulei Eco-agriculture Science and Technology Co., Ltd
|
|
Sales of
chemical fertilizers, packaged seeds, agricultural mulches, micronutrient fertilizers, organic fertilizers, plant
growth regulators, agricultural machineries, and water economizers; Purchase and sales of agricultural by-products; Cultivation
of fruits and vegetables; Consulting services and training for agricultural technologies; Storage services; Sales of articles
of daily use, food and oil; On-line sales of the above mentioned products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
37,000,000
|
|
|
|
51,000,000
|
|
|
(1)
|
The
exchange rate between RMB and U.S. dollars on June 30, 2016 is RMB1=US$0.1508, according
to the exchange rate published by Bank of China.
|
Pursuant
to the SAA and the ACN, the shareholders of the Targets, while be in possession of the equity interests and will continue to be
the legal owners of such interests, agreed to pledge and entrust all of their equity interests, including the proceeds thereof
but excluding any claims or encumbrances, and the operations and management of its business to Jinong, in exchange of an aggregated
amount of RMB37,000,000 (approximately $5,579,600) to be paid by Jinong within three days following the execution of the SAA,
ACN and the VIE Agreements, and convertible notes with an aggregated face value of RMB51,000,000 (approximately $7,690,800) with
an annual fixed compound interest rate of 3% and term of three years.
The
SAA contains representations and warranties by both Jinong and the shareholders of the Targets including:
Should
the shareholders of the Targets fail to satisfy the conditions listed in the exhibit to the SAA, i.e., the entry into the VIE
Agreements, as defined below or are in breach of any representations or warranties in the SAA, other than the direct and consequential
damages that may cause to Jinong, they shall pay RMB100,000 (approximately $15,080) as a breach make up.
The
shareholders of the Targets agree and ensure its main management members and technology persons to agree and enter into Non-Compete
Agreements which shall prohibit any direct or indirect operation, holding of equity interests of the same or similar business
of the Targets, its customers or suppliers, unless the operation of such an entity is through the Targets.
The
equity interests of the Targets do not have any form of Claims or Encumbrances, as such terms are defined in the SAA. The shareholders
of the Targets represented that there is no action, suit, arbitration, or legal proceeding pending or, currently threatened against
the Targets that would have a material adverse effect on the Target’s capacity to fulfill their contractual obligations.
The Targets shall have a minimum of 10% of annual compound growth rate (the “Growth Rate”) within the three (3) years
after the closing of the Strategic Acquisitions (the “Closing”).
According
to the SAA, all the existing employees will continue to be the employees of the Targets after the Closing based on the current
employment terms, subject to the decisions from the new board of the Targets to be formed after the Closing.
Under the ACN, each convertible note (or note,
as referred to below) has a face value of RMB100 with a term of three years and an annual fixed compound interest rate of 3%. The
convertible notes take priority over the preferred stock and common stock of Jinong, and any other class or series of capital stocks
Jinong issues in the future in terms of interests and payments in the event of any liquidation, dissolution or winding up of Jinong.
On or after the third anniversary of the issuance date of the note (the “Mature Date”), noteholders may request Jinong
to process the note conversion through mechanics of conversion chosen by Jinong. The noteholder shall not have Jinong convert the
note prior to the Mature Date and Jinong may decline the conversion if the noteholder requests so. If the note is converted into
the Company’s common stock, the noteholder will become the holders of the Company’s common stock.
The per share conversion price of the note is
the higher of the following: (i) $5.00 per share or (ii) 75% of the closing price of the Company’s common stock on the date
the noteholder delivers the conversion notice.
If the profits of the Targets hit certain level
of sales target set by the parties, i.e., the Growth Rate, Jinong may at its discretion, convert the notes to (i) cash , (ii)
the Company’s common stock, or (iii) to a combination of cash and the Company’s common stock, in the amount of the
face value of the notes with compound interest for three years.
Upon
the arrival of the Mature Date of the note, the noteholder can (i) requests Jinong to convert all or a part of the note; (ii)
continue to hold the note until such a holder delivers a conversion request at his/her will; however, if the holder chooses to
hold the note after the Mature Date, no interests shall accrue on the note after the three year term.
In
the event that the behavior of the Targets or noteholders materially impair Jinong or, if the annual compounded rate for sales
within the three years following the acquisition of any of the Targets by Jinong fail to achieve the sales target listed in the
SAA, or the Growth Rate, Jinong may request noteholders to redeem the shares they hold of the Targets with (i) amount represented
by the convertible notes including the accrued interests and the cash payment Jinong made on the Closing of the Strategic Acquisition
and (ii) 15% of the amount under (i) mentioned immediately prior to this item. However, the noteholder can elect to offset the
payment of the interests of the note by the annual increase rate the Targets realizes, despite a lower rate.
VIE Structure with the Targets
Jinong,
the Targets, and the shareholders of the Targets also entered into a series of contractual agreements for the Targets to qualify
as variable interest entities or VIEs (the “VIE Agreements”). The VIE Agreements are as follows:
Entrusted
Management Agreements
Pursuant
to the terms of certain Entrusted Management Agreements dated June 30, 2016, between Jinong and the shareholders of the Targets
(the “Entrusted Management Agreements”), the Targets and their shareholders agreed to entrust the operations and management
of its business to Jinong. According to the Entrusted Management Agreement, Jinong possesses the full and exclusive right to manage
the Targets’ operations, assets and personnel, has the right to control all of the Targets' cash flows through an entrusted
bank account, is entitled to the Targets' net profits as a management fee, is obligated to pay all of the Targets’ payables
and loan payments, and bears all losses of the Targets. The Entrusted Management Agreements will remain in effect until (i) the
parties mutually agree to terminate the agreement; (ii) the dissolution of the Targets; or (iii) Jinong acquires all of the assets
or equity of the Targets (as more fully described below under “Exclusive Option Agreements”).
Exclusive
Technology Supply Agreements
Pursuant
to the terms of certain Exclusive Technology Supply Agreements dated June 30, 2016, between Jinong and the Targets (the “Exclusive
Technology Supply Agreements”), Jinong is the exclusive technology provider to the Targets. The Targets agreed to pay Jinong
all fees payable for technology supply prior to making any payments under the Entrusted Management Agreement. The Exclusive Technology
Supply Agreements shall remain in effect until (i) the parties mutually agree to terminate the agreement; (ii) the dissolution
of the Targets; or (iii) Jinong acquires the Targets (as more fully described below under “Exclusive Option Agreements”).
Shareholder’s
Voting Proxy Agreements
Pursuant to the terms of certain
Shareholder’s Voting Proxy Agreements dated June 30, 2016, among Jinong and the shareholders of the Targets (the
“Shareholder’s Voting Proxy Agreements”), the shareholders of the Targets irrevocably appointed Jinong as
their proxy to exercise on such shareholders’ behalf all of their voting rights as shareholders pursuant to PRC law and
the Articles of Association of the Targets, including the appointment and election of directors of the Targets. Jinong agreed
that it shall maintain a board of directors, the composition and appointment of which shall be approved by the Board of the
Company. The Shareholder’s Voting Proxy Agreements will remain in effect until Jinong acquires all of the assets or
equity of the Targets.
Exclusive
Option Agreements
Pursuant
to the terms of certain Exclusive Option Agreements dated June 30, 2016, among Jinong, the Targets, and the shareholders of the
Targets (the “Exclusive Option Agreements”), the shareholders of the Targets granted Jinong an irrevocable and exclusive
purchase option (the “Option”) to acquire the Targets’ equity interests and/or remaining assets, but only to
the extent that the acquisition does not violate limitations imposed by PRC law on such transactions. The Option is exercisable
at any time at Jinong’s discretion so long as such exercise and subsequent acquisition of the Targets does not violate PRC
law. The consideration for the exercise of the Option is to be determined by the parties and memorialized in the future by definitive
agreements setting forth the kind and value of such consideration. Jinong may transfer all rights and obligations under the Exclusive
Option Agreements to any third parties without the approval of the shareholders of the Targets so long as a written notice is
provided. The Exclusive Option Agreements may be terminated by mutual agreements or by 30 days written notice by Jinong.
Equity
Pledge Agreements
Pursuant
to the terms of certain Equity Pledge Agreements dated June 30, 2016, among Jinong and the shareholders of the Targets (the “Pledge
Agreements”), the shareholders of the Targets pledged all of their equity interests in the Targets to Jinong, including
the proceeds thereof, to guarantee all of Jinong's rights and benefits under the Entrusted Management Agreements, the Exclusive
Technology Supply Agreements, the Shareholder’ Voting Proxy Agreements and the Exclusive Option Agreements. Prior to termination
of the Pledge Agreements, the pledged equity interests cannot be transferred without Jinong's prior written consent. The Pledge
Agreements may be terminated only upon the written agreement of the parties.
Non-Compete
Agreements
Pursuant
to the terms of certain Non-Compete Agreements dated June 30, 2016, among Jinong and the shareholders of the Targets (the “Non-Compete
Agreements”), the shareholders of the Targets agreed that during the period beginning on the initial date of their services
with Jinong, and ending five (5) years after termination of their services with Jinong, without Jinong’s prior written consent,
they will not provide services or accept positions including but not limited to partners, directors, shareholders, managers, proxies
or consultants, provided by any profit making organizations with businesses that may compete with Jinong. They will not solicit
or interfere with any of the Jinong’s customers, or solicit, induce, recruit or encourage any person engaged or employed
by Jinong to terminate his or her service or engagement. In the event that the shareholders of the Targets breach the non-compete
obligations contained therein, Jinong is entitled to all loss and damages; in the event that the damages are difficult to determine,
remedies bore the shareholders of the Targets shall be no less than 50% of the salaries and other expenses Jinong provided in
the past.
Jinong acquired the Targets using the VIE arrangement
based on our need to further develop our business and comply with the regulatory requirements under the PRC laws.
As our business focuses on the production of
fertilizer, all of our business activities intertwine with those in the agriculture industry in China. Specifically, we deal with
compliance, regulation, safety, inspection, and licenses in fertilizer production, farm land use and transfer, growing and distribution
of agriculture goods, agriculture basic supplies, seeds, pesticides, and trades of grains. It is an industry in which heavy regulations
get implemented and strictly enforced. In addition, E-commerce, which is also under strict government regulations in the PRC, has
lately become a sale and distribution channel for agricultural products. Currently, we are developing an online platform to connect
the physical distribution network we either own or lease.
Compared with the regulatory environment in
other jurisdictions, the regulatory environment in the PRC is unique. For example, On August 8, 2006, six PRC regulatory agencies
promulgated the Regulation on Merger and Acquisition of Domestic Companies by Foreign Investors (the “M&A Rules”),
which became effective on September 8, 2006. The “M&A Rules” purports to require that an offshore special purpose
vehicle controlled directly or indirectly by PRC companies or individuals and formed for purposes of overseas listing through acquisition
of PRC domestic interests held by such PRC companies or individuals obtain the approval of the China Securities Regulatory Commission
(the “CSRC”) prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock
exchange. On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings
by special purpose vehicles. However, the CSRC has not issued any definitive rules or interpretations concerning whether offerings
such as the Offering are subject to the CSRC approval procedures under the M&A Rules. Based on our understanding of the PRC
Laws (including the M&A Rules), a prior approval from the CSRC is not required for the Offering because (1) the Company established
its first foreign invested enterprise in 1999, prior to the adoption of M&A Rules; (2) the Company did not acquire any equity
interests or assets of a PRC company owned by its controlling shareholders or beneficial owners who are PRC companies or individuals,
as such terms are defined under the M&A Rules. However, uncertainties still exist as to how the M&A Rule will be interpreted
and implemented and our opinion stated above is subject to any new laws, rules and regulations or detailed implementations and
interpretations in any form relating to the M&A Rule.
For both E-commerce and agriculture industries,
PRC regulators limit the investment from foreign entities and set particularly rules for foreign-owned entities to conduct business.
We expect these limitations on foreign-owned entities will continue to exist in E-commerce and agriculture industries. VIE arrangement,
however, provides feasibility for the purpose of obtaining administrative approval process and avoiding industry restrictions that
be imposed on an entity that is a wholly-owned subsidiary of a foreign entity. The VIE agreements reduces uncertainty and the current
limitation risk. It is our understanding that the VIE agreements, as well as the control we obtained through VIE arrangement, are
valid and enforceable. Such legal structure does not violate the known, published, and current PRC laws. While there are substantial
uncertainties regarding the interpretation and application of PRC Laws and future PRC laws and regulations, and there can be no
assurance that the PRC authorities will take a view that is not contrary to or otherwise different from our belief and understanding
stated above, we believe the substantial difficulty that we experienced previously to conduct business in agriculture as a foreign
ownership ca be greatly reduced by the VIE arrangement. Further, as an integral part of the VIE arrangement, the underlying equity
pledge agreements provide legal protection for the control we obtained. Pursuant to the equity pledge agreements, we have completed
the equity pledge processes with the Targets to ensure the complete control of the interests in the Targets. The shareholders of
the Targets are not entitled to transfer any shares to the third party under the exclusive option agreements. If necessary, they
may transfer shares to our company without consideration.
While the VIE arrangement provides us with
the feasibility to conduct our business in the E-Commerce and agriculture industries, validity and enforceability of VIE arrangement
is subject to (i) any applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or similar laws affecting
creditors’ rights generally, (ii) possible judicial or administrative actions or any PRC Laws affecting creditors’
rights, (iii) certain equitable, legal or statutory principles affecting the validity and enforceability of contractual rights
generally under concepts of public interest, interests of the State, national security, reasonableness, good faith and fair dealing,
and applicable statutes of limitation; (iv) any circumstance in connection with formulation, execution or implementation of any
legal documents that would be deemed materially mistaken, clearly unconscionable, fraudulent, coercionary at the conclusions thereof;
and (v) judicial discretion with respect to the availability of indemnifications, remedies or defenses, the calculation of damages,
the entitlement to attorney’s fees and other costs, and the waiver of immunity from jurisdiction of any court or from legal
process. Validity and enforceability of VIE arrangement is also subject to risk derived from the discretion of any competent PRC
legislative, administrative or judicial bodies in exercising their authority in the PRC. As a result, there can no assurance that
any of such PRC Laws will not be changed, amended or replaced in the immediate future or in the longer term with or without retrospective
effect.
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 from 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.
After
the acquisition of Green New Jersey, the Company changed its name to China Green Agriculture, Inc., effective on 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. Effective June 16, 2013, Yuxing was converted into a PRC domestic enterprise wholly owned by an individual
who entered into a series of contractual agreements with Jinong pursuant to which Yuxing became Jinong’s variable interest
entity, or VIE.
On
March 9, 2009, the Company’s common stock was listed on the NYSE MKT, formerly known as 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 equity interests of Gufeng and its subsidiary
Tianjuyuan. As a result, Gufeng and Tianjuyuan became 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. The Company routinely posts important information on its website.
On June 30, 2016, the Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition
agreements and a series of contractual agreements with the shareholders of the following six companies that are organized under
the laws of the PRC and would be deemed
as
our VIEs: Shaanxi Lishijie Agrochemical Co., Ltd., Songyuan Jinyangguang Sannong Service Co., Ltd., Shenqiu County Zhenbai Agriculture
Co., Ltd., Weinan City Linwei District Wangtian Agricultural Materials Co., Ltd., Aksu Xindeguo Agricultural Materials Co., Ltd.,
and Xinjiang Xinyulei Eco-agriculture Science and Technology Co., Ltd.
Our
current corporate structure is set forth in the following diagram:
Industry
Analysis
Fertilizer
Market in China
Influenced
by the sluggish demand in domestic and international fertilizer market, China’s fertilizer market is in downturn during
this year. In terms of production, the output of fertilizer will reach another record high during the Fiscal Year 2016. However,
large inventory of fertilizer guarantee no profits. The prices of raw material move down, so the price of fertilizer is hard to
rise; in terms of domestic consumption, though grain price increased to some extent, the domestic consumption capacity is limited;
as for export, international market is depressed continuously resulted from the declined export price. In this year, fertilizer
industry is in downward trend as the profit is compressed again and the losses of enterprises are enlarged. Under the pressure
of sluggish growth in fertilizer market, industrial restructuring, mergers and reorganization were frequently conducted in the
industry, hence the number of enterprises continued to decline. At the same time, the production equipment and technological level
was largely improved: coal-water slurry gasification technology, powdered coal pressure gasification technology, large sulfur-based
compound fertilizer technology and beneficiation technology of mid-low grade phosphorite were widely used, while new fertilizer
products such as slow controlled release fertilizer and microbial fertilizer has been rapidly developed and resulted in significant
market expansion.
Recently,
as the growth of China’s economy has gradually slowed down and the risk of economic downturn therefore exists, the government
has adopted various measures to maintain the growth and the Company needs structural adjustment and growth pattern transformation.
On
the one hand, government’s support to agricultural production includes intensive agricultural investment, subsidies and
minimum purchasing price raise for farm products. China has seen another bumper year of grain production, making 2013 the 10
th
year in a row of increase output, which supports fertilizer scale to remain high in 2016. The country has achieved 10 consecutive
year of rising grain harvests since the founding of the People’s Republic of China in 1949. As the concentration of fertilizer
industry is steadily improving, the influence on market from key enterprises have increased which helped to ease the weakened
market volatility. On the other hand, the current oversupply problem is hard to relieve. Mechanism of Price reform for raw materials
(such as coal, natural gas, sulfur phosphate ore, etc.) is accelerating, which casted pressure on production cost. Stricter export
tariff policy is expected to last for long, and weak external economical situation may limit the operation and expansion of fertilizer
enterprises in international market.
The
interaction of the above factors complicated the situation in fertilizer market in 2016.The overall growth rate of this industry
has continually slowed down and the market has fluctuated violently. The transformation for China’s fertilizer industry
from quantitative growth pattern to qualitative growth pattern is irreversible. The centralization of production, high-end orientated
product, service orientated marketing and market-oriented raw materials dominated the development in fertilizer market.
Additionally, government support for the agriculture
industry in China would act as an additional boost to the fertilizer industry in China. However, we anticipate organic
fertilizers will become an emerging segment in the coming years given the additional subsidies for farming, elimination of certain
land taxes, land reform initiatives to be implemented by the PRC government to promote the growing of organic produce. We believe
the demand for fertilizer will continue to grow as a result of increase in food demand, decrease in arable land and reduction
of crop yields. The demand for fertilizers nationwide is expected to reach thousands of tons of nutrient by 2017, with a compound
annual growth rate of 5.7% between 2012-2017.
Organic
versus Chemical Fertilizers
In
general, fertilizer products are categorized into organic and 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, blood meal, 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.
Over
the past 20 years, the use of chemical fertilizers in China substantially increased, but years of use created unintended consequences
for the agriculture industry—Agricultural products gradually lack certain minerals since Chemical fertilizers applied fell
short of natural minerals which made soil infertile.
In
addition, heavy use of chemical fertilizers would create "fertilizer burn", the over-fertilization of a single nutrient
such as nitrogen. which dried roots and suspend crop growth due to the upset of balance in compound salts and soil acidification.
Another drawback caused by chemical fertilizers is that soil are easily depleted by irrigation, rainfall and flooding. In addition,
the production of chemical fertilizers consumed a great deal of natural resources. For example, the production of synthetic ammonia,
a common chemical fertilizer, consumes about 5% among the world’s natural gas consumption.
Organic
fertilizers, on the other hand, improve the biodiversity and long-term productivity of soil. Organic nutrients increase the abundance
of soil organisms by providing organic micronutrients. Unlike chemical fertilizers, organic fertilizer nutrients are diluted with
better solubility. It requires less application on soil to reach the same result as of chemical fertilizers, which maintains soil
fertility and avoid the runoff caused by components like soluble nitrogen and phosphorus. However, the composition of organic
fertilizer is more complex and costly than chemical products. As an alternative to pure chemical fertilizer use, farmers can also
use inorganic fertilizer supplemented with small portion 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 slowed down 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,
such as humic acid-based organic compound fertilizers and mixed organic-inorganic compound fertilizers, because they provide crops
with incremental yield by adding various nutrients essential to soil. Although being relatively new to farmers, the demand for
these green fertilizers was increasing and we expect this trend to continue in the coming years. Among other Asian and Southeast
Asian countries we expanded business to, the PRC remained our principal market for organic compound fertilizers and related agricultural
products.
The
“Green Food” Industry in the PRC
The
rise of the PRC industry for food free from pollutants or harmful chemicals, or “green food”, raise the demand for
organic fertilizers. “Green Food”, the certificate for agricultural products promoted by Chinese Government, positioned
between ordinary agricultural food from common farming practice and the organic food has two levels: “AA Green Food”
and “A Green Food”. The “AA Green Food” standard indicates or equals to that of organic agriculture. Since
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 exceed that of the average organic agricultural products consumption in the world in the next
few years, and the market of Chinese organic agricultural products will reach RMB 24.8 billion-59.4 billion in 2015with an incremental
15 percent increase year over year during the next following years.
With
the rapid development of organic food industry in China, an increasing number of companies have been entering into the green food
sector to utilize market opportunities. In 1990, the PRC Ministry of Agriculture began to promote the production of green food;
In 1992, the PRC Ministry of Agriculture established the
China Green Food Development Center (
CGFDC)
to supervise 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 for green food labeling; In 1996, a trademark for green food was registered and put into
use in the PRC.
Crops
grown with the use of our products are qualified for “AA Green Food” certificate. As mentioned above, the “AA”
rating indicates that the crops contain minimal chemical residue from fertilizers. Although our products are not qualified for
the “AA Green Food” certificate, they are (except for the products from “Gufeng”) certified as “Green
Food Production Material” by the CGFDC.
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’ purchase.
As
described by the CGFDC, the development strategy for China’s green food industry are as follows: first, maintain high quality
standards and focus on developing key products; second, promote and facilitate the industrialization of green food; third, implement
an integrated development strategy emphasizing producers, production base and farmers; fourth, accelerate the pace of development
with the aid of the government; and fifth, to carry out an international development strategy aimed at promoting exports.
According
to the Investment and Forecast Report on China Green Food Industry 2012-2016 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 huge growth when they achieve national and provincial agricultural industrialization with the supports
of favorable government policies and tax breaks.
