The number of outstanding
shares of the registrant’s common stock on October 14, 2019, was 4,977,479.
In addition to historical information, this
report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. You can identify such forward-looking statements by terms such as “anticipates,” “believes,” “could,”
“estimates,” “expects,” “intends,” “may,” “plans,” “potential,”
“predicts,” “projects,” “should,” “would” and similar expressions intended to identify
forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on
assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking
statements. These forward-looking statements include, among other things, statements relating to:
Also, forward-looking statements represent
our estimates and assumptions only as of the date of this report. You should read this report and the documents that we reference
in this report, or that we filed as exhibits to this report, in their entirety and with the understanding that our actual future
results may be materially different from what we expect.
Except as required by law, we assume no obligation
to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated
in any forward-looking statements, even if new information becomes available in the future.
PART
I
China
Green Agriculture, Inc. (‘we” or “the Company”) is 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 its wholly-owned Chinese subsidiaries, Jinong Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd. (“Jinong”),
and Beijing Gufeng Chemical Products Co., Ltd., (“Gufeng”), both of which are engaged in fertilizer production. In
addition, we operate through variable interest entities (the “VIEs”), including Xi’an Hu County Yuxing Agriculture
Technology Development Co., Ltd. (“Yuxing”), engaged in agricultural products production, and another eight VIE companies
that we acquired since June 2016. Our primary business is fertilizer products, specifically humic acid-based compound fertilizer
produced through Jinong; and compound fertilizer, blended fertilizer, organic compound fertilizer, slow-release fertilizers, highly-concentrated
water-soluble fertilizers and mixed organic-inorganic compound fertilizer produced through Gufeng. In addition, through Yuxing,
we develop and produce agricultural products, such as top-grade fruits, vegetables, flowers and colored seedlings.
Since
June 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 eight companies that are organized under the laws of the PRC
and are deemed as 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., Sunwu County Xiangrong Agricultural
Materials Co., Ltd., and Anhui Fengnong Seed Co., Ltd. (collectively hereafter referred to as “the VIE Companies.”)
Fertilizer
production is our core business and we generated approximately $237,212,740, $210,706,415, and $211,088,271, or 80.6%, 73.1%,
and 74.1% of our total revenues for the years ended June 30, 2019, 2018 and 2017, respectively. Our total annual production capacity
was 555,000 metric tons as of June 30, 2019.
As
of June 30, 2019, we sold our products through a network of 2,043 regional distributors covering 22 provinces, 4 autonomous regions
and 4 central government-controlled municipalities in China. We do not rely on any single distributor. Our top five distributors
accounted for approximately 34.4% of our fertilizer revenues for the fiscal year ended June 30, 2019.
As
of June 30, 2019, we have developed 729 different fertilizer products. We conduct our research and development activities through
Yuxing, one of Jinong’s VIEs, which tests new fertilizers and grows high quality flowers, vegetables and seedlings for commercial
sales.
During
the fiscal years ended June 30, 2019, 2018, and 2017, our revenues were $294,320,803, $287,053,530, and $277,848,486, respectively;
our net income (loss) for these periods was $15,507,166, $(6,931,225), and $25,152,154, respectively.
Recent
Developments
Strategic
Acquisitions:
On
June 30, 2016 and January 1, 2017, through Jinong, we entered into (i) Strategic Acquisition Agreements (the “SAA”),
and (ii) Agreements for Convertible Notes (the “ACN”), with the shareholders of the companies as identified below
(the “Targets”).
June
30, 2016:
|
|
|
|
Cash
|
|
|
Principal
of
|
|
|
|
|
|
Payment
for
|
|
|
Notes
for
|
|
|
|
|
|
Acquisition
|
|
|
Acquisition
|
|
Company
Name
|
|
Business
Scope
|
|
(RMB[1])
|
|
|
(RMB)
|
|
Shaanxi
Lishijie
Agrochemical Co., Ltd.
|
|
Sales
of pesticides, agricultural chemicals, chemical fertilizers, agricultural materials; Manufacture and sales of mulches.
|
|
|
10,000,000
|
|
|
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Songyuan
Jinyangguang Sannong Service Co., Ltd.
|
|
Promotion
and consulting services regarding agricultural technologies; Retail sales of chemical fertilizers (including compound fertilizers
and organic fertilizers); Wholesale and retail sales of pesticides, agricultural machinery and accessories; Collection of
agricultural information; Development of saline-alkali soil; Promotion and development of high-efficiency agriculture and
related information technology solutions for agriculture, agricultural and biological engineering high technologies; E-commerce;
Cultivation of freshwater fish, poultry, fruits, flowers, vegetables, and seeds; Recycling and complex utilization of straw
and stalk; Technology transfer and training; Recycling of agricultural materials; Ecological industry planning.
|
|
|
8,000,000
|
|
|
|
12,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenqiu
County Zhenbai Agriculture Co., Ltd.
|
|
Cultivation
of crops; Storage, sales, preliminary processing and logistics distribution of agricultural by-products; Promotion and application
of agricultural technologies; Purchase and sales of agricultural materials; Electronic commerce.
|
|
|
3,000,000
|
|
|
|
12,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Weinan
City Linwei District Wangtian Agricultural Materials Co., Ltd.
|
|
Promotion
and application of new agricultural technologies; Professional prevention of plant diseases and insect pests; Sales of plant
protection products, plastic mulches, material, chemical fertilizers, pesticides, agricultural medicines, micronutrient fertilizers,
hormones, agricultural machinery and medicines, and gardening tools.
|
|
|
6,000,000
|
|
|
|
12,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Aksu
Xindeguo Agricultural Materials Co., Ltd.
|
|
Wholesale
and retail sales of pesticides; Sales of chemical fertilizers, packaged seeds, agricultural mulches, micronutrient fertilizers,
compound fertilizers, plant growth regulators, agricultural machinery, 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 was RMB1=US$0.1508, according
to the exchange rate published by Bank of China.
|
|
(2)
|
On November 30, 2017, the Company, through its wholly-owned subsidiary Jinong, discontinued the strategic
acquisition agreements and the series of contractual agreements with the shareholders of Zhenbai. In return, the shareholders of
Zhenbai agreed to tender the whole payment consideration in the SAA back to the Company with early termination penalties. The convertible
notes paid to Zhenbai’s shareholders and the accrued interest have been forfeited.
|
January
1, 2