Growth
Strategy
We
believe that our increased production capacity and our research and development capability positioned us to benefit from the anticipated
growth of the PRC fertilizer market. We expect to expand sales and grow revenues through the following strategies:
☐
Expand Capacity and Diversify Product Offerings.
Our current annual fertilizer production capacity is 555,000 metric tons
and our portfolio of fertilizers includes 459 products. In the future we will expand our existing production lines, develop new
products and acquire certain PRC fertilizer manufacturers that complement our product lines.
☐
Capitalize
on Synergies Created by Research and Development Efforts.
In connection with the construction of Yuxing’s research and
development center, we have established 98 sunlight greenhouses and six “intelligent” greenhouses. We expect the Yuxing
facility to help us shorten the fertilizer market cycle by providing an advanced testing field for new products which are manufactured
by Jinong. In addition, by making efforts in research and development, we expect to simultaneously facilitate the production of
superior agricultural products, such as flower bulbs, flowers, fruits and vegetables, which would eventually increase revenues.
☐
Develop new advanced high efficient fertilizers
. The new fertilizer products represented by slow controlled-release fertilizer,
microbial fertilizer and others, developed rapidly with high market expansion. Gufeng has signed a cooperation agreement with
Anhui Diyuan Biological Technology Co., LTD (“Anhui Diyuan”) to produce the “Tianjuyuan” controlled-release
fertilizer. The objective is to provide Gufeng with fertilizer agent supplied by Anhui Diyuan to improve the control release effectiveness
when producing controlled-release compound fertilizers. In the agreement, Chinese Academy of Sciences (“CAS”) and
Anhui Diyuan authorized Gufeng to refer to CAS and Anhui Diyuan’s name in marketing related fertilizer products. We expect
that Gufeng’s controlled-release compound fertilizer will stay an advantageous position in the market.
Products
Our
principal products are our fertilizers, which consist of liquid, granular and powdered fertilizers and various kinds of compound
fertilizers developed to increase crop yields. We manufacture and sell 459 fertilizer products from humic acid-based fertilizers
to compound fertilizers. In addition, we produce high quality agricultural products such as fruits, vegetables and flowers for
commercial sale.
Fertilizer
Products
Fertilizer
business is our main business, which produce approximately 96.9% of total revenues. Fertilizers are produced and sale 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 with natural, organic ingredient essential to make soil fertile. Humic acid-rich material, such as peat, lignite
or weathered coal generating naturally from decomposed plant or animal remains, is one of the major organic constituents for soil
composition. 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 stabilize soil. The regular use of humic acid organic liquid compound fertilizer
can effectively reduce the use of chemical fertilizer, insecticide, herbicide and water. This mechanism contributes to environmental
protection by preventing 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 from wind and water as well as radical
toxic pollutants. Humic acid promotes the developing of root systems, seed germination and overall plant growth. It also enhances
health, resilience and overall appearance of plants. We believe 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 principally used as a foliar fertilizer (a liquid, water soluble fertilizer applied to a plant’s
foliage by a fine spray so the plant absorbs the nutrients through its leaves), through spraying directly on soil or injecting
into the irrigation systems. Benefits of using our products are to stimulate the growth and yield of plants, protecting them from
drought, disease and temperature damages while improving soil structure and fertility.
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: “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.” which are both PRC registered
trademarks.
We
have a multi-tiered product line of 459 fertilizer products, covering humic acid-based compound fertilizer produced through Jinong,
and organic/inorganic compound fertilizer through Gufeng.
During
the fiscal years ended June 30, 2016, 2015 and 2014, we earned $260,378,357, $259,030,774 and $229,717,266, respectively, in gross
revenues from sales of our fertilizer products, representing 96.9%, 98.4% and 98.4% of our total revenues for such periods. Gufeng
and Tianjuyuan manufacture a total of 332 fertilizer products. 89.6% of Gufeng’s fertilizer revenue came from humic acid
compound fertilizers and 10.4% from compound fertilizer for the fiscal year ended June 30, 2016.
Agricultural
Products
Our
subsidiary, Yuxing, Jinong’s VIE produce top-grade fruits, vegetables, flowers and colored seedlings for commercial sale.
The gross revenues from the sale of our agricultural products for the fiscal years ended June 30, 2016, 2015 and 2014, were $8,406,663,
$4,323,514 and $3,684,822, respectively, representing 1.6%, 1.6% or 1.6% of our total revenues, respectively.
Yuxing
was originally established to be the research and development base for humic acid fertilizers produced by Jinong. By simulating
the growing conditions and cycles of various plants, such as flowers, vegetables and seedlings, Yuxing regularly conducts 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. These production lines are fully automated and ran by a central control system with minimal manual input by technicians.
The machinery and vats for the line are supplied by a local medical machinery manufacturer and the automatic control systems were
developed by us. Our access management system protects the proprietary ingredient mixes from any unauthorized use at all time.
Our computer server is connected to the electronic scales on each of the material input bins to ensure that the exact quantity
of each elements or ingredients is delivered correctly, thus maintain product quality and reduce waste. Our production line producing
liquid fertilizer and powered fertilizer is centrally controlled by a wireless panoramic audio and video monitoring system that
allows connectivity with mobile terminals such as cell phones.
In
Jinong, we operate a 6,495 square meters (69,911 square feet) production facility that manufactures liquid fertilizer products
and a 13,803 square meter (148,576 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.
In
Gufeng and Tianjuyuan, we operate eight manufacturing facilities 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.
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 all different compound
fertilizers. To ensure high quality, Gufeng and Tianjuyuan employ strict quality controls from the raw materials purchases to
the products sales to end users.
We
produced and sold a total of approximately 413,633 metric tons of fertilizer products during the fiscal year ended June 30, 2016.
Raw
Materials and Suppliers
Fertilizer
Products
Among
the three materials utilized to produce humic acid (weathered coal, lignite and peat), we have chosen weathered coal as our principal
raw material because it is abundant with the price of approximately $116.1 per metric ton including delivery. We have been using
Inner Mongolia Tianlibao Fertilizer Co., Ltd. (“Tianlibao”) as our main supplier for the abundant and high-quality
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 local markets. We utilize spectral analysis
technology to select raw materials with the best quality, and we have specially-trained buyers to ensure the consistency of raw
materials procured.
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 hydro nitrogen. Shaanxi Shanbei Agricluture
Co., Ltd.. and Sino-agri are the primary suppliers for raw materials to Gufeng, accounting for approximately 29.1% and 26.8%,
respectively, of Gufeng’s total purchase for the fiscal year end June 30, 2016. However, the loss of either of these suppliers
would not cast 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 provinces.
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 Yuxing. We purchase seeds of green vegetables and fruits from agricultural companies, such as RijkZwaan
Company which imports the seeds from foreign markets including Holland. 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 real demands. Products are shipped directly to distributors after
production in response to orders we received. We normally carry finished goods up to one week and do not maintain any work-in-process.
For
our agricultural products, we maintain approximately one month’s inventory because we need a significant amount of agricultural
products to serve as our product testing base for research and development purpose.
Return
Policy
The
Company only accepts returns of defective fertilizer products. During the fiscal year ended June 30, 2016, the Company did not
experience any significant returns.
Backlog
As
of June 30, 2016, we had a backlog of orders in the amount of $9,664,348 as compared to $9,413,250, $5,359,200, and $1,009,062
in backlog orders as of June 30, 2015, 2014 and 2013.
Seasonality
The
peak season to sell fertilizer products was from January through June. However, during the fiscal year ended June 30, 2016, Jinong
did not experience seasonal variation with respect to its fertilizer sales since approximately 47.5% of its annual sales revenue
occurred in the third fiscal quarter (winter) and the fourth fiscal quarter (spring). Gufeng’s sales of compound fertilizer
has undergone significant seasonal variation in China. Correspondingly, the purchase of its raw material, basic fertilizers, is
affected by the supply and demand in the fertilizer market with seasonality. Over non-peak sales season, when the raw material
price is low, Gufeng still places larger orders for raw material as its export business offset the seasonality when exportation
made to southern Asia, such as India, where their selling are on corresponds to the non-peak season in China.
The
peak selling season for our agricultural products is from October till March the next calendar year, namely our second fiscal
quarter (fall) and the third fiscal quarter (winter). This was primarily due to the strong demand for high-end fruits and decorative
flowers during the holiday seasons. However, Yuxing did not have seasonal variation problem during the period from October 2015
through March 2016, it generated approximately 5.3 million, or 63.7% of our annual sales of agricultural products.
Marketing,
Distribution and Customers
Overview
We
currently market our fertilizer products to private wholesalers and retailers of agricultural farm products in 27 provinces, 4
autonomous regions and 3 central government-controlled municipalities in China. For the fiscal year 2016, the following five PRC
provinces, collectively accounted for 56.3% of our total fertilizer revenue: Beijing(24.1%), Hebei (11.9%), Shaanxi (8.4%), Heilongjiang
(6.8%) and Liaoning (5.0%). 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 and product awareness nationwide. We also manufacture our fertilizer products for exportation
through contracted distributors in foreign countries, including India and Ghana. Total revenues from exported products accounted
for approximately 0.1% of our total fertilizer revenues in fiscal 2016.
FY2016
Export Details
Export to
|
|
Subsidiary
|
|
Type
|
|
Amount ($)
|
|
India
|
|
Gufeng
|
|
40% humic acid organic/inorganic fertilizer
|
|
|
0
|
|
India
|
|
Jinong
|
|
Liquid Fertilizer
|
|
|
170,512
|
|
India
|
|
Jinong
|
|
Solid Fertilizer
|
|
|
52,029
|
|
Total
|
|
|
|
|
|
|
222,541
|
|
Our
agricultural products are distributed through various channels in Shaanxi Province and other 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 departments of city
planning.
A
multi-tiered product strategy 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 are willing to invest in expensive and specialized fertilizers. In contrast, we market
low-cost fertilizers to farmers in the Northwest areas of China due to the inclement weather.
Our
research and development capabilities allows us to tailor products to meet specific farming needs in considering different factors
such as crops species, 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 communicate with distributors and customers by regularly organizing training courses on
new agricultural techniques.
Compared
with industry norms, we believe our product development cycle of three to nine months is relatively short. Through our regular
collection of market data, including growth records of a variety of plants cultivated in different soil and climate conditions,
together with feedbacks 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 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 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 questions and have constructed
an SMS text message platform to have real-time interaction with customers.
Our
best-selling fertilizers, based on revenues for the fiscal year ended June 30, 2016, are listed below:
Ranking
|
|
Product Names
|
|
Volume
(Tons)
|
|
|
Revenues
(USD)
|
|
|
Percent of
Fertilizer Sales
|
|
1
|
|
Organic/Inorganic Compound Fertilizer (humicacid) NPK46%
|
|
|
158,593
|
|
|
|
59,779,757
|
|
|
|
22.3
|
%
|
2
|
|
Compound Fertilizer NPK40%
|
|
|
149,922
|
|
|
|
52,529,295
|
|
|
|
19.1
|
%
|
3
|
|
Organic/Inorganic Compound Fertilizer (humic acid) NPK45%
|
|
|
11,208
|
|
|
|
4,505,530
|
|
|
|
1.7
|
%
|
4
|
|
Organic/Inorganic Compound Fertilizer (humic acid) NPK54%
|
|
|
8,991
|
|
|
|
3,783,319
|
|
|
|
1.4
|
%
|
5
|
|
Organic/Inorganic Compound Fertilizer (humic acid) NPK50%
|
|
|
5,433
|
|
|
|
2,208,884
|
|
|
|
0.8
|
%
|
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.
As
of June 30, 2016, we sold our products through a carefully constructed network of about 1,904 distributors covering 27 provinces,
4 autonomous regions and 3 central government-controlled municipalities in China.
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 dominant to warrant
exclusivity. We enter into non-exclusive written distribution agreements with chosen distributors that demonstrate their ability
in regional sales networks. The distribution agreements do not dictate distribution quantity because changes in weather and local
market could dramatically affect sales quotas.
For
the fiscal year ended June 30, 2016, sales to our top five distributors accounted for approximately 38.5% of our fertilizer product
revenue, of which Sino-agri Holding Company Limited accounted for 23.7% of the total fertilizer revenues. As we do not depend
on any particular customers, we believe that the loss of single customers 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, 2016. Yuxing’s customers accounted for
approximately 29.7% of the total revenues from Yuxing’s agricultural products.
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: (i) establishment of Company directly-owned retail stores to sell fertilizer products produced by Jinong
and Gufeng through the designated sales personnel (the “Pilot Program”) and (ii) selection of qualified retailers
from the Company's distributor base to be designated as "China Green Agriculture Authorized Retailers". Under the Pilot
Program, we currently have one directly-owned store operating in Shaanxi Province, with each store having an assigned territory
in order not to compete with other existing distributors. Since the launch of the Pilot Program in January 2010, we have worked
closely with our existing distributors who designate over 26,175 retailers, namely the “China Green Agriculture Retailers”
for fiscal year ended June 30, 2016. 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 attract target farmers.
Research
and Development
We
conduct the bulk of our research and development activities through Yuxing. Through Yuxing, 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.
Yuxing operates advanced research and development facilities that: (i) provide testing and an experimental data collection base
for new fertilizers produced by Jinong by simulating the growing conditions and development stages of a variety of plants, such
as flowers, vegetables and seedlings, (ii) 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. In addition, our research
and development capabilities allow us to develop products tailored to specific farming needs generated by different crop species,
humidity, weather and soil conditions. Flowers, fruits and vegetables grown from experimental testing of Jinong’shumic acid
compound fertilizers are of high quality and are sold to local supermarkets and airline companies.
The
capital expenditure and other payments on Yuxing’s construction were approximately $13,300,313, $474,322 and $927,153 for
the fiscal year ended June 30, 2016, 2015 and 2014, respectively. Upon completion, we expect the research and development center
to help expanding our output of high quality agricultural products for commercial sale while providing an advanced testing field
for new products. The new facility will continue to enhance our capability to produce more products while shortening the development
cycle, thus increase revenues and market share. In addition to developing new humic acid-based fertilizer products, we plan to
develop other agricultural derivatives such as humic-acid based organic pesticides, which can provide additional revenue sources.
For the fiscal year ended June 30, 2016, we sold approximately $8,406,663 of these agricultural products.
|
|
FY 2016
|
|
|
FY2015
|
|
|
FY2014
|
|
Machines, Buildings and Equipment
|
|
$
|
13,236,949
|
|
|
$
|
405,401
|
|
|
$
|
878,270
|
|
Land Use Right
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Advanced Payment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Construction in Progress
|
|
$
|
63,364
|
|
|
$
|
68,921
|
|
|
$
|
48,883
|
|
Total
|
|
$
|
13,300,313
|
|
|
$
|
474,322
|
|
|
$
|
927,153
|
|
The
research and development costs in Jinong for the fiscal year ended June 30, 2016, 2015 and 2014 are illustrated as the following:
|
|
FY
2016
|
|
|
FY2015
|
|
|
FY2014
|
|
Freight Expense
|
|
$
|
|
|
|
$
|
4,316
|
|
|
$
|
1,011
|
|
Travel Expense
|
|
$
|
6,984
|
|
|
$
|
10,562
|
|
|
$
|
4,514
|
|
Salary
|
|
$
|
56,750
|
|
|
$
|
56,960
|
|
|
$
|
58,140
|
|
Experiment and Testing
|
|
$
|
52,240
|
|
|
$
|
44,379
|
|
|
$
|
86,595
|
|
Other
|
|
$
|
20,308
|
|
|
$
|
13,321
|
|
|
$
|
7,105
|
|
Total R&D Expense for Jinong
|
|
$
|
136,282
|
|
|
$
|
129,538
|
|
|
$
|
157,365
|
|
The
research and development costs in Gufeng for the fiscal year end June 30, 2016, 2015 and 2014 are illustrated in the table below:
Item
|
|
FY 2016
|
|
|
FY2015
|
|
|
FY2014
|
|
Raw material
|
|
$
|
49,428
|
|
|
$
|
537,26
|
|
|
$
|
46,869
|
|
Manufacturing Cost
|
|
$
|
4,578
|
|
|
$
|
49,76
|
|
|
$
|
1,949
|
|
Experiment and Testing
|
|
$
|
229
|
|
|
$
|
2,48
|
|
|
$
|
97
|
|
Labor Cost
|
|
$
|
2,289
|
|
|
$
|
24,88
|
|
|
$
|
974
|
|
License fee
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Total R&D Expense for Gufeng
|
|
$
|
56,524
|
|
|
$
|
61,438
|
|
|
$
|
49,889
|
|
In
summary, as illustrated by the summary table below, for Jinong, Gufeng and Yuxing, the Company bears research and development
costs as incurred. For the years ended June 30, 2016, 2015 and 2014, research and development costs were $192,806, $190,976 and
$207,254 respectively.
|
|
FY
2016
|
|
|
FY2015
|
|
|
FY2014
|
|
Yuxing
|
|
$
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Jinong
|
|
$
|
136,282
|
|
|
$
|
129,538
|
|
|
$
|
157,365
|
|
Gufeng
|
|
$
|
56,524
|
|
|
$
|
61,438
|
|
|
$
|
49,889
|
|
Total
|
|
$
|
192,806
|
|
|
$
|
190,976
|
|
|
$
|
207,254
|
|
New
Product
With
our strong and advanced research and development capabilities, we have developed 459 products and continued to develop new products.
During the fiscal year ended June 30, 2016, we developed 5 new products, which contributed $29,248 to our sales revenue for the
period.
Among
the new products we introduced in fiscal year 2016, there are several powder fertilizers, liquid fertilizers and compound fertilizers.
In
addition to developing new fertilizer products, we also developed soilless seeding and breeding of colored-leaf plants, rare flowers
and new species of fruits and vegetables.
Intellectual
Property
Trademark
|
|
Registration Number
|
|
Valid term
|
Huang Cheng Gen
|
|
No.5219720
|
|
June 28, 2009 to June 27, 2019
|
Mei Er An
|
|
No.1508004
|
|
January 21, 2011 to January 20, 2021
|
KEBA
|
|
No.10045980
|
|
December 07, 2012 to December 06, 2022
|
KEBA
|
|
No.10046405
|
|
December 14, 2012 to December 13, 2022
|
KEBA
|
|
No.10045898
|
|
March 07, 2013 to March 06, 2023
|
KEBA
|
|
No.10046344
|
|
March 07, 2013 to March 06, 2013
|
AGR GFJ
|
|
No.3320281
|
|
May 28, 2014 to May 27, 2024
|
SPR HOP
|
|
No.3320282
|
|
May 28, 2014 to May 27, 2024
|
T.J.Y
|
|
No.3320283
|
|
May 28, 2014 to May 27, 2024
|
KEBA
|
|
No.760379
|
|
August 14, 2005 to August 13, 2025
|
We
hold the following trademarks registered with the PRC Trademark Offices of National Industrial and Commerce Administrative Bureau
(the “PRC Trademark Offices”):
A
registered trademark is protected in China for a term of 10 years, and is renewable for another 10 year term under the PRC trademark
law, as long as the renewal application is submitted to the PRC Trademark Offices within 6 months prior to the expiration of the
previous term.
Listed
below are Jinong’s four patents for a fertilizer formulation and a proprietary production line and manufacturing processes.
Patent/Pending
Patent
Application
|
|
Type
of Patent
|
|
Patent
No.
/Application
No.
|
|
Inventor’s
Name
and
Patent
Holder
|
|
Date
of
Application
|
|
Date
of
Publication
and
Term
|
Patent:
Production facility of Humic Acid Products
|
|
Utility Model
Patent
|
|
Patent No.: ZL
NL 2007 20031884.2
|
|
Inventor: Tao Li
Patent Holder:
Jinong
|
|
May 29, 2007
|
|
May 14, 2008; 10 years
|
|
|
|
|
|
|
|
|
|
|
|
Patent:
Method and recipe of the water soluble humic
acid fertilizers
|
|
Utility Model
Patent
|
|
Application No.:
ZL200710017334.x
|
|
Applicant:
Jinong
|
|
February 1, 2007
|
|
November 24, 2010;
20 years
|
|
|
|
|
|
|
|
|
|
|
|
Patent:
Production method of Organic Fertilizer
|
|
Utility Model
Patent
|
|
Application No.:
ZL201110282544.8
|
|
Applicant:
Jinong
|
|
September 22, 2011
|
|
December 4, 2013;
20 years
|
|
|
|
|
|
|
|
|
|
|
|
Patent:
Production method of Multifunctional liquid
calcium fertilizer
|
|
Utility Model
Patent
|
|
Application No.:
NL 201410020442.2
|
|
Applicant:
Jinong
|
|
January 17, 2014
|
|
October 19, 2014;
20 Years
|
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. Both of our registered patents are all utility patents. Any use of our patent without consent or a proper license from
the us constitutes an infringement of patent rights.
In
addition to trademark and patent protection in China, we also rely on contractual confidentiality provisions to protect our brand
and intellectual property rights. To safeguard these rights 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.
They also agree that all work products belong to us. Moreover, we take steps to limit the number of personnel involved in the
production process and, instead of disclosing fertilizer ingredients to employees, we refer to the ingredients by numbers.
Competitive
Strengths
We
believe our products possess the following competitive advantages which 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 1,292 distributors nationwide
across 27 provinces, 4 autonomous regions and 3 central government-controlled municipalities in China. Most of our competitors
do not have a sales team as large as ours that specializes in the sale of compound fertilizer products. Moreover, we believe the
regional strengths of Gufeng’s distribution network have expanded and will continue to expand our sales coverage to certain
cities and counties as well as foreign markets.
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 on 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.
Since most of Jinong’s experimental work is conducted in Yuxing’s greenhouse facilities, thereby speeding up development
cycles, we are able to reduce costs without sacrificing accurate results. During the fiscal year ended June 30, 2016, we generated
approximately $8,406,663 revenue from sales of Yuxing’s agricultural products, and we anticipate that this source of revenue
will grow in the future. We have built 98 sunlight greenhouses and six intelligence greenhouses over an 88-acre parcel of land
in connection with Yuxing's pending research and development center, which expands output of high quality agricultural products
for commercial sale while providing an advanced testing field for new products.
Gufeng
and Tianjuyuan have a total of 17 employees in research and development. They have independently developed seven technologies:
(1)
Drying fan for urea-based compound fertilizer;
(2)
Heat balance control system for flexible compound fertilizer;
(3)
Automatic control system for the anti-block of compound fertilizer;
(4)
Water control technology for low nitrogen, low potassium and high phosphorus compound fertilizer;
(5)
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);
(6)
Manufacturing technology for compound HA fertilizer with high density (NPK ≥ 51%);
(7)
Manufacturing technology for the sustained release of blending and compound fertilizer
While
we believe our greenhouse facilities provide us with a competitive advantage over the competitors, some of them may still have
better understanding in certain local markets where they successfully marketed products over a period of time and have developed
specifically formulated fertilizers for local plants, soil and climate conditions. To enhance our competitiveness, we will seek
to diversify our fertilizers to benefit a wider range of plants and soil conditions.
Well-known
Brand.
We believe customers have strong brand recognition and would make purchase decision accordingly. “Jinong”,
“KEBA” and “T.J.Y” are registered trademarks and are well recognized by end users; in addition, certain
large national fertilizer traders, such as Sinoagri Holding Company Limited, one of the largest domestic fertilizer traders in
China, had strong brand preference for Gufeng’s fertilizer products. 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 orgainc/inorganic compound fertilizer (humic acid) with NPK ≥ 40%, and organic /inorganic compound fertilizer
(humic acid) with NPK ≥ 48%.
Automated
Production Line and Process
. All of Jinong’s major production procedures are controlled by a centralized computer system
only accessible for 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 material input
bins. In addition, spectral analysis is used to accurately check the composition of materials. During the fiscal year 2016, Jinong’s
highly advanced production lines manufactured a multi-tiered line of 132 fertilizer products, and we believe that Jinong’s
production lines are among the few advanced lines in the Chinese industry. As mentioned above, we have patent protection for Jinong’s
two proprietary production lines, one of which has medical grade production equipment with precise quality control, and the other
is capable of producing liquid, powder and granular fertilizers. 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 discernible market
leaders in the sector. We believe our competitors are currently comprised of approximately 90% small-sized local manufacturers
and 10% large national manufacturers such as Yongye International, Inc. We believe we are among the largest national fertilizer
manufacturers.
Gufeng’s
primary competitor is Stanley Fertilizer Co., Ltd. (“Stanley”), a compound fertilizer manufacturer based in Linyi,
Shandong Province, which was listed on Shenzhen Stock Exchange (China) in June 2011. Stanley manufactures various kinds of compound
fertilizers and tailored fertilizers which were in direct compete with Gufeng.
The
smaller competitors of ours are generally producers of amino acid compound fertilizers which are very price competitive. However,
lacking of adequate quality or process control technologies, these companies always sell products with inconsistent quality.
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 influenced by China’s diverse climate and terrains.
Agricultural
Products
The
competitive market of our agriculture products varies among our three main products: Top-grade flowers, green vegetables and fruits,
multi-colored seedlings.
Top-grade
Flowers
: The main competitor to our flowers and flower seedlings is Sanyi Agriculture Technology Co., Ltd. (Beijing).
We believe that our flower products have comparative advantages in terms of the advanced technologies we apply, the superior species
of the seedlings we select and the efficiency and stability due to strict quality control. In addition, 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. With the aid from our green fertilizers that improve
soil conditions and limit bacterial growth, our competitive advantage lies in the advanced greenhouse facilities which contribute
to the pollution-free end products.
Multi-colored
Seedlings
: In the market of Multi-colored seedlings, one of our main competitors is Kunming Anthura horticulture Co. Ltd.
Our products, primarily red photiniaserrulata, are imported from other countries with high survival rates.
Government
Regulation
Our
business operations are subject to various laws, including environmental, health and workplace safety laws issued by governmental
agencies on the provincial and state levels. Business and company registrations, along with the products, are monitored through
the issuance of licenses and certificates including the following:
“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”. Currently, the CGFDC provides two different certifications within the green food industry: "Green
Food Certification" granted to edible foods, and "Green Food Production Material Certification" granted to production
materials such as our fertilizers. A “Green Food Production Material Certification” was issued to Jinong on March
2015 and will expire in March 2018. The certificate is renewable with an application within 90 days prior to the expiration.
Operating license.
Our
operating license enables us to (1) undertake research and development, production, sales and services of humic-acid liquid fertilizer,
(2) sales of pesticides, and (3) export and import of products, technology and equipment. Jinong’s license (Registration
No. 610000100003655) is valid until August 8, 2057, and the license is renewable. Gufeng and Tianjuyuan maintain valid operating
licenses with expiration day on August 1, 2043 (for the license with Registration No. 110000008250498) and August 7, 2021 (for
the license with Registration No.110117003157142), respectively.
Fertilizer Registration.
Fertilizer registration is issued by the Ministry of Agriculture of the PRC and is required for producing fertilizers. 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, if granted, is valid for five years, and thereafter must be renewed every
five years. Jinong currently holds 16 formal fertilizer registration certificates. Gufeng and Tianjuyuan hold 11 interim fertilizer
certificates and 259 formal certificates.
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.
Investing in our securities
involves risk. Before making an investment decision, you should carefully consider the following information about these risks,
together with the other information contained in this Report. Our business, results of operations or financial condition could
be adversely affected by any of these risks, which could result in a decline in the market price of our securities, causing you
to lose all or part of your investment.
Risks Related to Our
Business
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 and it is possible that these competitors have better access in certain local markets, an enhanced
ability to customize products to particular regions and better established local distribution channels. 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 has led to increased foreign competition for us. International producers
and traders import products into China that generally are of higher quality than those produced by the local Chinese manufacturers.
If they are localized and become familiar with fertilizers we produce, we may face additional competition. If we are not successful
in our research, development and production of new products and/or in our marketing and advertising efforts to increase awareness
of our brands, our revenues could decline, which might 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 than we are. When facing reduced demand for our products, we can either
choose to maintain market share by reducing selling prices to meet competition, or to maintain the prices while sacrificing a
portion of market share. The overall profitability would be reduced in either case. In addition, we cannot assure you that additional
competitors will not enter into our existing markets, or that we will be able to compete successfully against existing or new
competitors.
If we are unable to design,
manufacture, and market fertilizer products in a timely and efficient manner, we may not remain as competitive
.
A lot of our fertilizer
products are characterized by short product development cycles as they target at 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 new and/or improved fertilizer products that cater to customer needs. New fertilizers
may not be easily developed. 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 a desired rate.
Our proprietary fertilizer
formula may become obsolete or be unintentionally disclosed to competitors, which could materially adversely affect the competitiveness
of our future fertilizer products.
Our proprietary fertilizer
formula is the base for producing our fertilizer. Our future success will depend upon our ability to address the increasingly
sophisticated needs of our customers by supplying existing humic acid fertilizer products and by developing new products on a
timely basis that keep pace with the evolving industry standards and changing customer requests. 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 key employees, we cannot assure you that if there is
a breach of such agreement by an employee, we would not 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,
significant expense will incur and a favorable outcome cannot be guaranteed.
If our warehouse selling
and credit sales of certain fertilizer products continue to increase and we fail to collect the accounts receivables that are
due in a timely manner, our financial condition and results of operation may be materially adversely affected.
We had accounts receivable
of $118,021,105 as of June 30, 2016, as compared to $68,528,598 and $88,781,608 as of June 30, 2015 and 2014, respectively, an
increase of $49,492,507 and a decrease of $20,253,010, or 72.2% and 22.8% year over year. The increase was primarily due to the
increased credit sales of Gufeng’s fertilizer products and the aggressive marketing of Jinong’s humic acid fertilizer
products including liquid and powder fertilizers. We offer a tentative credit period up to 180 days to our customers. Although
we perform routine assessment of our customers’ creditworthiness, evaluate the structure and collectability of accounts
receivable and provide an allowance for doubtful accounts when necessary, we may not be able to receive or collect payment for
our products on time or at all if our customers encounter financial difficulties. Any such failure may have a material adverse
impact on our financial condition and results of operation.
Our concentration of
customers could have a material adverse effect on us.
Gufeng’s top five
distributors accounted for 75.2% of its revenues with its largest distributor accounted for 46.2% of the total revenues for the
fiscal year of 2016. Jinong’s top five distributors accounted for 1.6% of its fertilizer revenues for the fiscal year ended
June 30, 2016. If those major customers reduce or discontinue their product purchases from us and we are unable to find their
replacements, it would adversely affect our results of operations.
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
four registered patents. The first patent is a fertilizer formulation named “Method and Recipe of the Water Soluble Humic
Acid Fertilizers”. The second patent, “Production Facility of Humic Acid Products”, relates to our proprietary
production line and manufacturing processes in the PRC. The third patent is “Production Method of Organic Fertilizer”.
The fourth patent is “ Production method of Multifunctional liquid calcium fertilizer”. 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 defense 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 consume 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 that 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 court judgments in China, there is no guarantee that we would be able to halt any unauthorized
use of our intellectual property through litigation.
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.
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 applied to the manufacturing of our products. Although there are numerous weathered coal
suppliers available in market, 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 supplier
in a timely manner or on the same terms, we may not be able to meet customer demand on humic acid-based fertilizers in a timely
manner or maintain our standards of quality for humic acid-based fertilizers during the transitional period, which may result
in the loss of customers and net sales or we may not be able to keep our profit margin as before for our humic acid-based fertilizers.
Gufeng and Tianjuyuan are
supplied with over 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 acquired
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, 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 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 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.
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 also 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 where product liability
claims could be more prevalent.
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
.
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.
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 16 formal registration certificates. Gufeng and Tianjuyuan have 19 interim fertilizer certificates and 259 formal
certificates. 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 grants 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 such fertilizer products without certificates
which will cause the termination of commercial operations for such 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 19 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 any unexpected incidents 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, with a particular reliance upon Mr. Tao Li, our CEO 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 in the event his services are not available to us. We do not carry key man life insurance
for our key personnel.
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, and the research and development initiatives may be delayed which will negatively impact our financial
condition, results of operations and share price.
Mr. Tao Li, our Chairman
and CEO may not devote all of his time to our business.
Our Chairman and CEO, Mr. Tao Li, also serves as Chairman of Xi’an Techteam Science & Technology
Industry (Group) Co. Ltd., a company engaged in hi-tech application fields in China, Chairman and CEO of Xi’an Techteam Investment
Holding (Group) Co., Ltd, a holding company for certain entities such as Gem Grain, and Chairman of Kingtone Wirelessinfo Solution
Holding Ltd, a publicly-traded, China-based developer and provider of mobile enterprise solutions. This may give rise to further
allocation of Mr. Li’s 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. Performing the
system and process documentation and evaluation needed to comply with Section 404 are both costly and challenging. 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 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 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 $134,661,420 for its fiscal year ended June 30, 2016, Gufeng’s net income for such period was $10,557,315. 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 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 RMB 35,500 (approximately $5,783). The
term of the Lease is from February 1, 2004 to January 31, 2054. We were informed by our PRC counsel that the Lease
is invalid and unenforceable pursuant to the PRC Land Administration Law and related regulations. Therefore, we have
been 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. As of the date of this report, we were informed by the local government that our application
materials for the land use right in issue has been moved up from the department in charge of general matters to the land administrative
department of the local government and is under their review. 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 is 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.
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. Our interests may be adversely affected by changes in
policies by the PRC government, including:
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in laws, regulations or their interpretation;
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restrictions
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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 political, economic and social life in China.
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.
We and any future subsidiaries
are considered foreign persons or foreign funded enterprises under PRC laws, and we are subject to 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 from 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 business.
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.
Substantially 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 the 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 2.6%, 2.0%, and 1.44% in 2013, 2014 and 2015, 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, Gufeng and Yuxing (a VIE entity). As a result of our holding company structure,
we rely entirely on dividends payments from our subsidiaries in the 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 to our common stock holders.
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 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 the PRC to pay capital expenses such as the repayment of bank loans denominated in foreign
currencies.
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 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 August 2015, China’s currency dropped by a cumulative 4.4% against the U.S. dollar
on hopes of boosting the domestic economy, making Chinese exports cheaper and imports into China more expensive by that amount.
The effect on trade can be substantial. 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.
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 promulgated the Circular
on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip
Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly
known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 (the “SAFE Notice”)
requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control
of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets
or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special
purpose vehicle” (the “SPV”). SAFE Circular 37 further requires amendment to the registration in the event of
any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC
individuals, share transfer or exchange, merger, division or other material event. Under the SAFE Notice, failure to comply with
the registration procedures set forth above could result in liability under Chinese law for foreign exchange evasion and may result
in penalties and legal sanctions, including fines, the imposition of restrictions on a Chinese subsidiary’s foreign exchange
activities and its ability to distribute dividends to the SPV, its ability to pay the SPV proceeds from any reduction in capital,
share transfer or liquidation in respect of the Chinese subsidiary and the SPV’s ability to contribute additional capital
into or provide loans to the Chinese subsidiary. 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.
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.
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.
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 and CEO, was the controlling stockholder holding
31% 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 corporate structure, in particular, the control asserted by the
shareholders in the United States will be materially adversely affected.
Jinong’s contractual
arrangements with Yuxing may result in adverse tax consequences to us.
We could face material and
adverse tax consequences if the PRC tax authorities determine that Jinong’s contractual arrangements with Yuxing were not
made on an arm’s length basis and adjust our income and expenses for PRC tax purposes in the form of a transfer pricing
adjustment. A transfer pricing adjustment could result in a reduction, for PRC tax purposes, of adjustments recorded by Yuxing,
which could adversely affect us by increasing Yuxing’s tax liability without reducing Jinong’s tax liability, which
could further result in late payment fees and other penalties to Yuxing for underpaid taxes.
We control Yuxing through
contractual arrangements which may not be as effective in providing control over Yuxing as direct ownership, and if Yuxing or
its shareholders breach the contractual arrangements, we would have to rely on legal remedies under PRC law, which may not be
available or effective, to enforce or protect our rights.
Effective June 16, 2013,
we conduct substantially all of our operations on agriculture products, and generate substantially all of our revenues from agriculture
products, through contractual arrangements with our VIE, Yuxing, that provide us, through our ownership of Green New Jersey and
its ownership of Jinong, with effective control over Yuxing. We have no direct ownership interest in Yuxing. We depend on Yuxing
to hold and maintain agriculture products contracts with our customers. Yuxing also owns substantially all of our property, facilities
and other assets relating to the operation of our agriculture products business, and employs the personnel for substantially all
of our agriculture products business. Neither our company nor Jinong has any ownership interest in Yuxing. Although we believe
that that each contract under Jinong’s contractual arrangements with Yuxing is valid, binding and enforceable under current
PRC laws and regulations in effect, these contractual arrangements may not be as effective in providing us with control over Yuxing
as direct ownership of Yuxing would be. In addition, Yuxing may breach the contractual arrangements. For example, Yuxing may decide
not to make contractual payments to Jinong, and consequently to our company, in accordance with the existing contractual arrangements.
In the event of any such breach, we would have to rely on legal remedies under PRC law. These remedies may not always be available
or effective, particularly in light of uncertainties in the PRC legal system.
Yuxing may also seek to
renew its agreements on terms that are disadvantageous to us. Although we have entered into a series of agreements that provide
us with substantial ability to control Yuxing, we may not succeed in enforcing our rights under them insofar as our contractual
rights and legal remedies under PRC law are inadequate. If we are unable to renew these agreements on favorable terms when these
agreements expire or enter into similar agreements with other parties, our business may not be able to operate or expand, and
our operating expenses may significantly increase.
In addition, although we
do not rely on Yuxing’s revenue, Yuxing’s VIE structure is subject to uncertainty amid the PRC’s changing legislative
practice. In January 2015, China’s Ministry of Commerce unveiled a draft legislation that could change how the government
is regulating corporate structures, especially for VIEs controlled by foreign investments. Instead of looking at “ownership”,
the draft law focused on the entities or individuals hold control of a VIE. If a VIE is deemed to be controlled by foreign investors,
it may be barred from operating in restricted sectors or the prohibited sectors listed on a “negative list”, where
only companies controlled by Chinese nationals could operate, even if structured as VIEs.
In the event that the draft
law is implemented in any form, and that the Company’s business was characterized as one of the “restricted”
or “prohibited” sectors, Yuxing may be barred from operation which will materially adversely affect our business.
PRC laws and regulations
governing our businesses and the validity of certain of our contractual arrangements are uncertain. If we are found to be in violation
of such PRC laws and regulations, we could be subject to sanctions. In addition, changes in such PRC laws and regulations may
materially and adversely affect 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, or the enforcement and performance of Yuxing’s contractual arrangements with Jinong. Jinong is considered
a foreign invested enterprise under PRC law. As a result, Jinong is subject to PRC law limitations on its businesses and foreign
ownership of Chinese companies. These laws and regulations are relatively new and may be subject to change, 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.
The PRC government has broad
discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by relevant governmental
bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing
or new PRC laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would
not be found in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including
fines, and could be required to restructure our operations or cease to provide certain services. In addition, any litigation in
China may be protracted and result in substantial costs and diversion of resources and management attention. Any of these or similar
actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business
operations, which could materially and adversely affect our business, financial condition and results of operations.
The PRC environment laws
and regulations may adversely impact on our business.
Our manufacturing operations
are subject to numerous environment laws, ordinances and regulations. These laws, ordinances and regulations address and regulate,
among other matters, wastewater discharge, air quality and the generation, handling, storage, treatment, disposal and transportation
of solid and hazardous waste. It is possible that compliance with a new regulatory requirement could impose significant compliance
costs on us. Such costs could have a material adverse effect on our business, financial condition and results of operations.
We believe that we have
obtained all permits, licenses and approvals, and filed all registrations required for the conduct of our business, except where
the failure to obtain such permit, license or approval, or file any registration would not have a material adverse effect on our
business, financial condition and results of operations. We have not been notified by any governmental authority of any continuing
noncompliance, liability or other claim in connection with any of our properties or business operations, nor are we aware of any
other material environmental condition with respect to any of our properties or arising out of our business operations at any
other location.
However, No assurance can
be given that all potential environmental liabilities have been identified or properly quantified or that any prior owner, operator,
or tenant has not created an environmental condition unknown to us. Moreover, no assurance can be given that (i) future laws,
ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of
the properties will not be affected by the condition of land or operations in the vicinity of the properties (such as the presence
of underground storage tanks), or by third parties unrelated to us.
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 a holding company
in the United States 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.
While we do not foresee
this to happen in the near future, with respect to future loans by us to our PRC subsidiaries or with respect to future capital
contributions by us to our PRC subsidiaries, 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, when the need arises. If circumstances call and 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 ability to fund and expand our business.
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 (“2008 EIT Law”) in the PRC and our non-PRC shareholders could be subject
to certain PRC taxes.
Under the 2008 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 2008 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 2008
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 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 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 most of our directors and officers
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. It is unclear if extradition treaties
now in effect between the United States and the PRC would permit effective enforcement against us or most of our directors and
officers of criminal penalties, under the United States Federal securities laws or otherwise. In addition, enforcement of
a foreign judgment in the PRC may be limited or otherwise affected by applicable bankruptcy, insolvency, liquidation, arrangement,
moratorium or similar laws relating to or affecting creditors’ rights generally and will be subject to a statutory limitation
of time within which proceedings may be brought.
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.
We may have difficulty
managing the risk associated with doing business in the Chinese fertilizer and agricultural products sectors.
In general, the fertilizer
and agricultural products sectors 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 agricultural products 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 agricultural products or sectors which provide critical inputs to fertilizer and agricultural products 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.
|
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 may not pay any cash dividends in the
foreseeable future.
We paid cash dividend on January 30, 2015
to stockholders of record as of the close of business on the record date of October 31, 2014. However, we may 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.
|
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.
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
equity or debt 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.
A 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.
Stockholders should have no expectation
of any dividend in the futures.
We paid cash dividend on January 30, 2015 to
stockholders of record as of the close of business on the record date of October 31, 2014. However, the Board of Directors may
not intend to declare any dividends on our common stock in the near future, but instead intends to retain all earnings, if any,
for use in the operation and expansion of our business. If we decide to pay dividends, foreign exchange and other regulations in
China may restrict our ability to distribute retained earnings from China or convert those payments from Renminbi into foreign
currencies. – See “
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 this section.
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.
Item 1B.
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Unresolved Staff Comments
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Not applicable.
There is no private ownership
of land in China. All land is owned by the PRC government on behalf of all Chinese citizens or collectively owned by farmers.
Land use rights can be granted or transferred with or without consideration upon approval by the PRC State Land Administration
Bureau or its authorized branches.
Our principal executive
offices are located at Third floor, Borough A, Block A. No. 181, South Taibai Road, Xi’an, Shaanxi Province, PRC 710065.
The office space is approximately 360 square meters (3,875 square feet). It is leased from Xi’an Kingtone Information
Technology Co., Ltd. (“Kingtone Information”), for a term of two years from July 1, 2016 at monthly rent of RMB25,723
(approximately $4,000) for 612 square meters (approximately 6,588 square feet) of office space.
Through Jinong, we own an
approximately 6,495 square meters (69,911 square feet) production facility that manufactures liquid fertilizer products and a
13,803 square meter (148,576 square feet) production facility that produces liquid and highly concentrated (powdered) fertilizers,
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 occupied approximately 30,947 square meters (333,111 square feet) of land, which contains
office buildings, warehouses and research laboratories. The production lines have a total annual production capacity
of 55,000 metric tons. We own the land use rights for the land Jinong’s manufacturing facilities are situated for
a term of 50 years from 2001.
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 98 sunlight greenhouses and 6 intelligent greenhouses as part of a research and development
center currently under construction. Yuxing owns the land use rights to the property for a terms of 50 years from 2009.
Through Gufeng and Tianjuyuan,
we own an additional 17,930 square meters (approximately 192,997 square feet) of manufacturing, office and warehouse space and
47,110 square meters (approximately 507,088 square feet) of auxiliary facilities of the building 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.
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 RMB 35,500 (approximately $5,591).
The lease term is from February 1, 2004 to January 31, 2054.
While
the lease was recognized previously by our PRC counsel as invalid and unenforceable due to the its permitted use, we have since
obtained the proper land use right certificate from the relevant government entity.
The details on our properties
and manufacturing facilities are described in the table below:
Facility Location
and Production
Segment
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Address
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Area
(square meters/ square feet)
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Ownership
Status and
Term
|
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Xi’an –
Fertilizers (Jinong)
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Yang
Ling Agriculture High-tech Demonstration Zone, No. 6 Guhua 5 Road, Yangling, Xi’an, Shaanxi province
|
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30,947
sq. m.
(333,111 sq. ft.)
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Land
use right (Certificate #006012633) expires in January 2051*
(1)
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Xi’an
– Fertilizers (Jinong)
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Yang
Ling Agriculture High-tech Demonstration Zone, No. 6 Guhua 5 Road, Yangling, Xi’an, Shaanxi province
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6,495
sq. m.
(69,911 sq. ft.)
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Building
Ownership Certificate (Certificate # 20050722)
*
(1)
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Xi’an
– research and development center (Yuxing)
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North
Xin’an Village, Weifeng, Hu County, Shaanxi Province
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353,000
sq. m.
(3,799,660 sq. ft.)
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Land
use right (Certificate #006001700) expires in August 2059
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Beijing
– fertilizers (Tianjuyuan & Gufeng)
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South
of Nanzhangdai Village, Donggaocun Town, Ping Gu District, Beijing
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42,726
sq. m.
(459,898 sq. ft.)
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Land
use right (Certificate #2003189) expires in August 2053 *
(1)
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Beijing
– fertilizers (Tianjuyuan & Gufeng)
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South
of Nanzhangdai Village, Donggaocun Town, Ping Gu District, Beijing
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17,930
sq. m.
(192,997 sq. ft.)
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Building
Ownership Certificate# 33142 *
(1)
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Beijing
– fertilizers (Tianjuyuan & Gufeng)
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South
of Nanzhangdai Village, Donggaocun Town, Ping Gu District, Beijing
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47,333
sq. m.
(509,488 sq. ft.)
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Lease
from February 2004 to January 2054
|
*
(1)
As
of June 30, 2016, the encumbrances over our land use right and building ownership are summarized as below:
No.
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Loan Amount
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Lending Institution
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Contract
Period
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Type of
Guarantee
|
|
Interest
Rate
(Per Annum)
|
|
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Property under
Mortgage
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1
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RMB 13 million
($2,021,500)
|
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Agriculture Bank of
China-Pinggu Branch
|
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May 18, 2016-
Mar 17, 2017
|
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Mortgage
|
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4.9
|
%
|
|
Tianjuyuan’s
land
|
2
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RMB 8 million
($1,244,000)
|
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Agriculture Bank of China-Pinggu
Branch
|
|
Jan 19, 2016-
Jan 17, 2017
|
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Mortgage
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5.0
|
%
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|
Tianjuyuan’s land
|
Item 3.
|
Legal Proceedings
|
There
are no actions, suits, proceedings, inquiries or investigation before or by any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened
against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries' officers
or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 4.
|
Mine Safety Disclosures.
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This item is not applicable
to us.
PART III
Item 10.
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Directors, Executive Officers and Corporate Governance
|
Set forth below are the names
of our directors, executive officers and significant employees of our company as of the date of this Form 10-K, their ages, all
positions and offices that they hold with us, the periods during which they have served as such, and their business experience
during at least the last five years.
Name
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Position with the Company
|
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Age
|
|
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Term as Director of Company
|
|
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|
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Tao Li
|
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Chairman of the Board of Directors, Chief Executive Officer
|
|
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50
|
|
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2007 - Present
|
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|
|
|
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|
|
|
Zhuoyu “Richard” Li
|
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President
|
|
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24
|
|
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2016 - Present
|
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|
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Ken Ren
|
|
Chief Financial Officer
|
|
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39
|
|
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2010 - Present
|
|
|
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|
|
|
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Ale Fan
|
|
Director
|
|
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35
|
|
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2015 - Present
|
|
|
|
|
|
|
|
|
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Yiru Shi
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Director
|
|
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43
|
|
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2011 - Present
|
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Chairman of the Audit Committee
|
|
|
|
|
|
|
|
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Compensation Committee Member
|
|
|
|
|
|
|
|
|
Nominating Committee Member
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lianfu Liu
|
|
Director
|
|
|
77
|
|
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2007 - Present
|
|
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Chairman of the Nominating Committee
|
|
|
|
|
|
|
|
|
Audit Committee Member
|
|
|
|
|
|
|
|
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Compensation Committee Member
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
Jianlei Shen
|
|
Director
|
|
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54
|
|
|
2015 - Present
|
|
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Chairman of the Compensation Committee
|
|
|
|
|
|
|
|
|
Audit Committee Member
|
|
|
|
|
|
|
|
|
Nominating Committee Member
|
|
|
|
|
|
|
Name
|
|
Position
with the Company and Principal Occupations
|
|
|
|
Tao
Li
|
|
Chairman
of the Board of Directors and Chief Executive Officer since December 26, 2007. Mr. Li has served as the
President and CEO of Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd., our wholly-owned subsidiary
(“Jinong”), since 2000. Mr. Li established Xi’an TechTeam Industry (Group) Co., Ltd. in 1996 and
established Jinong in 2000. Mr. Li is also currently the Chairman of Kingtone Wirelessinfo Solution Holding Ltd, a NASDAQ
listed company. He graduated from Northwest Polytechnic University in Xi’an, China with a Master’s degree in
heat and metal treatment. Mr. Li is the current Vice Chairman of the China Green Food Association. Previously, he has
held positions at the World Bank Loan Office of China Education Commission, National Key Laboratory for Low Temperature
Technology, and Northwest Polytechnic University. Mr. Li is active in Shaanxi Province business and trade organizations
including as a member of the CPPCC Shaanxi Committee, the Shaanxi Provincial Decision-Making Consultation Committee, Vice
Chairman of the Shaanxi Provincial Federation of Industry and Commerce, Vice President of the Shaanxi Overseas Friendship
Association, Vice Chairman of the Shaanxi Provincial Credit Association, Vice Chairman of the Shaanxi Provincial Youth
Entrepreneurs Association, Vice Chairman of the Xi’an Municipal Federation of Industry and Commerce and Vice
Chairman of the Xi’an Municipal Youth Entrepreneurs Association. Mr. Li, as the founder of our company, has been
critical to our success and his experience brings to the board of directors an irreplaceable perspective with respect to
our business and the industry in which we compete. These attributes make Mr. Li an ideal candidate to serve as our
Chairman.
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Zhuoyu
“Richard” Li
|
|
Mr.
Li has served as the President of our company since May 11, 2016. Mr. Li has four years of experience in the agricultural
industry. Prior to joining the Company, Mr. Li has served as Chief Operating Officer at the Company’s affiliate, 900LH.com
Food Co., Ltd. (“900LH.com”) since January 2016. From January 2015 to January 2016, Mr. Li served as a senior
manager at the international department of 900LH.com, where he helped to develop the international market. Richard served
as a senior manager at the customer center of 900LH.com from March 2013 through January 2015. He studied business at the University
of Auckland in 2012. We believe Mr. Li is a good fit for the position given his background in the agricultural industry.
|
|
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|
Ken
Ren
|
|
Mr. Ren has served as the Chief Financial Officer of our company since April 23, 2010. Prior to joining our company,
he served as a capital market analyst for the Federal Home Loan Bank of Des Moines since April 2009, where he analyzed, priced,
and assisted in trading investments and issuing debt, conducted hedges and performed relative value analysis in the bank’s
capital market group. From March 2008 to April 2009, Mr. Ren served as a senior investment associate at an asset management subsidiary
of Wells Fargo, which provides money management services to institutional clients. Mr. Ren received a Ph.D. degree in Operations
Research in 2006, and a M.S. degree in Computational Finance in 2004, both from Purdue University. We believe Mr. Ren is a good
fit to serve as our Chief Financial Officer, given his credentials mentioned above.
|
Ale
Fan
|
|
Director.
Ms. Fan had served as a Director of our company since 2015 and a Director of Finance at Jinong since January 2013. Ms. Fan had
served as the deputy Director of Finance at Jinong since January 2013. She has also served as comptroller of the financial department
at Jinong from September 2007 to December 2012. Prior to that, she worked as an accountant at Jinong from August 2003. Ms. Fan
holds a degree in Accounting from Baoji University of Arts and Sciences. We believe that Ms. Fan’s knowledge of the Company’s
history and day-to-day operations and her experience in accounting and finance in the PRC qualify her to serve a director of our
company.
|
|
|
|
Lianfu
Liu
|
|
Director,
Chairman of Nominating Committee, Audit Committee Member and Compensation Committee Member. Mr. Liu has served as a director of
our company since December 26, 2007. Mr. Liu has served as the Chairman of the China Green Food Association since 1998. From 1992
to 1998, Mr. Liu was a Director and Senior Engineer for the China Green Food Development Center. Prior to that, Mr. Liu was a
Vice Director of the PRC Ministry of Agriculture. Mr. Liu graduated from Beijing Forestry University and studied soil conservation.
We believe Mr. Liu’s experience in the agricultural industry in the PRC allows him to bring a unique perspective as an independent
director of our company.
|
|
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|
Yiru
Shi
|
|
Director, Chairman
of the Audit Committee, Compensation Committee Member and Nominating Committee Member. Ms. Shi has served as a director
of our company since December 9, 2011. Ms. Shi previously served as an independent director for Kingtone Wirelessinfo
Solution Holding Ltd (Nasdaq: KONE) from March 2010 to July 2011. Prior to that, Ms. Shi served as Chief Financial Officer
at China Infrastructure Construction Inc. from December 2009 to October 2010 and Chief Financial Officer at Shengtai Pharmaceutical
Inc. from 2008 to December 2009. Prior to that, Ms. Shi served as Audit Manager at Kabani & Co. Inc. from 2005 to
2008. Ms. Shi graduated from the University of California, Irvine with an MBA degree in 2003 and Beijing Polytechnic University
in 1997 with a Bachelor’s degree in Computer Science and International Trade and Business. Ms. Shi is a CPA in the
United States and is fluent in English and Chinese. We believe Ms. Shi’s technical accounting background, strong
academic credentials and substantial experience as a director and officer of other public companies qualifies Ms. Shi
to serve on, and be a significant addition to, our Board of Directors.
|
|
|
|
Jianlei
Shen
|
|
Director,
Chairman of Compensation Committee, Audit Committee Member and Nominating Committee Member. Mr. Shen has four years of experience
in online sales of agriculture materials. He has been working on developing an national e-commerce transaction platform of fertilizer
since 2011. He worked on integrating fertilizer producers with online financial service and distributors in order to help the
fertilizer producers survive and transit with the development of the e-commerce in the Chinese agriculture industry. Prior to
that, Mr. Shen was working in China Medical Instrument Company(CMIC), and he was in charge of the enterprise information-based
construction, including the development of the national medical apparatus and instruments online sales platform. Before that,
Mr. Shen worked in the State Pharmaceutical Administration. Mr. Shen also worked at the Ministry of Science and Technology from
1991 to 1997. He graduated with a Master’s degree in industrial engineering from Changchun University of Technology in 2000.
We believe Mr. Shen’s extensive e-commerce experience in agriculture industry qualifies Mr. Shen to serve as an independent
director of our company.
|
All directors of our company
hold office until the next annual meeting of our shareholders or until their successors have been elected and qualified. The executive
officers of our company are appointed by our board of directors and hold office until their death, resignation or removal from
office.
Family Relationships
Except for Mr. Tao Li and
Mr. Zhuoyu “Richard” Li, who are father and son, there is no family relationship among any of our officers or directors.
Involvement in Certain
Legal Proceedings
To the best of our knowledge,
none of our directors or executive officers was involved in any legal proceedings during the last 10 years as described in Item
401(f) of Regulation S-K.
Section 16(a) Beneficial
Ownership Reporting Compliance
Section 16(a) of the Exchange
Act requires our executive officers and directors, and persons who own more than 10% of a registered class of our equity securities
(“Reporting Persons”), to file reports of ownership and changes in ownership with the SEC. The Reporting Persons are
also required to furnish us with copies of all such reports. Based solely on our review of the reports received by us, we believe
that, during the year ended June 30, 2016, our directors, executive officers and holders of ten percent (10%) or more of our common
stock complied with Section 16(a) filing requirements applicable to them except as follows: the Form 4s filed on December 23,
2014 by five of our directors, executive officers and holders of ten percent or more of our common stock, which reported certain
shares granted under the Company’s 2009 Equity Incentive Plan and were due on October 2, 2014, were not timely filed; the
Form 4 filed on August 17, 2015 by Ms. Yiri Shi which reported certain shares sold and were due on August 10, 2015, was not timely
filed.
Code of Ethics
We have adopted a Code of
Ethics that applies to all of our employees and officers, and the members of our Board of Directors, which was amended and restated
in 2010. The Amended and Restated Code of Ethics (the “Code of Ethics”) is available on our website at
www.cgagri.com
.
Printed copies are available upon request without charge. Any amendment to or waiver of the Code of Ethics will be disclosed on
our website promptly following the date of such amendment or waiver
Corporate Governance
Guidelines
We have adopted a Code of
Ethics that applies to all of our employees and officers, and the members of the Board, which was amended and restated in 2010.
The Amended and Restated Code of Ethics (the “Code of Ethics”) is available on our website at
www.cgagri.com
.
Printed copies are available upon request without charge. Any amendment to or waiver of the Code of Ethics will be disclosed on
our website promptly following the date of such amendment or waiver.
Audit Committee
The Audit Committee is responsible
for: (i) overseeing the corporate accounting and financial reporting practices; (ii) recommending the selection of our registered
public accounting firm; (iii) reviewing the extent of non-audit services to be performed by the auditors; and (iv) reviewing the
disclosures made in our periodic financial reports. The members of the Audit Committee are Messrs. Jianlei Shen, Lianfu Liu and
Ms. Yiru Shi, each of whom is an independent director within the meaning of the rules of the NYSE and Rule 10A-3 promulgated by
the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In addition, the Board has determined
that Ms. Shi qualifies as an Audit Committee Financial Expert under applicable SEC Rules. The Chairman of the Audit Committee
is Ms. Shi. The Audit Committee held four meetings during the fiscal year ended June 30, 2016. The Audit Committee carries out
its responsibilities in accordance with the terms of its Audit Committee Charter, a copy of which was attached as Annex A to our
Definitive Proxy Statement on Schedule 14A for our 2010 Annual Meeting, filed with the SEC on October 28, 2010, and is also available
on our website at
www.cgagri.com
.
Compensation Committee
The Compensation Committee
determines matters pertaining to the compensation of executive officers and other significant employees, and administers our stock
and incentive plans. The members of the Compensation Committee are Messrs. Jianlei Shen, Lianfu Liu and Ms. Yiru Shi. The Chairman
of the Compensation Committee is Ms. Shen. The Compensation Committee held one meeting during the fiscal year ended June 30, 2016.
Each of the members of the Compensation Committee is a “non-employee director” within the meaning of Rule 16b-3 under
the Exchange Act, and an “outside director” within the meaning of Section 162(m) under the Internal Revenue Code.
The Compensation Committee carries out its responsibilities pursuant to a written charter, a copy of which was attached as Annex
C to our Definitive Proxy Statement on Schedule 14A for our 2009 annual meeting, filed with the SEC on October 28, 2009, and is
also available on our website at
www.cgagri.com
.
Nominating Committee
The Nominating Committee
identifies and nominates candidates to serve on our Board. The members of the Nominating Committee are Messrs. Jianlei Shen, Lianfu
Liu and Ms. Yiru Shi. The Chairman of the Nominating Committee is Mr. Liu. The Nominating Committee held one meeting during the
fiscal year ended June 30, 2016. A copy of our Nominating Committee Charter was attached as Annex B to our Definitive Proxy Statement
on Schedule 14A for our 2010 annual meeting, filed with the SEC on October 28, 2010, and is also available on our website at
www.cgagri.com
.
See “Director Nominations” below for the procedures for the nomination of directors.
Board Leadership Structure
and Board’s Role in the Oversight of Risk Management
Our Board believes it is
important to select our Chairman and our Chief Executive Officer in the manner it considers in the best interests of our company
at any given point in time. Due to Mr. Li’s substantial experience in the industry, our Board has determined that the most
effective leadership structure for our company is for Mr. Li to serve as both our Chairman and Chief Executive Officer. Our Board
benefits from the Chairman having direct knowledge of the operations of, and opportunities and challenges facing, our business
on a regular and company-wide basis. Mr. Li’s combined role as Chairman and Chief Executive Officer fosters greater communication
between the Board and management and provides unified leadership for carrying out our company’s strategic initiatives and
business plans.
To counterbalance the potential
for ineffective Board oversight, we have adopted a governance structure that includes: (i) a designated lead independent director;
(ii) annual elections of directors by a majority of votes cast at the annual meeting of shareholders; (iii) committees composed
entirely of independent directors; and (iv) established corporate governance and ethics guidelines. Our Board appointed Ms. Yiru
Shi to serve as the Board’s lead independent director. The lead independent director acts as an intermediary between the
Board and senior management. Among other things, the lead independent director is responsible for facilitating communication among
directors and between the Board and the Chief Executive Officer, working with the Chief Executive Officer to provide an appropriate
information flow to the Board, and chairing executive sessions of the independent directors. Executive sessions of our independent
directors occur following regularly scheduled quarterly audit committee meetings, and at such other times as the independent directors
deem appropriate. However, the Board recognizes that circumstances may change over time and as they do, changes to the leadership
structure may be warranted.
The Board has an active
role, directly and through its committees, in the oversight of our risk management efforts. The Board carries out this oversight
role through several levels of review. The Board regularly reviews and discusses with members of management information regarding
the management of risks inherent in the operations of our businesses and the implementation of our strategic plan, including our
risk mitigation efforts.
In accordance with corporate
governance standards of the NYSE, the Audit Committee charter assigns to that committee the responsibility to review our policies
and practices with respect to risk assessment and risk management, including major financial risk exposures, and the steps management
has taken to monitor and control such exposures. Additionally, each of the Board’s committees also oversees the management
of our risks that are under each committee’s areas of responsibility. For example, the Audit Committee oversees management
of accounting, auditing, external reporting, internal controls, and cash investment risks. The Nominating Committee oversees our
compliance policies, Code of Conduct, conflicts of interests, director independence and corporate governance policies. The Compensation
Committee oversees risks arising from compensation practices and policies. In this manner the Board is able to coordinate its
risk oversight.
Director Nominations
The Nominating Committee
recommends director candidates and will consider for such recommendation director candidates proposed by management, other directors
and stockholders. All director candidates will be evaluated based on the criteria identified below, regardless of the identity
of the individual or the entity or person who proposed the director candidate.
The selection of director
nominees includes consideration of factors deemed appropriate by the Corporate Governance and Nominating Committee and the Board.
We may engage a firm to assist in identifying, evaluating, and conducting due diligence on potential board nominees. Factors will
include integrity, achievements, judgment, intelligence, personal character, any prior contact or relationship between a candidate
and a current or former director or officer of our company, the interplay of the candidate’s relevant experience with the
experience of other Board members, the willingness of the candidate to devote adequate time to Board duties and the likelihood
that he or she will be willing and able to serve on the Board for a sustained period. The Corporate Governance and Nominating
Committee will consider the candidate’s independence, as defined by the rules of the SEC and the NYSE. In connection with
the selection, due consideration will be given to the Board’s overall balance of diversity of perspectives, backgrounds,
and experiences. Experience, knowledge, and skills to be represented on the Board include, among other considerations, financial
expertise (including an “audit committee financial expert” within the meaning of the SEC’s rules), financing
experience, related industry experience, strategic planning, business development, and community leadership.
Item
11.
|
Executive
Compensation
|
Compensation Discussion
and Analysis
Overview
This section contains a
discussion of the material elements of compensation awarded to, earned by or paid to our principal executive officer, our principal
financial officer, and our other executive officers whose total compensation exceeded $100,000 during the fiscal year ended June
30, 2016. Accordingly, our “Named Executive Officers” are i) Mr. Tao Li, our Chairman, and Chief Executive Officer,
ii) Mr. Zhuoyu “Richard” Li, our President, and iii) Mr. Ken Ren, our Chief Financial Officer.
Our Board established the
Compensation Committee to assist with the analysis and determination of the compensation structure for our executive officers.
Our Compensation Committee, consisting of three independent directors, reviews and approves, or in some cases recommends for the
approval of the full Board, the annual compensation for our executive officers. Typically, management recommends to the Compensation
Committee compensation package proposals based on prevailing compensation standards in our industry, which in turn reviews and
approves such proposals. Our Compensation Committee may consult with the executive officers to form consensus on such packages.
Our executive officers may discuss any disagreements and needed amendment to such proposals with our Compensation Committee before
such proposals are finalized and approved by the Compensation Committee.
Compensation Objectives
Our compensation objectives
are as follows:
|
●
|
We
strive to provide competitive executive compensation programs that will help to attract highly qualified individuals necessary
for our continued growth. Once an executive is hired, our goal is to retain and motivate them to achieve higher levels of
performance and be appropriately rewarded for that effort.
|
|
●
|
Compensation
and benefits are competitive with the local labor markets in which we compete, and focus also will be given to companies that
operate in the agriculture, feed, and fertilizer industries. Peer companies will typically have annual revenues that are one-half
to double that of us, for the purposes of compensation benchmarking.
|
|
●
|
We
provide an executive compensation package consisting of base salary, incentives (short term & long term), and benefits
that are consistent with similar positions at our recognized competitors. Each component addresses individual and company
performance with a focus on long-term profitable growth and shareholder return, competitive conditions, and our overall financial
performance.
|
|
●
|
All
compensation programs are administered without regard to race, religion, national origin, color, sex, age, or disability,
and adhere to all local laws and regulations.
|
Elements of Compensation
Base Salary
Our approach is to pay our
executives a base salary that is competitive with those of other executive officers in similar positions and with similar responsibilities
in our peer group of competitive companies. We believe that a competitive base salary is a necessary element of any compensation
program that is designed to attract and retain talented and experienced executives. We also believe that attractive base salaries
can motivate and reward executives for their overall performance.
Stock-Based Awards under
the Equity Incentive Plan
In addition to base salary,
the other key component of executive compensation we provide to our Named Executive Officers is equity-based compensation. In
October 2009, our Board adopted our 2009 Equity Incentive Plan (the “Plan”), which was approved by our shareholders
at our annual shareholders meeting in December 2009 and amended in December 2012, December 2013 and June 2015. The Plan gives
us the ability to grant stock options, stock appreciation rights (SARs), restricted stock and other stock-based awards to employees
or consultants of our company or of any subsidiary of our company and to non-employee members of our advisory board or our Board
or the board of directors of any of our subsidiaries. The Board and the Compensation Committee believe the ability to grant restricted
stock, stock options and make other stock-based awards under the Plan is an important factor in attracting, stimulating and retaining
qualified and distinguished personnel with proven ability and vision to serve as employees, officers, consultants or members of
the Board or advisory board of our company and our subsidiaries, and to chart our course towards continued growth and financial
success.
During the fiscal year ended
June 30, 2016, effective June 29, 2016, the Compensation Committee granted (i) 400,000 shares of restricted stock to Mr. Tao Li,
the Company’s CEO; (ii) 200,000 shares of restricted stock to Mr. Ken Ren, the CFO, (iii) 30,000 shares of restricted stock
to Ms. Yiru Shi, 20,000 shares of restricted stock to Mr. Jianlei Shen and 20,000 shares of restricted stock to Mr. Lianfu Liu,
each of whom is an independent director of the Company. The Stock Grants were vested immediately for the CEO, CFO and three independent
directors.
On October 3, 2015, the Company granted an
aggregate of 1,000,000 shares of restricted stock under the 2009 Plan to certain key employees. The stock grants are subject to
time-based vesting schedules, vesting in various installments until June 30, 2016. The value of the restricted stock awards was
$1,660,000 and is based on the fair value of the Company’s common stock on the grant date.
On September 30, 2014, the
Company granted an aggregate of 1,750,000 shares of restricted stock under the 2009 Plan to certain executive officers, directors
and employees, among which (i) 240,000 shares of restricted stock to Mr. Tao Li, the CEO; (ii) 100,000 shares of restricted stock
to Mr. Ken Ren, the CFO, (iii) 40,000 shares of restricted stock to Mr. Yizhao Zhang, 30,000 shares of restricted stock to Ms.
Yiru Shi, and 20,000 shares of restricted stock to Mr. Lianfu Liu, each an independent director of the Company; and (iv) 1,320,000
shares of restricted stock to key employees. The stock grants are subject to time-based vesting schedules, vesting in various
installments until March 31, 2015 for the CFO and the three independent directors, until June 30, 2015 for the CEO and until December
31, 2016 for the employees.
Employee Stock Purchase
Plan
On August 9, 2012 the Board
adopted the Company’s 2012 Employee Stock Purchase Plan (the “ESPP”), which became effective as of such date.
The Board adopted the Company’s Third Amended and Restated Employee Stock Purchase Plan (the “Restated ESPP”)
on May 15, 2015. The Restated ESPP reserved a total of 3,750,000 shares of Common Stock, including 1,250,000 shares of Common
Stock that was increased the third time. Shareholder approval is not required with respect to the issuance under the ESPP pursuant
to Sections 303A.08 or 312.03 of the NYSE Listed Company Manuel. The ESPP has been delegated to be administered by the Compensation
Committee since October 19, 2012. Any employee of the Company or any parent (if any) and subsidiary corporation of the Company
(the “Affiliate”), who is not a natural person resident in the United States, who has been in the employ of the Company
or any Affiliate for such continuous period as required by the Board preceding the grant of rights under the ESPP is eligible
to participate in the ESPP during the applicable offering period, subject to administrative rules established by the Compensation
Committee.
The ESPP is implemented
by sequential offerings, the commencement and duration of which are determined by the Compensation Committee. The purchase price
at which each share of Common Stock may be acquired in an offering period upon the exercise of all or any portion of a purchase
right are established by the Compensation Committee. However, the purchase price on each purchase date shall not be less than
the fair market value of a share of Common Stock on the purchase date.
During the fiscal year ended June 30, 2014, the Company firstly issued 118,778 shares of common stock at the
market price of $4.42 per share to Mr. Tao Li ($525,000 in total), the Company’s Chairman and Chief Executive Officer under
the ESPP on September 26, 2013. The Company then issued 533,165 shares of common stock at the market price of $2.35 per share to
certain employees enrolled in the ESPP ($1,252,938 in total) on May 26, 2014. During the year ended June 30, 2015, the Company
issued 1,362,495 shares of common stock to its employees under the ESPP for cash of $2,946,746 and the Company issued 326,483 shares
of common stock to its Chairman, Mr. Li, for cash proceeds of $626,847 under the ESPP.
Retirement or Pension
Benefits
Currently, we do not provide
any company sponsored retirement benefits to any employee, including the Named Executive Officers.
Deferred Compensation
We do not have any qualified
or nonqualified deferred compensation plans.
Perquisites
Historically, we have provided
our Named Executive Officers with minimal perquisites and other personal benefits that we believe are reasonable. We do not view
perquisites as a significant component of compensation, but do believe they can be useful in attracting, motivating and retaining
the executive talent for which we compete. We believe that these additional benefits assist our Named Executive Officers in performing
their duties and provide time efficiencies for them. It is expected that our historical practices regarding perquisites will continue
and will be subject to periodic review by our Board.
Summary Compensation
Table— Fiscal Years Ended June 30, 2016, 2015 and 2014
The following
table sets forth information concerning cash and non-cash compensation we and/or Jinong paid to our principal executive officer
and our other most highly paid executive officer (the “named executive officers”) for services rendered in all capacities
during the noted periods. No other executive officers received total annual salary and bonus compensation in excess of $100,000
during each of the three fiscal years ended June 30, 2016, 2015 and 2014.
SUMMARY
COMPENSATION TABLE
|
|
Name
and
Principal
Position
|
|
Year
Ended
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards ($)
(1)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
Nonqualified
Deferred
Compensation
Earnings ($)
|
|
|
All
Other
Compensation
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tao
Li
Chief
Executive
|
|
June
30, 2016
|
|
$
|
200,000
|
|
|
$
|
24,000
|
|
|
$
|
536,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
760,000
|
|
Officer,
and Chairman
|
|
June
30, 2015
|
|
$
|
300,000
|
|
|
$
|
36,000
|
|
|
$
|
504,400
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
840,000
|
|
of the Board (2)
|
|
June
30, 2014
|
|
$
|
300,000
|
|
|
$
|
36,000
|
|
|
$
|
2,054,400
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
2,390,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhuoyu
“Richard” Li
|
|
June
30, 2016
|
|
|
100,000
|
|
|
|
12,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
112,000
|
|
President (2)
|
|
June
30, 2015
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
June
30, 2014
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ken
Ren
|
|
June
30, 2016
|
|
$
|
160,000
|
|
|
$
|
168,000
|
|
|
$
|
268,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
596,000
|
|
Chief
Financial
|
|
June
30, 2015
|
|
$
|
160,000
|
|
|
$
|
16,800
|
|
|
$
|
210,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
386,800
|
|
Officer
|
|
June
30, 2014
|
|
$
|
160,000
|
|
|
$
|
16,800
|
|
|
$
|
856,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
1,032,800
|
|
(1)
|
The amounts reported in this column reflect the fair value on the grant date of the restricted stock awards granted to our Named Executive Officers. These values are determined by multiplying the number of shares granted by the closing price of our common stock on the trading day immediately preceding the grant date. The dollar amounts do not necessarily reflect the dollar amounts of compensation actually realized or that may be realized by our Named Executive Officers.
|
(2)
|
Mr. Tao Li resigned as the President and Mr. Zhuoyu “Richard” Li was appointed as the President on May 19, 2016.
|
The Company has not used
a compensation consultant to determine or recommend the amount or form of executive or director compensation but its management
believes that its executive officer compensation package is comparable to similar businesses in our location of operations.
Grants of Plan-Based
Awards
The following table sets
forth information regarding grants of awards to Named Executive Officers during the year ended June 30, 2016:
GRANTS OF PLAN-BASED AWARDS
|
|
|
|
Estimated Future Payouts
Under
Non-Equity Incentive Plan
Awards
|
|
|
Estimated Future Payouts Under
Equity Incentive Plan Awards
|
|
|
All
Other
Stock
Awards:
Number
of
Shares
of
Stock or
|
|
|
All
Other
Option
Awards:
Number
of
Securities
Underlying
|
|
|
Exercise
or
Base
Price of
Option
|
|
|
Grant
Date
Fair
Value
of Stock
and
Option
|
|
Name
|
|
Grant
Date
|
|
Threshold
($)
|
|
|
Target
($)
|
|
|
Maximum
($)
|
|
|
Threshold
(#)
|
|
|
Target
(#)
|
|
|
Maximum
($)
|
|
|
Units
(#)
|
|
|
Options
(#)
|
|
|
Awards
($ /Sh)
|
|
|
Awards
($)(1)
|
|
Tao Li
|
|
June 29,
2016
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
400,000
|
|
|
|
—
|
|
|
$
|
2.10
|
|
|
$
|
504,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ken Ren
|
|
June 29,
2016
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
200,000
|
|
|
|
—
|
|
|
$
|
2.10
|
|
|
$
|
210,000
|
|
|
(1)
|
|
With
respect to the restricted stock awards, the grant date fair value is calculated by multiplying the number of shares granted
by the closing price on the trading day immediately preceding the grant date.
|
Narrative Disclosure to
Summary Compensation Table and Grants of Plan-Based Awards Table
Employment Agreement
The following is a summary
of the material terms of the written employment by and between Jinong and Mr. Tao Li.
Tao Li.
Pursuant
to an employment agreement between Jinong and Mr. Tao Li dated January 16, 2008, Mr. Li is employed by Jinong as its Chairman
of the Board and Chief Executive Officer for a term of five years. Upon its expiration of the initial term in 2013, the agreement
was automatically renewed on the same terms and conditions for successive additional five-year periods unless either party provides
written notice of termination at least 60 days prior to the end of any five-year term. No such written notice was provided by
either party at the end of the initial term under the agreement. The agreement is terminable immediately, or upon 30-days prior
written notice, upon the occurrence of certain events. The agreement provides for an annual salary of RMB 60,000 (approximately
$8,508).
The following is a summary
of the material terms of the written employment by and between the Company and Mr. Zhuoyu “Richard” Li.
Zhuoyu “Richard”
Li. According to the employment agreement, Mr. Li will receive annual base salary $100,000 and bonus $12,000 for serving as the
Company’s President, effective May 19, 2016. In addition, Mr. Li will receive stock awards to be determined when the Company
grants the awards to directors and officers under the Company’s 2009 Equity Incentive Plan, as amended. The initial term
of the employment agreement is one year which will be automatically extended for additional one-year terms unless either party
provides written notice of termination sixty (60) days prior to the end of the prior term.
Description of Plan Based
Awards
The equity incentive awards
reported in the above table entitled “Grants of Plan Based Awards” were granted under, and are subject to, the terms
of our 2009 Equity Incentive Plan, as amended (the “Plan”). The Plan is administered by the Compensation Committee.
The Compensation Committee has authority to interpret the plan provisions and make all required determinations under the Plan.
With respect to all restricted
stock grants disclosed herein, if we terminate the grantee’s employment or affiliation with us for any reason, all unvested
portions of such restricted stock grants are forfeited. Any shares of restricted stock that do not vest for failure to meet the
requisite performance targets will also be forfeited.
With respect to all non-qualified
stock option grants disclosed herein, if we terminate the grantee’s employment or affiliation with us for any reason, all
unvested options are forfeited. If the grantee’s employment or affiliation with us is terminated voluntarily by the grantee
or by us for cause, all vested options are also terminated. In the event we terminate the grantee’s employment or affiliation
with us without cause, the grantee has the lesser of ninety (90) days or the remaining term of the option to exercise any vested
options. If we terminate the grantee’s employment or affiliation with us due to death or disability, the grantee has the
lesser of twelve (12) months or the remaining term of the option to exercise any vested options. In the case of non-qualified
options subject to performance based vesting, any options which do not vest for failure to meet the requisite performance targets
will be forfeited.
Outstanding Equity Awards
at Fiscal Year End
The following table provides
information on all restricted stock and stock option awards held by our Named Executive Officers as of June 30, 2016.
OUTSTANDING EQUITY
AWARDS AT FISCAL YEAR-END
|
|
|
Option Awards
|
|
|
|
Stock Awards
|
|
Name
|
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
|
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
|
|
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
|
|
|
Option
Exercise
Price
($)
|
|
|
|
Option
Expiration
Date
|
|
|
|
Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
(#)
|
|
|
|
Market
Value of
Shares
or Units
of Stock
That
Have
Not
Vested
($)
|
|
|
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)
|
|
|
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tao Li
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ken Ren
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Option Exercises and Stock
Vested During the Fiscal Year
OPTION EXERCISES AND STOCK VESTED DURING
THE FISCAL YEAR
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
Name
|
|
Number of Shares
Acquired on Exercise
(#)
|
|
|
Value Realized
on Exercise
($)
|
|
|
Number of
Shares Acquired
on Vesting
(#)
|
|
|
Value Realized
on Vesting
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tao Li
|
|
|
—
|
|
|
|
—
|
|
|
|
400,000
|
|
|
$
|
536,000
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ken Ren
|
|
|
—
|
|
|
|
—
|
|
|
|
200,000
|
|
|
$
|
268,000
|
(2)
|
(1)
|
Represents
the vesting of 400,000 shares of restricted stock on June 30, 2016 with a market value of $1.34 per share on such
date.
|
|
|
(2)
|
Represents
the vesting of 200,000 shares of restricted stock on June 30, 2016 with a market value of $1.34 per share on such
date.
|
Securities Authorized for
Issuance Under Equity Compensation Plans
As of June 30, 2016, there
were no outstanding options to purchase any shares of common stock granted under the Plan. Options granted in the future under
the Plan are within the discretion of our Board 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, 2016.
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
|
|
|
—
|
|
|
$
|
—
|
|
|
|
2,488,615
|
|
Equity
compensation plans not approved by security holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
—
|
|
|
$
|
—
|
|
|
|
2,488,615
|
|
Director
Compensation
The
following table sets forth information concerning cash and non-cash compensation we paid to our directors during the fiscal year
ended June 30, 2016.
Name
|
|
Fees
Earned
or
Paid in
Cash
($)
|
|
|
Stock
Awards
($)
(1)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
|
Non-Qualified
Deferred
Compensation
Earnings
($)
|
|
|
All
Other
Compensation
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yiru Shi
|
|
$
|
26,000
|
|
|
$
|
40,200
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0
|
|
|
|
66,200
|
|
Lianfu Liu
|
|
$
|
26,000
|
|
|
$
|
26,800
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0
|
|
|
|
52,800
|
|
Jianlei Shen
(3)
|
|
$
|
16,000
|
|
|
$
|
26,800
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0
|
|
|
|
42,800
|
|
Ale Fan
(3)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
(1)
|
The
amounts reported in this column reflect the fair value on the grant date of the restricted stock awards granted to our directors.
These values are determined by multiplying the number of shares granted by the closing price of our common stock on the trading
day immediately preceding the grant date. The dollar amounts do not necessarily reflect the dollar amounts of compensation
actually realized or that may be realized by our directors.
|
(2)
|
Represents
40,000, 30,000, 20,000 shares of restricted shares to three independent directors respectively which granted by the Company
as of June 30, 2016.
|
The
directors will also be reimbursed for all of their out-of-pocket expenses in traveling to and attending meetings of the Board
and committees on which they serve.
Compensation
Committee Interlocks and Insider Participation
The
members of the Compensation Committee during the fiscal year ended June 30, 2016 were Ms. Yiru Shi and Messrs. Jianlei Shen and
Lianfu Liu. During the fiscal year ended June 30, 2016:
|
☐
|
none
of the members of the Compensation Committee was an officer (or former officer) or employee of our company or any of its subsidiaries;
|
|
☐
|
none
of the members of the Compensation Committee had a direct or indirect material interest in any transaction in which we were
a participant and the amount involved exceeded $120,000;
|
|
☐
|
none
of our executive officers served on the compensation committee (or another board committee with similar functions or, if none,
the entire board of directors) of another entity where one of that entity’s executive officers served on our Compensation
Committee;
|
|
☐
|
none
of our executive officers was a director of another entity where one of that entity’s executive officers served on our
Compensation Committee; and
|
|
☐
|
none
of our executive officers served on the compensation committee (or another board committee with similar functions or, if none,
the entire board of directors) of another entity where one of that entity’s executive officers served as a director
on our Board.
|
Changes
in Control
The
following table reflects amounts payable to our Named Executive Officers (1) assuming their employment was terminated without
cause on June 30, 2016, and (2) assuming a change in control on June 30, 2016.
Name
|
|
Termination
Without
Cause
(1)
|
|
|
Change in
Control
(2)
|
|
Tao Li
|
|
$
|
794
|
|
|
$
|
1,811,920
|
(3)
|
(1)
|
Represents
the payment made pursuant to contractual agreements with the Named Executive Officer as described below in this subsection.
|
|
|
(2)
|
Amounts
in this column reflect the value of unvested restricted stock that would be accelerated upon a change of control. The amounts
are calculated based on the closing market price of a share of our common stock on June 30, 2016, i.e., $1.34 per shares,
multiplied by the number of unvested shares.
|
|
|
(3)
|
Represents
the vesting of 400,000 shares of restricted stock.
|
T
ermination
Clauses in Employment Agreements
Tao
Li.
Pursuant to the terms of Mr. Li’s employment agreement with Jinong, Jinong may terminate Mr. Li’s employment
for any reason upon 30 days prior written notice, in which case no termination payment is due. Alternatively, Jinong may terminate
his employment immediately upon the payment of one month’s salary. In the case of termination for cause as defined therein,
we may terminate Mr. Li’s employment immediately without pay.
2009
Equity Incentive Plan Change in Control Provisions
In
the event of a change in control of our company, and except as otherwise set forth in the applicable award agreement, all unvested
portions of awards shall vest immediately. Awards, whether or not then vested, shall be continued, assumed, or have new rights
as determined by our Compensation Committee or a committee of the Board designated to administer the Plan, and restrictions to
which any shares of restricted stock or any other award granted prior to the change in control are subject shall not lapse. Awards
shall, where appropriate at the discretion of the Committee, receive the same distribution of our common stock on such terms as
determined by the Compensation Committee. Upon a change in control, the Committee may also provide for the purchase of any awards
for an amount of cash per share of common stock issuable under the award equal to the excess of the highest price per share of
our common stock paid in any transaction related to a change in control of our company over the exercise price of such award.
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
|
The following table sets forth certain information
as of October 3, 2016, the latest applicable date, with respect to the beneficial ownership of our common stock, the sole outstanding
class of our voting securities, by (i) any person or group owning more than 5% of each class of voting securities, (ii) each director,
(iii) each executive officer and (iv) all executive officers and directors as a group.
As of October 3, 2016, an aggregate of 37,648,605 shares of our common stock were outstanding.
Title of Class
|
|
Name and Address of Beneficial Owners
(1)
|
|
Amount and
Nature of
Beneficial
Ownership
|
|
|
Percent of Class
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater Than 5% Shareholders: None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Tao Li
Chief Executive Officer
and Chairman of the Board
|
|
|
11,062,695
|
(3)
|
|
|
29.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Zhuoyu “Richard” Li
President
|
|
|
11,062,695
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Ken Ren
Chief Financial Officer
|
|
|
880,000
|
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Yiru Shi
Director
|
|
|
90,000
|
|
|
|
--
|
*
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Jianlei Shen
Director
|
|
|
20,000
|
|
|
|
--
|
*
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Ale Fan
Director
|
|
|
0
|
|
|
|
--
|
*
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Lianfu Liu
Director
|
|
|
101,000
|
|
|
|
--
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All executive officers and directors as a group
|
|
|
12,153,695
|
|
|
|
32.3
|
%
|
*
Represents a percentage that is less than 1%.
(1)
|
Unless
otherwise stated, each beneficial owner has sole power to vote and dispose of the shares and the address of such person is
c/o China Green Agriculture, Inc., 3rd Floor, Borough A, Block A. No. 181, South Taibai Road, Xian, Shaanxi Province, People’s
Republic of China 710065.
|
(2)
|
In
determining the percent of common stock owned by the beneficial owners, (a) the numerator
is the number of shares of common stock beneficially owned by such owner, including shares
the beneficial ownership of which may be acquired, within 60 days upon the exercise of
the options, if any, held by the owner; and (b) the denominator is the sum of (i) the
total 37,648,605 shares of common stock outstanding as of October 3, 2016, and (ii)
the number of shares underlying the options, which such owner has the right to acquire
upon the exercise of the options within 60 days (for those who have options), if any.
|
(3)
|
Includes (i) 9,667,921 shares beneficially owned by Mr. Tao Li individually, (ii) 497,387 shares beneficially owned by Mr. Tao Li’s wife, and (iii) 897,387 shares beneficially owned by Mr. Tao Li’s son, Mr.Zhuoyu “Richard” Li Mr. Li disclaims beneficial ownership with respect to the shares held by his wife and son.
|
|
|
(4)
|
Includes (i) 897,387 shares beneficially
owned by Mr. Zhuoyu“Richard” Li individually, (ii) 497,387 shares beneficially owned by Mr. Zhuoyu“Richard”
Li’s mother, and (iii) 9,667,921 shares beneficially owned by Mr. Zhuoyu“Richard” Li’s father, Mr. Tao
Li. Mr. Zhuoyu“Richard” Li disclaims beneficial ownership with respect to the shares held by his father and mother.
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director Independence
|
Certain
Relationships and Related Transactions
As
of June 30, 2016 and 2015, the amount due to related parties was $2,473,004 and $2,068,102, respectively. As of June
30, 2016 and 2015, $1,092,243 and $1,184,643, respectively were amounts that Gufeng borrowed from a related party, Xi’an
Techteam Science & Technology Industry (Group) Co. Ltd., a company controlled by Mr. Tao Li, Chairman and CEO of the Company,
representing unsecured, non-interest bearing loans that are due on demand. These loans are not subject to written agreements.
At
the end of December 2015, Yuxing entered into a sales agreement with the Company’s affiliate, 900LH.com Food Co., Ltd. ("900LH.com",
previously announced as Xi'an Gem Grain Co., Ltd) pursuant to which Yuxing is to supply various vegetables to 900LH.com for its
incoming seasonal sales at the holidays and year ends (the “Sales Agreement”). The contingent contracted value of
the Sales Agreement is RMB 25,500,000 (approximately $3,965,250). For the year ended June 30, 2016, Yuxing has sold approximately
$1,383,787 products to 900LH.com.
Our
principal executive offices are located at Third floor, Borough A, Block A. No. 181, South Taibai Road, Xi’an, Shaanxi Province,
PRC 710065. The office space is approximately 360 square meters (3,875 square feet). It is leased from Xi’an Kingtone
Information Technology Co., Ltd. (“Kingtone Information”), for a term of two years from July 1, 2016 at monthly rent
of RMB25,723 (approximately $4,000) for 612 square meters (approximately 6,588 square feet) of office space.
Procedures
for Approval of Related Party Transactions
In
November 2010, we adopted a written Related Party Transactions Policy (the “Policy”). According to the Policy, a “Related
Party Transaction” is a transaction, arrangement or relationship (or any series of similar transactions, arrangements or
relationships) in which we (including any of our subsidiaries) are, were or will be a participant and the amount involved exceeds
$120,000, and in which any related party had, has or will have a direct or indirect “material” interest. The Policy’s
definition of a “Related Party” is in line with the definition set forth in the instructions to Item 404(a) of Regulation
S-K promulgated by the SEC.
Under
the Policy, our Chief Financial Officer is responsible for determining whether a proposed transaction, as submitted by a Related
Party is a Related Party Transaction that requires the consideration and discussion of the Audit Committee. The Audit Committee
is responsible for evaluating and assessing a proposed transaction based on the facts and circumstances including those listed
in the Policy, including comparing the terms of the proposed transaction and the terms available to unrelated third parties or
to employees generally. The Policy states that the Audit Committee shall approve only those Related Party Transactions that are
in, or are not inconsistent with, the best interests of our company and our stockholders. No member of the Audit Committee shall
participate in any review, consideration or approval of any Related Party Transaction in which he or she or any immediate family
member directly or indirectly is involved.
In
the event that we become aware of a Related Party Transaction that has not been previously approved under the Policy, such transaction
will be presented to the Audit Committee. A Related Party Transaction entered into without pre-approval of the Audit Committee
shall not be deemed to violate the Policy, or be invalid or unenforceable, so long as the transaction is brought to the Audit
Committee as promptly as reasonably practical after it is entered into and is subsequently ratified by the Audit Committee.
Communications
with the Board
Interested
parties may communicate with any of our directors, our Board as a group, our independent directors as a group or any committees
of the Board by sending an e-mail to Ran Liu, Secretary to the Board of Directors, at
liuran
@cgagri.com
and indicating
the intended recipient in the subject line, or by writing to Ms. Liu at China Green Agriculture, Inc., 3rd Floor, Borough A, Block
A. No. 181, South Taibai Road, Xian, Shaanxi Province, People’s Republic of China 710065. The Board has given Ms. Liu, as
Secretary to the Board of Directors, the discretion to distribute communications to the director or directors, after ascertaining
whether the communications are appropriate to duties and responsibilities of the Board. Communications that relate to ordinary
business matters that are not within the scope of the Board’s responsibilities will be forwarded to the appropriate employee
within our company. Solicitations, junk email and obviously frivolous or inappropriate communications will not be forwarded. You
will receive a written acknowledgement from the Secretary to the Board upon receipt of your communication.
Independence
of the Board
Our
Board is currently composed of five (5) members. Jianlei Shen, Yiru Shi and Lianfu Liu qualify as independent directors in accordance
with the published listing requirements of the New York Stock Exchange (“NYSE”). The NYSE independence definition
includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our
employees and that neither the director nor any of his or her family members has engaged in various types of business dealings
with us. In addition, as further required by NYSE rules, our Board has made an affirmative determination as to each independent
director that no relationships exist which, in the opinion of our Board, would interfere with the exercise of independent judgment
in carrying out the responsibilities of a director. In making these determinations, our directors reviewed and discussed information
provided by the directors and us with regard to each director’s business and personal activities as they may relate to us
and our management. Our directors hold office until their successors have been elected and qualified or their earlier death, resignation
or removal.
Board
Meetings
The
Board held four meetings, by telephone, in the fiscal year ended June 30, 2016. In addition, the Board unanimously approved twelve
written consents on matters between meetings. During the fiscal year ended June 30, 2016, each incumbent director attended at
least 75% of the aggregate number of meetings of the Board and applicable committee meetings (held during the period for which
he or she was a director) on which he or she served. We do not have a formal policy regarding attendance by members of the Board
at the annual meeting of stockholders, but we encourage all members of the Board to attend the meetings.
Promoters
and Certain Control Persons
We
did not have any promoters at any time during the past five fiscal years.
Except
as set forth in our discussion above, none of our directors or executive officers has been involved in any transactions with us
or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules
and regulations of the SEC.
Item
14.
|
Principal
Accountant Fees and Services
|
The
following are the fees billed to us by our auditors during fiscal years ended June 30, 2016 and 2015:
|
|
Years Ended
|
|
|
|
June 30,
2016
|
|
|
June 30,
2014
|
|
Audit Fees
|
|
$
|
370,000
|
|
|
$
|
320,000
|
|
Audit related fees
|
|
|
10,000
|
|
|
|
10,000
|
|
Tax fees
|
|
|
-
|
|
|
|
-
|
|
All Other Fees
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
380,000
|
|
|
$
|
330,000
|
|
Audit
Fees
The
aggregate fees billed by Kabani &Company, Inc. for professional services rendered for the audit of our annual financial statements
included in our Annual Reports on Form 10-K, for the reviews of the financial statements included in our Quarterly Reports on
Form 10-Q, for our Sarbanes-Oxley Act of 2002 compliance audit, and for services in connection with statutory and regulatory filings
or engagements were $370,000 and $320,000 for the fiscal years ended June 30, 2016 and 2015, respectively.
Audit-Related
Fees
The
aggregate fees billed by our principal accountants for audit-related services was $10,000 and $10,000 for the fiscal years ended
June 30, 2016, and 2015, respectively.
Tax
Fees
We
did not engage our principal accountants to provide tax or related services during the last two fiscal years.
All
Other Fees
We
did not engage our principal accountants to render services to us during the last two fiscal years, other than as reported above
Pre-Approval
Policies and Procedures
Under
the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our
Audit Committee to assure that such services do not impair the auditors’ independence from us. In accordance with its policies
and procedures, the Audit Committee pre-approved the audit service performed by Friedman for our consolidated financial statements
as of and for the year ended June 30, 2016.
The
Company’s principal accountant, Kabani & Company, Inc., did not engage any other persons or firms other than the principal
accountant’s full-time, permanent employees.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
China
Green Agriculture, Inc. (the “Company”, “Parent Company” or “Green Nevada”), through its subsidiaries,
is engaged in the research, development, production, distribution and sale of humic acid-based compound fertilizer, compound fertilizer,
blended fertilizer, organic compound fertilizer, slow-release fertilizers, highly-concentrated water-soluble fertilizers and mixed
organic-inorganic compound fertilizer and the development, production and distribution of agricultural products.
Unless
the context indicates otherwise, as used in the notes to the financial statements of the Company, the following are the references
herein of all the subsidiaries of the Company (i) Green Agriculture Holding Corporation (“Green New Jersey”), a wholly-owned
subsidiary of Green Nevada, incorporated in the State of New Jersey; (ii) Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd.
(“Jinong”), a wholly-owned subsidiary of Green New Jersey organized under the laws of the PRC; (iii) Xi’an Hu
County Yuxing Agriculture Technology Development Co., Ltd. (“Yuxing”), a Variable Interest Entity (“VIE”)
in the in the People’s Republic of China (the “PRC”) controlled by Jinong through a series of contractual agreements;
(iv) Beijing Gufeng Chemical Products Co., Ltd., a wholly-owned subsidiary of Jinong in the PRC (“Gufeng”), and (v)
Beijing Tianjuyuan Fertilizer Co., Ltd., Gufeng’s wholly-owned subsidiary in the PRC (“Tianjuyuan”).
On June 30, 2016,
the Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition agreements and a series of contractual
agreements with the shareholders of the following six companies that are organized under the laws of the PRC and would be deemedVIEs:
Shaanxi Lishijie Agrochemical Co., Ltd., Songyuan Jinyangguang Sannong Service Co., Ltd., Shenqiu County Zhenbai Agriculture Co.,
Ltd., Weinan City Linwei District Wangtian Agricultural Materials Co., Ltd., Aksu Xindeguo Agricultural Materials Co., Ltd., and
Xinjiang Xinyulei Eco-agriculture Science and Technology Co., Ltd. (collectively hereafter referred to as “the VIE Companies.”)
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016
NOTE
2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principle
of consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Green New
Jersey, Jinong, Gufeng, Tianjuyuan, Yuxing and the VIE Companies. The operations of the VIE Companies are not included in
the accompanying statement of operation as the acquisition date was June 30, 2016. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Effective
June 16, 2013, Yuxing was converted from being a wholly-owned foreign enterprise 100% owned by Jinong to a domestic enterprise
100% owned one natural person, who is not affiliated to the Company (“Yuxing’s Owner”). Effective the same day,
Yuxing’s Owner entered into a series of contractual agreements with Jinong pursuant to which Yuxing became the VIE of Jinong.
VIE
assessment
A VIE is an entity (1) that has total equity
at risk that is not sufficient to finance its activities without additional subordinated financial support from other entities,
(2) where the group of equity holders does not have the power to direct the activities of the entity that most significantly impact
the entity’s economic performance, or the obligation to absorb the entity’s expected losses or the right to receive
the entity’s expected residual returns, or both, or (3) where the voting rights of some investors are not proportional to
their obligations to absorb the expected losses of the entity, their rights to receive the expected residual returns of the entity,
or both, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that
has disproportionately few voting rights. In order to determine if an entity is considered a VIE, the Company first perform a
qualitative analysis, which requires certain subjective decisions regarding its assessments, including, but not limited to, the
design of the entity, the variability that the entity was designed to create and pass along to its interest holders, the rights
of the parties, and the purpose of the arrangement. If the Company cannot conclude after a qualitative analysis whether an entity
is a VIE, it performs a quantitative analysis. The qualitative analysis considered the design of the entity, the risks that cause
variability, the purpose for which the entity was created, and the variability that the entity was designed to pass along to its
variable interest holders. When the primary beneficiary could not be identified through a qualitative analysis, we used internal
cash flow models to compute and allocate expected losses or expected residual returns to each variable interest holder based upon
the relative contractual rights and preferences of each interest holder in the VIE’s capital structure. Based on the agreements
entered into with the VIE Companies, the Company is deemed to have control over the VIE Companies as it has power over decisions
that most significantly impact the economic activities of the VIE and it has potential to receive significant benefits or absorb
significant losses of the VIE. The financial statements of the VIE Companies will be consolidated with those of the Company’s
as of June 30, 2016. As required by ASC 810, the Company will present in a separate footnote, balance sheet and income statement
information of the VIE Companies and Yuxing (previously controlled company the is considered a VIE).
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016
Use
of estimates
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amount of revenues
and expenses during the reporting periods. Management makes these estimates using the best information available at the time the
estimates are made. However, actual results could differ materially from those results.
Cash
and cash equivalents and concentration of cash
For
statement of cash flows purposes, the Company considers all cash on hand and in banks, certificates of deposit with state owned
banks in the 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 cash in such accounts and on hand as of June 30, 2016 and 2015 was $102,728,991
and $92,686,188, respectively. There is no insurance securing these deposits in China. In addition, the Company also had $167,495
and $306,376 in cash in two banks in the United States as of June 30, 2016 and 2015, respectively, with $250,000 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, 2016 and 2015, the Company had accounts receivable of $118,418,228 and $68,528,598,
net of allowance for doubtful accounts of $397,123 and $307,923, respectively. The Company adopts no policy to accept product
returns post to the sales delivery.
Other
receivable
Other receivable relates to the amount due from the sale of certain equipment from the Company’s Jintai
facility. The receivable balance is secured by the equipment that was sold and is non-interest bearing. The balance of other receivables
was paid in full during the year ended June 30, 2015. The Company had none other receivable during the year ended June 30, 2016.
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. At June 30, 2016 and 2015, the Company had no reserve for obsolete goods.
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.
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016
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. At June 30, 2016 and 2015, the Company determined that there were no impairments of its long-lived
assets.
Deferred
asset
Deferred
assets represent amounts that the distributors owed to the Company in their marketing efforts and developing standard stores to
expand the Company’s products’ competitiveness and market shares. The amount owed to the Company to assist its distributors
will be expensed over three years which is the term as stated in the cooperation agreement, as long as the distributors are actively
selling the Company’s products. For the years ended June 30, 2016 and 2015, the Company amortized $35,068,272 and $41,902,052,
respectively, of the deferred assets. If a distributor breaches, defaults, or terminates the agreement with the Company within
the three-year period, the outstanding unamortized portion of the amount owed will become payable to the Company immediately.
The Company’s Chairman, Mr. Li, guaranteed to the Company of amounts remaining unpaid due from distributors. These deferred
assets are subject to annual impairment testing. The estimated amortization expense of the deferred assets for the twelve months
ending June 30, 2017 and 2018 is $12,661,672 and $769,949, respectively.
The
deferred assets consist of items inside the distributors’ stores such as furniture, racks, cabinets, and display units,
and items outside or attached to the distributors’ stores such as signage and billboards. These types of assets would be
capitalized as fixed assets if the Company actually owned the stores or utilized the assets for its own operations. These assets
would also be capitalized as leasehold improvements if the Company leased these stores from the distributors. Therefore, the Company
believes that under the U.S. generally accepted accounting principles, these types of assets purchases are properly capitalized.
In addition, the Company believes that these assets are properly classified as deferred assets because if a distributor breaches,
defaults, or terminates the agreement with the Company within a three-year period, a proportionate amount expended by the Company
is to be repaid by the distributor. The Chairman of the Board of directors of the Company guaranteed to the Company of amounts
remaining unpaid due from distributors.
The
assets inside the distributors’ stores are custom made to fit the layout of each individual store and the signage and billboards
are also custom designed to fit the specific location. The assets were purchased by the Company directly from the manufacturers
and installed in the distributors’ stores. The Company wants to maintain control over the quality of the items being purchased
as well as making them uniform among all the distributor locations.
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Total Deferred Assets
|
|
$
|
130,086,315
|
|
|
$
|
141,495,879
|
|
Less: accumulated amortization
|
|
|
(116,654,694
|
)
|
|
|
(89,968,670
|
)
|
Total
|
|
$
|
13,431,621
|
|
|
$
|
51,527,209
|
|
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, 2016 and 2015, respectively.
Goodwill
Goodwill represents the excess of purchase
price over the underlying net assets of businesses acquired. Goodwill is reviewed for impairment on an annual basis, or more frequently
if events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. The goodwill impairment test
is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value including goodwill.
If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. If the fair value
of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and
the enterprise must perform step two of the impairment test. Under step two, an impairment loss is recognized for any excess of
the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value
of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation.
The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. As of June 30, 2016 and
2015, the Company performed the required impairment review which resulted in no impairment adjustment.
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016
Summary
of changes in goodwill by reporting segments is as follows:
|
|
Balance at
|
|
|
|
|
|
Foreign
|
|
|
Balance at
|
|
|
|
June 30,
|
|
|
|
|
|
Currency
|
|
|
June 30,
|
|
Segment
|
|
2015
|
|
|
Additions
|
|
|
Adjustment
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gufeng
|
|
$
|
5,245,643
|
|
|
|
-
|
|
|
$
|
(422,984
|
)
|
|
|
4,822,659
|
|
Acquisition of VIE Companies
|
|
|
-
|
|
|
|
3,158,179
|
|
|
|
-
|
|
|
|
3,158,179
|
|
|
|
$
|
5,245,643
|
|
|
$
|
3,158,179
|
|
|
$
|
(422,984
|
)
|
|
$
|
7,980,838
|
|
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, 2015.
The
following table presents the Company’s assets and liabilities required to be reflected within the fair value hierarchy as
of June 30, 2016.
|
|
Fair Value
|
|
|
Fair Value Measurements at
|
|
|
|
As of
June 30,
|
|
|
June 30,
2016
|
|
Description
|
|
2016
|
|
|
Using Fair Value Hierarchy
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liability
|
|
$
|
144,818
|
|
|
$
|
-
|
|
|
$
|
144,818
|
|
|
$
|
-
|
|
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.
Derivative
financial instruments
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is
initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in
the statements of operations. The Company uses a binomial option pricing model to value the derivative instruments. The classification
of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at
the end of each reporting period.
At
June 30, 2016, the only derivative financial instrument is the variable conversion feature embedded in the convertible notes payable
(See Note 9). The fair value of the embedded conversion of $144,818 is recorded as a derivative liability at June 30, 2016. The
fair value was determined using a binomial option pricing model with the following assumptions:
Risk-free rate
|
|
|
2.5
|
%
|
Volatility
|
|
|
51.2
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
Country risk premium
|
|
|
90.0
|
%
|
Liquidity risk premium
|
|
|
3.0
|
%
|
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016
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.
The
Company's revenue consists of invoiced value of goods, net of a value-added tax (VAT). No product return or sales discount allowance
are made as products delivered and accepted by customers are not returnable and sales discounts are not granted after products
are delivered.
Customer
deposits
Payments
received before all of the relevant criteria for revenue recognition are satisfied are recorded as customer deposits. When all
revenue recognition criteria are met, the customer deposits are recognized as revenue. As of June 30, 2016 and 2015, the Company
had customer deposits of $8,578,341 and $19,129,853, respectively.
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, 2016, and 2015. 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; stockholders’ equity is translated at the historical rates and items in the income statement
and 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.
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016
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, 2015, the Company, through its subsidiaries is engaged into three main business segments based on location and product:
Jinong (fertilizer production), Gufeng (fertilizer production) and Yuxing (agricultural products production). As of June 30, 2016,
with the acquisition of the VIE Companies, the Company added a new distribution segment.
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 sheets. 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 sheets.
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:
|
|
Years Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Net Income for Basic Earnings Per Share
|
|
$
|
24,704,193
|
|
|
$
|
31,445,126
|
|
Basic Weighted Average Number of Shares
|
|
|
36,703,576
|
|
|
|
33,983,698
|
|
Net Income Per Share – Basic
|
|
$
|
0.67
|
|
|
$
|
0.93
|
|
Net Income for Diluted Earnings Per Share
|
|
$
|
24,704,193
|
|
|
$
|
31,445,126
|
|
Diluted Weighted Average Number of Shares
|
|
|
36,703,576
|
|
|
|
33,983,698
|
|
Net Income Per Share – Diluted
|
|
$
|
0.67
|
|
|
$
|
0.93
|
|
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016
Reclassification
Certain
reclassifications have been made to the prior year consolidated financial statements to conform to the 2015 consolidated financial
statement presentation. Such reclassifications did not affect total revenues, operating income or net income or cash flows as
previously reported.
Recent
accounting pronouncements
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition
guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred
to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.
ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required
within the revenue recognition process than are required under existing U.S. GAAP. This pronouncement is effective for annual
reporting periods beginning after December 15, 2016, and is to be applied using one of two retrospective application methods,
with early application not permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on
its consolidated financial statements.
In
January 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-01 (Subtopic 225-20) -
Income Statement - Extraordinary
and Unusual Items
. ASU 2015-01 eliminates the concept of an extraordinary item from GAAP. As a result, an entity will no longer
be required to segregate extraordinary items from the results of ordinary operations, to separately present an extraordinary item
on its income statement, net of tax, after income from continuing operations or to disclose income taxes and earnings-per-share
data applicable to an extraordinary item. However, ASU 2015-01 will still retain the presentation and disclosure guidance for
items that are unusual in nature and occur infrequently. ASU 2015-01 is effective for periods beginning after December 15, 2015.
The adoption of ASU 2015-01 is not expected to have a material effect on the Company’s consolidated financial statements.
Early adoption is permitted.
In
February, 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-02,
Consolidation (Topic 810): Amendments to the
Consolidation Analysis.
ASU 2015-02 provides guidance on the consolidation evaluation for reporting organizations that are
required to evaluate whether they should consolidate certain legal entities such as limited partnerships, limited liability corporations,
and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security
transactions). ASU 2015-02 is effective for periods beginning after December 15, 2015. The adoption of ASU 2015-02 is not expected
to have a material effect on the Company’s consolidated financial statements. Early adoption is permitted.
In
September, 2015, the FASB issued ASU No. 2015-16,
Business Combinations (Topic 805).
Topic 805 requires that an acquirer
retrospectively adjust provisional amounts recognized in a business combination, during the measurement period. To simplify the
accounting for adjustments made to provisional amounts, the amendments in the Update require that the acquirer recognize adjustments
to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount
is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings
of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts,
calculated as if the accounting had been completed at the acquisition date. In addition an entity is required to present
separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount
recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment
to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning
December 15, 2015. The adoption of ASU 2015-016 is not expected to have a material effect on the Company’s consolidated
financial statements.
In
November 2015, the FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes
. The new guidance requires
that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance
sheet. This update is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods.
The Company does not anticipate the adoption of this ASU will have a significant impact on its consolidated financial position,
results of operations, or cash flows.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. The guidance in ASU No. 2016-02 supersedes the lease
recognition requirements in ASC Topic 840,
Leases (FAS 13)
. ASU 2016-02 requires an entity to recognize assets and liabilities
arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures.
ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently
evaluating the effect this standard will have on its consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share Based Payment Accounting
, to simplify several aspects
of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either
equity or liabilities, and classification on the statement of cash flows. The guidance will be effective for annual periods beginning
after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted, including adoption in an
interim period. The Company is currently evaluating the impact of the adoption of this newly issued guidance to its consolidated
financial statements.
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company's present or future financial statements.
NOTE
3 – INVENTORIES
Inventories
consisted of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Raw materials
|
|
$
|
29,926,762
|
|
|
$
|
48,294,614
|
|
Supplies and packing materials
|
|
|
444,373
|
|
|
|
529,398
|
|
Work in progress
|
|
|
408,820
|
|
|
|
348,670
|
|
Finished goods
|
|
|
56,656,360
|
|
|
|
52,130,265
|
|
Total
|
|
$
|
87,436,315
|
|
|
$
|
101,302,947
|
|
NOTE
4 - PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consisted of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Building and improvements
|
|
$
|
42,489,975
|
|
|
$
|
43,699,066
|
|
Auto
|
|
|
937,642
|
|
|
|
900,562
|
|
Machinery and equipment
|
|
|
19,015,420
|
|
|
|
23,173,209
|
|
Agriculture assets
|
|
|
765,983
|
|
|
|
833,165
|
|
Total property, plant and equipment
|
|
|
63,209,020
|
|
|
|
68,606,002
|
|
Less: accumulated depreciation
|
|
|
(25,639,281
|
)
|
|
|
(23,971,808
|
)
|
Total
|
|
$
|
37,569,739
|
|
|
$
|
44,634,194
|
|
NOTE
5 - INTANGIBLE ASSETS
Intangible
assets consisted of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Land use rights, net
|
|
$
|
10,381,215
|
|
|
$
|
11,554,776
|
|
Technology patent, net
|
|
|
-
|
|
|
|
251,008
|
|
Customer relationships, net
|
|
|
6,403,343
|
|
|
|
5,337,372
|
|
Non-compete agreement
|
|
|
925,678
|
|
|
|
-
|
|
Trademarks
|
|
|
6,129,812
|
|
|
|
6,662,590
|
|
Total
|
|
$
|
23,840,048
|
|
|
$
|
23,805,746
|
|
LAND
USE RIGHT
On
September 25, 2009, Yuxing was granted a land use right for approximately 88 acres (353,000 square meters or 3.8 million square
feet) by the People’s Government and Land & Resources Bureau of Hu County, Xi’an, Shaanxi Province. The fair value
of the related intangible asset was determined to be the respective cost of RMB73,184,895 (or $11,014,327). The intangible asset
is being amortized over the grant period of 50 years using the straight line method.
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016
On
August 13, 2003, Tianjuyuan was granted a certificate of Land Use Right for a parcel of land of approximately 11 acres (42,726
square meters or 459,898 square feet) at Ping Gu District, Beijing. The purchase cost was recorded at RMB1,045,950 (or $157,415).
The intangible asset is being amortized over the grant period of 50 years.
On
August 16, 2001, Jinong received a land use right as a contribution from a shareholder, which was granted by the People’s
Government and Land & Resources Bureau of Yangling District, Shaanxi Province. The fair value of the related intangible asset
at the time of the contribution was determined to be RMB7,285,099 (or $1,096,408). The intangible asset is being amortized
over the grant period of 50 years.
The
Land Use Rights consisted of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Land use rights
|
|
$
|
12,268,150
|
|
|
$
|
13,344,160
|
|
Less: accumulated amortization
|
|
|
(1,886,935
|
)
|
|
|
(1,789,384
|
)
|
Total land use rights, net
|
|
$
|
10,381,215
|
|
|
$
|
11,554,776
|
|
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 $884,198) and is
being amortized over the patent period of 10 years using the straight line method. This technology patent has been fully amortized.
On
July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The fair value on the acquired technology
patent was estimated to be RMB9,200,000 (or $1,384,600) and is amortized over the remaining useful life of six years using the
straight line method. As of June 30, 2016, this technology patent is fully amortized.
The
technology know-how consisted of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Technology know-how
|
|
$
|
2,268,798
|
|
|
$
|
2,467,789
|
|
Less: accumulated amortization
|
|
|
(2,268,798
|
)
|
|
|
(2,216,781
|
)
|
Total technology know-how, net
|
|
$
|
-
|
|
|
$
|
251,008
|
|
CUSTOMER
RELATIONSHIP
On July 2, 2010, the Company acquired
Gufeng and its wholly-owned subsidiary Tianjuyuan. The fair value on the acquired customer relationships was estimated to be RMB65,000,000
(or $9,782,500) and is amortized over the remaining useful life of ten years. On June 30, 2016, the Company acquired the VIE Companies.
The fair value on the acquired customer relationships was estimated to be RMB16,442,531 (or $2,474,601) and is amortized over the
remaining useful life of seven to ten years.
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
Customer
relationships
|
|
$
|
12,257,101
|
|
|
$
|
10,640,500
|
|
Less:
accumulated amortization
|
|
|
(5,853,758
|
)
|
|
|
(5,303,128
|
)
|
Total
customer relationships, net
|
|
$
|
6,403,343
|
|
|
$
|
5,337,372
|
|
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016
NON-COMPETE
AGREEMENT
On
July 2, 2010, the Company acquired Gufeng and its wholly-owned subsidiary Tianjuyuan. The fair value on the acquired non-compete
agreement was estimated to be RMB1,320,000 (or $198,660) and is amortized over the remaining useful life of five years using the
straight line method. On June 30, 2016, the Company acquired the VIE Companies. The fair value on the acquired non-compete
agreements were estimated to be RMB6,150,683 (or $925,678) and is amortized over the remaining useful life of five years using
the straight line method.
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Non-compete agreement
|
|
$
|
1,124,338
|
|
|
$
|
216,084
|
|
Less: accumulated amortization
|
|
|
(198,660
|
)
|
|
|
(216,084
|
)
|
Total non-compete agreement, net
|
|
$
|
925,678
|
|
|
$
|
-
|
|
TRADEMARKS
On July 2, 2010, the Company acquired
Gufeng and its wholly-owned subsidiary Tianjuyuan. The preliminary fair value on the acquired trademarks was estimated to be RMB40,700,000
(or $6,125,350) and is subject to an annual impairment test. On June 30, 2016, Jinong acquired Xindeguo and Xinyulei. The preliminary
fair value on the acquired trademarks was estimated to be RMB29,648 (or $4,462).
AMORTIZATION
EXPENSE
Estimated
amortization expenses of intangible assets for the next five twelve months periods ended June 30, 2016, are as follows:
Years Ending June 30,
|
|
Expense ($)
|
|
2015
|
|
|
1,941,112
|
|
2016
|
|
|
1,454,380
|
|
2017
|
|
|
1,699,727
|
|
2018
|
|
|
1,699,726
|
|
2019
|
|
|
1,699,726
|
|
2020
|
|
|
1,699,726
|
|
2021
|
|
|
737,218
|
|
NOTE
6 - ACCRUED EXPENSES AND OTHER PAYABLES
Accrued
expenses and other payables consisted of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Payroll payable
|
|
$
|
58,704
|
|
|
$
|
18,451
|
|
Welfare payable
|
|
|
154,510
|
|
|
|
168,061
|
|
Accrued expenses
|
|
|
4,450,306
|
|
|
|
3,554,733
|
|
Acquisitions payable*
|
|
|
5,568,500
|
|
|
|
-
|
|
Other payables
|
|
|
6,056,153
|
|
|
|
1,098,705
|
|
Other levy payable
|
|
|
126,219
|
|
|
|
113,027
|
|
Total
|
|
$
|
16,414,392
|
|
|
$
|
4,952,977
|
|
*Acquisitions payable represents the amount due to the
original owners of the VIEs acquired on June 30, 2016.
NOTE
7 - AMOUNT DUE TO RELATED PARTIES
As of June 30, 2016 and 2015, the amount due
to related parties was $2,473,004 and $2,068,102, respectively. As of June 30, 2016 and 2015, $1,092,243 and $1,184,643,
respectively were amounts that Gufeng borrowed from a related party, Xi’an Techteam Science & Technology Industry (Group)
Co. Ltd., a company controlled by Mr. Tao Li, Chairman and CEO of the Company, representing unsecured, non-interest bearing loans
that are due on demand. These loans are not subject to written agreements. Company had other payable of $1.350,000,
was an amount of advanced payable to our major shareholder.
At
the end of December 2015, Yuxing entered into a sales agreement with the Company’s affiliate, 900LH.com Food Co., Ltd. ("900LH.com",
previously announced as Xi'an Gem Grain Co., Ltd) pursuant to which Yuxing is to supply various vegetables to 900LH.com for its
incoming seasonal sales at the holidays and year ends (the “Sales Agreement”). The contingent contracted value of
the Sales Agreement is RMB 25,500,000 (approximately $3,965,250). For the year ended June 30, 2016, Yuxing has sold approximately
$1,383,787 products to 900LH.com.
At June 30, 2016, the Company’s subsidiary,
Jinong, owed 900LH.com $43,737 and 900nong owned Jinong $13,518.
At June 30, 2016, the Company’s subsidiary,,
Gufeng, owned 900LH.com $7,738 and 900nong.com owed Gufeng $454,534.
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016
At June 30, 2016, the Company’s variable
interest entity, Xinyulei, owned 900LH.com $15,050 and 900LH.com owned Xinyulei $48,518.
At June 30, 2016, Mr Rujun Mo, the owner
of Xinyulei and Xindeguo, had a bank loan of $301,000 under his personal term which is guaranteed by Xindeguo and Xinyulei. The
purpose of this loan is to pay off the purchase of inventory for Xinyulei; At June 30, 2016, Mr. Mo had a personal loan of $316,050,
which was borrowed from his family relatives. At June 30, 2016, Mr. Mo has paid $270,900 deposit for his membership card of 900LH.com.
This member card shall enjoy free fixed amount of product and member service every month and it can withdraw at any time, but the
membership and relevant services will be terminated.
On June 29, 2014,
Jinong signed an office lease with Kingtone Information Technology Co., Ltd. (“Kingtone Information”),
where Mr. Tao Li, Chairman and CEO of the Company, serves as its Chairman. Pursuant to the lease, Jinong rented 612 square meters
(approximately 6,588 square feet) of office space from Kingtone Information. The lease provided for a two-year term effective
as of July 1, 2014 with monthly rent of RMB25,723 (approximately $4,000).
NOTE
8- LOAN PAYABLES
As
of June 30, 2016, the short-term loan payables consisted of three loans which mature on dates ranging from May 18, 2016 through
March 17, 2017 with interest rates ranging from 4.87% to 5.82%. The loans No. 1 and 3 below are collateralized by Tianjuyan’s
land use right and building ownership right. The loans No. 2 is guaranteed by Jinong’s credit.
No.
|
|
Payee
|
|
Loan period per agreement
|
|
|
Interest Rate
|
|
|
June 30,
2016
|
|
1
|
|
Agriculture Bank of China-Pinggu Branch
|
|
|
May 18, 2016 - March 17, 2017
|
|
|
|
4.87
|
%
|
|
$
|
1,956,500
|
|
2
|
|
Beijing Bank Pinggu Branch
|
|
|
August 11, 2015- August 2, 2016
|
|
|
|
5.82
|
%
|
|
|
1,505,000
|
|
3
|
|
Agriculture Bank of China-Pinggu Branch
|
|
|
Jan 19, 2016 - Jan 17, 2017
|
|
|
|
5.00
|
%
|
|
|
1,204,000
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
4,665,500
|
|
As
of June 30, 2015, the short-term loan payables consisted of ten loans which mature on dates ranging from August 6, 2015 through
April 29, 2016 with interest rates ranging from 5.60% to 7.80%. The loans No 6 and 10 are collateralized by Tianjuyuan’s
land use right and building ownership right. The loan No.8 is collateralized by Gufeng’s deposit. The loan No.7 is collateralized
by Jinong’s land use right and Jinong’s credit. The loan No. 2 and 9 are guaranteed by Jinong’s credit. The
loans No.3, 4 and 5 are guaranteed by a bonding company in Zhongguancun Beijing, and counter guaranteed by Jinong’s credit.
The loan No.1 is guaranteed by Jinong and Tianjuyuan’s deposit.
No.
|
|
Payee
|
|
Loan period per agreement
|
|
|
Interest Rate
|
|
|
June 30,
2015
|
|
1
|
|
Beijing Bank – Pinggu Branch
|
|
|
Aug 6, 2014 – Aug 5, 2015
|
|
|
|
6.72
|
%
|
|
$
|
1,637,000
|
|
2
|
|
China Merchants Bank – Chaoyang Branch
|
|
|
Aug 27, 2014 – Aug 26, 2015
|
|
|
|
7.80
|
%
|
|
|
1,637,000
|
|
3
|
|
Beijing International Trust Co., Ltd
|
|
|
Sep 24, 2014 – Sep 23, 2015
|
|
|
|
7.80
|
%
|
|
|
1,637,000
|
|
4
|
|
Beijing International Trust Co., Ltd
|
|
|
Oct 28, 2014 – Oct 27, 2015
|
|
|
|
7.80
|
%
|
|
|
1,637,000
|
|
5
|
|
Beijing International Trust Co., Ltd
|
|
|
Dec 26, 2014 – Dec 15, 2015
|
|
|
|
7.28
|
%
|
|
|
1,637,000
|
|
6
|
|
Agriculture Bank of China-Pinggu Branch
|
|
|
Jan 21, 2015 – Jan 20, 2016
|
|
|
|
6.16
|
%
|
|
|
1,309,600
|
|
7
|
|
Tianjin Bank – Beijing Branch
|
|
|
Feb 3, 2015 – Jan 27, 2016
|
|
|
|
6.16
|
%
|
|
|
6,548,000
|
|
8
|
|
Tianjin Bank – Beijing Branch
|
|
|
Feb 11, 2015 – Feb 10, 2016
|
|
|
|
5.60
|
%
|
|
|
4,616,340
|
|
9
|
|
China Merchants Bank – Chaoyang Branch
|
|
|
Mar 16, 2015 – Mar 15, 2016
|
|
|
|
6.96
|
%
|
|
|
818,500
|
|
10
|
|
Agriculture Bank of China-Pinggu Branch
|
|
|
May 12, 2015 – Apr 29, 2016
|
|
|
|
5.89
|
%
|
|
|
2,128,100
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
23,605,540
|
|
The
interest expense from short-term loans was $995,959 and $1,712,639 for the years ended June 30, 2016 and 2015, respectively.
NOTE
9 – CONVERTIBLE NOTES PAYABLE
In
connection with the acquisition of the VIE Companies, the Company subsidiary, Jinong, issued to the VIE Companies shareholders
convertible notes payable in the aggregate amount of RMB 51,000,000 ($7,675,500) with a term of three years and an annual interest
rate of 3%. The convertible notes take priority over the preferred stock and common stock of Jinong, and any other class or series
of capital stocks Jinong issues in the future in terms of interests and payments in the event of any liquidation, dissolution
or winding up of Jinong. On or after the third anniversary of the issuance date of the note, noteholders may request Jinong to
process the note conversion to convert the note into shares of the Company’s common stock. The notes cannot be converted
prior to the mature date. The per share conversion price of the notes is the higher of the following: (i) $5.00 per share or (ii)
75% of the closing price of the Company’s common stock on the date the noteholder delivers the conversion notice.
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2016
The
Company determined that the fair value of the convertible notes payable was RMB 44,330,692 ($6,671,769) due to the lower than
market interest rate and the conversion feature. The difference between the fair value of the notes and the face amount of the
notes will be amortized to interest expense over the three year life of the notes. As these notes were issued on June 30, 2016,
there was no amortization of this discount into interest expense.
NOTE
10 – TAXES PAYABLE
Enterprise
Income Tax
Effective
January 1, 2008, the Enterprise Income Tax (“EIT”) law of the PRC replaced the tax laws for Domestic Enterprises (“DEs”)
and Foreign Invested Enterprises (“FIEs”). The EIT rate of 25% replaced the 33% rate that was applicable to both DEs
and FIEs. The two year tax exemption and three year 50% tax reduction tax holiday for production-oriented FIEs was eliminated.
Since January 1, 2008, Jinong became subject to income tax in China at a rate of 15% as a high-tech company, as a result of the
expiration of its tax exemption on December 31, 2007. Accordingly, it made provision for income taxes for the years ended June
30, 2016 and 2015 of $3,577,978 and $4,262,040, 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 $3,584,006 and $4,654,775 for the year ended June 30,
2016 and 2015, respectively.
Value-Added
Tax
All of the Company’s fertilizer products
that are produced and sold in the PRC were subject to a Chinese Value-Added Tax (VAT) of 13% of the gross sales price. On April
29, 2008, the PRC State of Administration of Taxation (SAT) released Notice #56, “
Exemption of VAT for Organic Fertilizer
Products
”, which allows certain fertilizer products to be exempt from VAT beginning June 1, 2008. The Company submitted
the application for exemption in May 2009, which was granted effective September 1, 2009, continuing through December 31, 2015.
Income
Taxes and Related Payables
Taxes
payable consisted of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
VAT provision
|
|
$
|
2,218
|
|
|
$
|
27,251
|
|
Income tax payable
|
|
|
3,445,480
|
|
|
|
3,778,339
|
|
Other levies
|
|
|
656,520
|
|
|
|
698,952
|
|
Total
|
|
$
|
4,104,218
|
|
|
$
|
4,504,542
|
|
The
provision for income taxes consists of the following:
|
|
Years Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Current tax - foreign
|
|
$
|
7,371,967
|
|
|
$
|
8,916,815
|
|
Deferred tax
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
7,371,967
|
|
|
$
|
8,916,815
|
|
The
components of deferred income tax assets and liabilities are as follows:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
13,803,943
|
|
|
$
|
11,847,474
|
|
Total deferred tax assets
|
|
|
13,803,943
|
|
|
|
11,847,474
|
|
Less valuation allowance
|
|
|
(13,803,943
|
)
|
|
|
(11,847,474
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2016
The
Company periodically evaluates the likelihood of the realization of deferred tax assets, and adjusts the carrying amount of the
deferred tax assets by the valuation allowance to the extent the future realization of the deferred tax assets is not judged to
be more likely than not. The Company considers many factors when assessing the likelihood of future realization of its deferred
tax assets, including its recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income
or loss, the carryforward periods available to the Company for tax reporting purposes, and other relevant factors.
At
June 30, 2016, based on the weight of available evidence, including cumulative losses in recent years and expectations of future
taxable income, the Company determined that it was more likely than not that its deferred tax assets would not be realized and
have a $13.8 million valuation allowance associated with its deferred tax assets.
Tax
Rate Reconciliation
Our
effective tax rates were approximately 21.6% and 22.1% for years ended June 30, 2016 and 2015, respectively. Substantially all
of the Company’s income before income taxes and related tax expense are from PRC sources. Actual income tax benefit reported
in the consolidated statements of income and comprehensive income differ from the amounts computed by applying the US statutory
income tax rate of 34% to income before income taxes for the years ended June 30, 2016 and 2015 for the following reasons:
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
15% - 25%
|
|
|
34%
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss)
|
|
$
|
32,076,160
|
|
|
|
|
|
|
$
|
(5,768,770
|
)
|
|
|
|
|
|
$
|
26,307,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax expense (benefit)
|
|
|
8,019,040
|
|
|
|
25.0
|
%
|
|
|
(1,961,382
|
)
|
|
|
34.0
|
%
|
|
|
6,062,571
|
|
|
|
|
|
High-tech income benefits on Jinong
|
|
|
(2,214,672
|
)
|
|
|
(5.7
|
)%
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,214,672
|
)
|
|
|
|
|
Losses from subsidiaries in which no benefit is recognized
|
|
|
1,567,599
|
)
|
|
|
(0.8
|
)%
|
|
|
-
|
|
|
|
-
|
|
|
|
1,567,599
|
)
|
|
|
|
|
Change in valuation allowance on deferred tax asset from US tax benefit
|
|
|
-
|
|
|
|
|
|
|
|
1,961,382
|
|
|
|
(34.0
|
)%
|
|
|
1,961,382
|
|
|
|
|
|
Actual tax expense
|
|
$
|
7,371,967
|
|
|
|
23
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
7,371,967
|
|
|
|
21.6
|
%
|
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2016
June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
15% - 25%
|
|
|
34%
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss)
|
|
$
|
46,922,721
|
|
|
|
|
|
|
$
|
(6,562,530
|
)
|
|
|
|
|
|
$
|
40,360,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax expense (benefit)
|
|
|
11,730,680
|
|
|
|
25.0
|
%
|
|
|
(2,231,260
|
)
|
|
|
34.0
|
%
|
|
|
9,499,420
|
|
|
|
|
|
High-tech income benefits on Jinong
|
|
|
(2,675,905
|
)
|
|
|
(5.7
|
)%
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,675,905
|
)
|
|
|
|
|
Losses from subsidiaries in which no benefit is recognized
|
|
|
(137,960
|
)
|
|
|
(0.3
|
)%
|
|
|
-
|
|
|
|
-
|
|
|
|
(137,960
|
)
|
|
|
|
|
Change in valuation allowance on deferred tax asset from US tax benefit
|
|
|
-
|
|
|
|
|
|
|
|
2,231,260
|
|
|
|
(34.0
|
)%
|
|
|
2,231,260
|
|
|
|
|
|
Actual tax expense
|
|
$
|
8,916,815
|
|
|
|
19.0
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
8,916,815
|
|
|
|
22.1
|
%
|
NOTE
11 – STOCKHOLDERS’ EQUITY
Common
Stock
On
September 30, 2014, the Company granted an aggregate of 1,750,000 shares of restricted stock under the 2009 Plan to certain executive
officers, directors and employees, among which (i) 240,000 shares of restricted stock to Mr. Tao Li, the CEO; (ii) 100,000 shares
of restricted stock to Mr. Ken Ren, the CFO, (iii) 40,000 shares of restricted stock to Mr. Yizhao Zhang, 30,000 shares of restricted
stock to Ms. Yiru Shi, and 20,000 shares of restricted stock to Mr. Lianfu Liu, each an independent director of the Company; and
(iv) 1,320,000 shares of restricted stock to key employees. The stock grants are subject to time-based vesting schedules,
vesting in various installments until March 31, 2015 for the CFO and the three independent directors, until June 30, 2015 for
the CEO and until December 31, 2016 for the employees. The value of the restricted stock awards was $3,675,000 and is based on
the fair value of the Company’s common stock on the grant date. This amount is being amortized to compensation expense over
the vesting periods for the various awards. As of June 30, 2016 the unamortized portion of the compensation expense was $235,264
which will be amortized to expense through December 15, 2016.
On
October 3, 2015, the Company granted an aggregate of 1,000,000 shares of restricted stock under the 2009 Plan to
certain key employees. The stock grants are subject to time-based vesting schedules, vesting in various installments until
June 30, 2016. The value of the restricted stock awards was $1,660,000 and is based on the fair value of the Company’s
common stock on the grant date. This amount is being amortized to compensation expense over the vesting periods for the
various awards.
On
June 26, 2016, the Company granted an aggregate of 670,000 shares of restricted stock under the 2009 Plan to certain key employees.
The stock grants vest immediately. The value of the restricted stock awards was $897,800 and is based on the fair value of the
Company’s common stock on the grant date.
The
following table sets forth changes in compensation-related restricted stock awards during years ended June 30, 2016 and 2015:
|
|
|
|
|
Fair
|
|
|
Grant Date
|
|
|
|
Number of
|
|
|
Value of
|
|
|
Fair Value
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Per share
|
|
Outstanding (unvested) at June 30, 2014
|
|
|
1,714,000
|
|
|
$
|
3,104,759
|
|
|
|
|
|
Granted
|
|
|
1,750,000
|
|
|
|
3,675,000
|
|
|
$
|
2.10
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Vested
|
|
|
(1,756,000
|
)
|
|
|
(4,981,767
|
)
|
|
|
|
|
Outstanding (unvested) at June 30, 2015
|
|
|
1,708,000
|
|
|
$
|
1,797,992
|
|
|
|
|
|
Granted
|
|
|
1,000,000
|
|
|
|
1,660,000
|
|
|
$
|
1.66
|
|
Granted
|
|
|
670,000
|
|
|
|
897,800
|
|
|
$
|
1.34
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Vested
|
|
|
(2,790,000
|
)
|
|
|
(4,120,528
|
)
|
|
|
|
|
Outstanding (unvested) at June 30, 2016
|
|
|
588,000
|
|
|
$
|
235,264
|
|
|
|
|
|
As
of June 30, 2016, the unamortized expense related to the grant of restricted shares of common stock of $235,264 will be amortized
into expense through December 31, 2016. The fair value of the restricted common stock awards was based on the closing price
of the Company’s common stock on the grant date. The fair value of the common stock awarded is amortized over the various
vesting terms of each grant.
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2016
During
the year ended June 30, 2016, the Company issued 73,407 shares of common stock for consulting services valued at $114,763. The
shares were valued at the market price on the date of issuance.
During
the year June 30, 2015, the Company issued 103,686 shares of common stock for professional fees valued at $205,103.The shares
were valued at the market price on the date of issuance.
In
addition, during the year ended June 30, 2015, the Company issued 1,362,495 shares of common stock to its employees under the
Company’s Employee Stock Purchase Plan (the “ESPP”) for cash of $2,946,746 and the Company sold 326,483 shares
of common stock to its Chairman, Mr. Li, for cash proceeds of $626,847 under the ESPP.
Dividend
On
October 1, 2014, the Company's Board of Directors declared a cash dividend of $0.10 per share to the Company's stockholders of
common stock. The dividend payable represents a total payment to the stockholders of $3,296,156. The cash dividend of $2,161,904
was paid on January 30, 2015 to stockholders of record as of the close of business on the record date of October 31, 2014. Certain
stockholders, including the Company’s Chairman, Mr. Li, elected to waive the dividend payment due to them and directed the
Company to retain the funds for working capital purposes.
Preferred
Stock
Under
the Company’s Articles of Incorporation, the Board has the authority, without further action by stockholders, to designate
up to 20,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges, qualifications
and restrictions granted to or imposed upon the preferred stock, including dividend rights, conversion rights, voting rights,
rights and terms of redemption, liquidation preference and sinking fund terms, any or all of which may be greater than the rights
of the common stock. If the Company sells preferred stock under its registration statement on Form S-3, it will fix the rights,
preferences, privileges, qualifications and restrictions of the preferred stock of each series in the certificate of designation
relating to that series and will file the certificate of designation that describes the terms of the series of preferred stock
the Company offers before the issuance of the related series of preferred stock.
As
of June 30, 2016, the Company has 20,000,000 shares of preferred stock authorized, with a par value of $.001 per share, of which
no shares are issued or outstanding.
NOTE
12 – STOCK OPTIONS
There
were no issuances of stock options during the years ended June 30, 2016 and 2015.
Options
outstanding and related weighted average price and intrinsic value are as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
of Shares
|
|
|
Price
|
|
|
Value
|
|
Outstanding, June 30, 2014
|
|
|
115,099
|
|
|
$
|
14.66
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited/Canceled
|
|
|
(115,099
|
)
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited/Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2016
NOTE
13 –CONCENTRATIONS AND LITIGIATION
Market
Concentration
All
of the Company's revenue-generating operations are conducted in the PRC. Accordingly, the Company's business, financial condition
and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state
of the PRC's economy.
The
Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies
in North America and Western Europe. These include risks associated with, among other things, the political, economic and legal
environment and foreign currency exchange. The Company’s results may be adversely affected by, among other things, changes
in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation.
Vendor
and Customer Concentration
There were two vendors, Shaanxi Shanhua
Agricultural Material Co. Ltd and Sino-agri Guangdong Fertilizer Co., Ltd., from which the Company purchased 18.8% and 17.4%
of its raw materials for the year ended June 30, 2016. Total purchase from these two venders amounted to $52,241,454 as June 30,
2016.
There were two vendors, Sino-agri Holding
Co., Ltd and Beijing Baofengnian Agricultural Material Co. Ltd,, from which the Company purchased 16.9% and 10.5% of its
raw materials for the year ended June 30, 2015. Total purchase from these two venders amounted to $47,116,232 as June 30, 2015.
One customer,Sino-agri Holding Co., Ltd.,
accounted for $59,696,999, or 23.0% of the Company’s sales for the year ended June 30, 2016.
One
customer,Sino-agri Holding Co., Ltd., accounted for $64,131,981, or 23.6% of the Company’s sales for the year ended June
30, 2015.
NOTE
14 – SEGMENT REPORTING
As
of June 30, 2016, the Company was organized into three main business segments based on location and product: Jinong (fertilizer
production), Gufeng (fertilizer production), and Yuxing (agricultural products production). As of June 30, 2016, with the acquisition
of the VIE Companies, the Company added a new distribution segment. Each of the four operating segments referenced above has separate
and distinct general ledgers. The chief operating decision maker (“CODM”) receives financial information, including
revenue, gross margin, operating income and net income produced from the various general ledger systems to make decisions about
allocating resources and assessing performance; however, the principal measure of segment profitability or loss used by the CODM
is net income by segment.
|
|
Years Ended June 30,
|
|
Revenues from unaffiliated customers:
|
|
2016
|
|
|
2015
|
|
Jinong
|
|
$
|
125,716,937
|
|
|
$
|
130,355,168
|
|
Gufeng
|
|
|
134,661,420
|
|
|
|
128,675,606
|
|
Yuxing
|
|
|
8,406,663
|
|
|
|
4,323,514
|
|
Consolidated
|
|
$
|
268,785,020
|
|
|
$
|
263,354,288
|
|
|
|
|
|
|
|
|
|
|
Operating income :
|
|
|
|
|
|
|
|
|
Jinong
|
|
$
|
22,942,976
|
|
|
$
|
27,569,969
|
|
Gufeng
|
|
|
13,952,983
|
|
|
|
20,063,568
|
|
Yuxing
|
|
|
1,464,728
|
|
|
|
640,367
|
|
Reconciling item (1)
|
|
|
0
|
|
|
|
0
|
|
Reconciling item (2)
|
|
|
(1,648,240
|
)
|
|
|
(1,580,963
|
)
|
Reconciling item (2)--stock compensation
|
|
|
(4,120,528
|
)
|
|
|
(4,980,017
|
)
|
Consolidated
|
|
$
|
32,591,919
|
|
|
$
|
41,712,924
|
|
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2016
Net income:
|
|
|
|
|
|
|
|
|
Jinong
|
|
$
|
19,637,155
|
|
|
$
|
23,489,740
|
|
Gufeng
|
|
|
9,364,364
|
|
|
|
13,764,794
|
|
Yuxing
|
|
|
1,471,412
|
|
|
|
751,372
|
|
Reconciling item (1)
|
|
|
30
|
|
|
|
200
|
|
Reconciling item (2)
|
|
|
(5,768,768
|
)
|
|
|
(6,560,980
|
)
|
Consolidated
|
|
$
|
24,704,193
|
|
|
$
|
31,445,126
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
Jinong
|
|
$
|
35,924,393
|
|
|
$
|
42,861,786
|
|
Gufeng
|
|
|
2,920,960
|
|
|
|
3,319,329
|
|
Yuxing
|
|
|
1,465,836
|
|
|
|
1,528,408
|
|
Consolidated
|
|
$
|
40,311,189
|
|
|
$
|
47,709,523
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Gufeng
|
|
|
995,959
|
|
|
|
1,712,639
|
|
Consolidated
|
|
$
|
995,959
|
|
|
$
|
1,712,639
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditure:
|
|
|
|
|
|
|
|
|
Jinong
|
|
$
|
7,894
|
|
|
$
|
9,266,682
|
|
Gufeng
|
|
|
3,239
|
|
|
|
13,595
|
|
Yuxing
|
|
|
8,059
|
|
|
|
405,401
|
|
Consolidated
|
|
$
|
19,192
|
|
|
$
|
9,685,678
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Identifiable assets:
|
|
|
|
|
|
|
Jinong
|
|
$
|
198,599,977
|
|
|
$
|
219,259,401
|
|
Gufeng
|
|
|
149,891,328
|
|
|
|
165,267,975
|
|
Yuxing
|
|
|
45,448,157
|
|
|
|
44,745,889
|
|
Distribution
|
|
|
24,675,497
|
|
|
|
0
|
|
Reconciling item (1)
|
|
|
170,444
|
|
|
|
312,198
|
|
Reconciling item (2)
|
|
|
(2,876
|
)
|
|
|
(2,845
|
)
|
Consolidated
|
|
$
|
418,782,527
|
|
|
$
|
429,582,618
|
|
(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.
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2016
Total
revenues from exported products currently accounted for less than 1% of the Company’s total fertilizer revenues for the
years ended June 30, 2016 and 2015, respectively.
NOTE
15 - COMMITMENTS AND CONTINGENCIES
On June 29, 2016, Jinong signed
an office lease with Kingtone Information. Pursuant to the lease, Jinong rented 612 square meters (approximately 6,588 square
feet) of office space from Kingtone Information. The lease provided for a two-year term effective as of July 1, 2016 with monthly
rent of $4,007 (RMB 24,480).
In
January 2008, Jintai signed a ten-year land lease with Xi’an Jinong Hi-tech Agriculture Demonstration Zone for a monthly
rent of $851 (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 $484 (RMB 2,958).
Accordingly,
the Company recorded an aggregate of $14,733 and $53,636 as rent expenses for the years ended June 30, 2016 and 2015, respectively.
Rent expenses for the next five years ended June 30, are as follows:
Years ending June 30,
|
|
|
|
2017
|
|
$
|
14,733
|
|
2018
|
|
|
12,386
|
|
2019
|
|
|
5,342
|
|
2020
|
|
|
5,342
|
|
2021
|
|
|
5,342
|
|
NOTE
16 – BUSINESS COMBINATIONS
On
June 30, 2016, the Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition agreements and also
into a series of contractual agreements to qualify as VIEs with the shareholders of the the VIE Companies.
Jinong,
the VIE Companies, and the shareholders of the VIE Companies also entered into a series of contractual agreements for the VIE
Companies to qualify as VIEs (the “VIE Agreements”). The VIE Agreements are as follows:
Entrusted
Management Agreements
Pursuant
to the terms of certain Entrusted Management Agreements dated June 30, 2016, between Jinong and the shareholders of the VIE Companies
(the “Entrusted Management Agreements”), the VIE Companies and their shareholders agreed to entrust the operations
and management of its business to Jinong. According to the Entrusted Management Agreement, Jinong possesses the full and exclusive
right to manage the VIE Companies’ operations, assets and personnel, has the right to control all of the VIE Companies'
cash flows through an entrusted bank account, is entitled to the VIE Companies' net profits as a management fee, is obligated
to pay all of the VIE Companies’ payables and loan payments, and bears all losses of the VIE Companies. The Entrusted Management
Agreements will remain in effect until (i) the parties mutually agree to terminate the agreement; (ii) the dissolution of the
VIE Companies; or (iii) Jinong acquires all of the assets or equity of the VIE Companies (as more fully described below under
“Exclusive Option Agreements”).
Exclusive
Technology Supply Agreements
Pursuant
to the terms of certain Exclusive Technology Supply Agreements dated June 30, 2016, between Jinong and the VIE Companies (the
“Exclusive Technology Supply Agreements”), Jinong is the exclusive technology provider to the VIE Companies. The VIE
Companies agreed to pay Jinong all fees payable for technology supply prior to making any payments under the Entrusted Management
Agreement. The Exclusive Technology Supply Agreements shall remain in effect until (i) the parties mutually agree to terminate
the agreement; (ii) the dissolution of the VIE Companies; or (iii) Jinong acquires the VIE Companies (as more fully described
below under “Exclusive Option Agreements”).
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2016
Shareholder’s
Voting Proxy Agreements
Pursuant to the terms of certain
Shareholder’s Voting Proxy Agreements dated June 30, 2016, among Jinong and the shareholders of the VIE Companies (the
“Shareholder’s Voting Proxy Agreements”), the shareholders of the VIE Companies irrevocably appointed
Jinong as their proxy to exercise on such shareholders’ behalf all of their voting rights as shareholders pursuant to
PRC law and the Articles of Association of the VIE Companies, including the appointment and election of directors of the VIE
Companies. Jinong agreed that it shall maintain a board of directors, the composition and appointment of which shall be
approved by the Board of the Company. The Shareholder’s Voting Proxy Agreements will remain in effect until Jinong
acquires all of the assets or equity of the VIE Companies.
Exclusive
Option Agreements
Pursuant
to the terms of certain Exclusive Option Agreements dated June 30, 2016, among Jinong, the VIE Companies, and the shareholders
of the VIE Companies (the “Exclusive Option Agreements”), the shareholders of the VIE Companies granted Jinong an
irrevocable and exclusive purchase option (the “Option”) to acquire the VIE Companies’ equity interests and/or
remaining assets, but only to the extent that the acquisition does not violate limitations imposed by PRC law on such transactions.
The Option is exercisable at any time at Jinong’s discretion so long as such exercise and subsequent acquisition of the
VIE Companies does not violate PRC law. The consideration for the exercise of the Option is to be determined by the parties and
memorialized in the future by definitive agreements setting forth the kind and value of such consideration. Jinong may transfer
all rights and obligations under the Exclusive Option Agreements to any third parties without the approval of the shareholders
of the VIE Companies so long as a written notice is provided. The Exclusive Option Agreements may be terminated by mutual agreements
or by 30 days written notice by Jinong.
Equity
Pledge Agreements
Pursuant
to the terms of certain Equity Pledge Agreements dated June 30, 2016, among Jinong and the shareholders of the VIE Companies (the
“Pledge Agreements”), the shareholders of the VIE Companies pledged all of their equity interests in the VIE Companies
to Jinong, including the proceeds thereof, to guarantee all of Jinong's rights and benefits under the Entrusted Management Agreements,
the Exclusive Technology Supply Agreements, the Shareholder’ Voting Proxy Agreements and the Exclusive Option Agreements.
Prior to termination of the Pledge Agreements, the pledged equity interests cannot be transferred without Jinong's prior written
consent. The Pledge Agreements may be terminated only upon the written agreement of the parties.
Non-Compete
Agreements
Pursuant
to the terms of certain Non-Compete Agreements dated June 30, 2016, among Jinong and the shareholders of the VIE Companies (the
“Non-Compete Agreements”), the shareholders of the VIE Companies agreed that during the period beginning on the initial
date of their services with Jinong, and ending five (5) years after termination of their services with Jinong, without Jinong’s
prior written consent, they will not provide services or accept positions including but not limited to partners, directors, shareholders,
managers, proxies or consultants, provided by any profit making organizations with businesses that may compete with Jinong. They
will not solicit or interfere with any of the Jinong’s customers, or solicit, induce, recruit or encourage any person engaged
or employed by Jinong to terminate his or her service or engagement. In the event that the shareholders of the VIE Companies breach
the non-compete obligations contained therein, Jinong is entitled to all loss and damages; in the event that the damages are difficult
to determine, remedies bore the shareholders of the VIE Companies shall be no less than 50% of the salaries and other expenses
Jinong provided in the past.
The
Company entered into these VIE Agreements as a way for the Company to have more control over the distribution of its products.
The transactions are accounted for as business combinations in accordance with ASC 805. A summary of the purchase price allocations
at fair value is below:
Cash
|
|
$
|
708,737
|
|
Accounts receivable
|
|
|
6,422,850
|
|
Advances to suppliers
|
|
|
1,803,180
|
|
Prepaid expenses and other current assets
|
|
|
807,645
|
|
Inventories
|
|
|
7,787,043
|
|
Machinery and equipment
|
|
|
140,868
|
|
Intangible assets
|
|
|
270,900
|
|
Other assets
|
|
|
3,404,741
|
|
Goodwill
|
|
|
3,158,179
|
|
Accounts payable
|
|
|
(3,962,670
|
)
|
Customer deposits
|
|
|
(3,486,150
|
)
|
Accrued expenses and other payables
|
|
|
(4,653,324
|
)
|
Taxes payable
|
|
|
(16,912
|
)
|
Purchase price
|
|
$
|
12,385,087
|
|
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2016
A
summary of the purchase consideration paid for the VIE Companies is below:
Cash
|
|
$
|
5,568,500
|
|
Convertible notes
|
|
|
6,671,769
|
|
Derivative liability
|
|
|
144,818
|
|
|
|
$
|
12,385,087
|
|
The cash component of the purchase price for these acquisitions was not paid until July and August 2016.
No
revenue is recorded in the accompanying statement of operations from the VIE Companies as the agreements were signed on June 30,
2016, the Company’s fiscal year end. None of the six VIE Companies are considered significant to the Company; therefore
the pro forma disclosures required under ASC 805 are not presented.
NOTE
17 - VARIABLE INTEREST ENTITIES
As
a result of these contractual arrangements, with Yuxing and the VIE Companies the Company is entitled to substantially all of
the economic benefits of Yuxing and the VIE Companies. The following financial statement amounts and balances of the VIEs were
included in the accompanying consolidated financial statements as of June 30, 2016 and 2015:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,017,841
|
|
|
$
|
79,867
|
|
Accounts receivable, net
|
|
|
7,050,201
|
|
|
|
72,748
|
|
Inventories
|
|
|
26,370,202
|
|
|
|
18,138,137
|
|
Other current assets
|
|
|
1,875,912
|
|
|
|
48,845
|
|
Advances to suppliers
|
|
|
4,900,524
|
|
|
|
61,739
|
|
Total Current Assets
|
|
|
41,214,680
|
|
|
|
18,401,336
|
|
|
|
|
|
|
|
|
|
|
Plant, Property and Equipment, Net
|
|
|
13,377,817
|
|
|
|
15,692,975
|
|
Other assets
|
|
|
334,264
|
|
|
|
68,921
|
|
Intangible Assets, Net
|
|
|
12,913,776
|
|
|
|
10,582,657
|
|
Goodwill
|
|
|
3,158,179
|
|
|
|
-
|
|
Total Assets
|
|
$
|
70,998,716
|
|
|
$
|
44,745,889
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,840,052
|
|
|
$
|
159,730
|
|
Customer deposits
|
|
|
3,486,150
|
|
|
|
-
|
|
Accrued expenses and other payables
|
|
|
5,580,642
|
|
|
|
222,871
|
|
Amount due to related parties
|
|
|
43,478,158
|
|
|
|
43,488,198
|
|
Total Current Liabilities
|
|
|
56,385,002
|
|
|
|
43,870,799
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
14,613,714
|
|
|
|
875,090
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
70,998,716
|
|
|
$
|
44,745,889
|
|
|
|
Years Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
8,406,663
|
|
|
$
|
4,323,514
|
|
Expenses
|
|
|
6,935,251
|
|
|
|
3,572,142
|
|
Net income
|
|
$
|
1,471,412
|
|
|
$
|
751,372
|
|
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2016
NOTE
18 – RESTRICTED NET ASSETS
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 as of June 30, 2016 and 2015 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.
Condensed Balance Sheets
|
|
As of June 30,
|
|
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
167,495
|
|
|
$
|
306,376
|
|
Other current assets
|
|
|
70
|
|
|
|
2,977
|
|
Total Current Assets
|
|
|
167,565
|
|
|
|
309,353
|
|
|
|
|
|
|
|
|
|
|
Long-term equity investment
|
|
|
376,321,912
|
|
|
|
377,245,446
|
|
Total long term assets
|
|
|
376,321,912
|
|
|
|
377,245,446
|
|
Total Assets
|
|
$
|
376,489,477
|
|
|
$
|
377,554,799
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
214,520
|
|
|
$
|
214,520
|
|
Amount due to related parties
|
|
|
1,388,743
|
|
|
|
888,743
|
|
Other payables and accrued expenses
|
|
|
4,401,882
|
|
|
|
3,502,062
|
|
Total Current Liabilities
|
|
|
6,005,145
|
|
|
|
4,605,325
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value, 115,197,165 shares authorized, 37,648,605 and 35,905,198, shares issued and outstanding as of June 30, 2016 and 2015, respectively
|
|
|
37,648
|
|
|
|
35,905
|
|
Additional paid in capital
|
|
|
127,593,932
|
|
|
|
123,360,384
|
|
Accumulated other comprehensive income
|
|
|
(5,696,388
|
)
|
|
|
25,708,238
|
|
Retained earnings
|
|
|
248,549,140
|
|
|
|
223,844,947
|
|
Total Stockholders' Equity
|
|
|
370,484,332
|
|
|
|
372,949,474
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
376,489,477
|
|
|
$
|
377,554,799
|
|
CHINA
GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2016
Condensed Statements of Operations
|
|
Year ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
General and administrative expenses
|
|
|
5,768,770
|
|
|
|
6,560,980
|
|
Interest income
|
|
|
30
|
|
|
|
200
|
|
Equity investment in subsidiaries
|
|
|
30,472,933
|
|
|
|
38,005,906
|
|
Net income
|
|
$
|
24,704,193
|
|
|
$
|
31,445,126
|
|
Condensed Statements of Cash Flows
|
|
Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(138,881
|
)
|
|
$
|
188,437
|
|
Net cash provided by investing activities
|
|
|
-
|
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
-
|
|
Cash and cash equivalents, beginning balance
|
|
|
306,376
|
|
|
|
117,939
|
|
Cash and cash equivalents, ending balance
|
|
$
|
167,495
|
|
|
$
|
306,376
|
|
Notes
to Condensed Parent Company Financial Information
As
of June 30, 2016 and 2015, 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.
F-
28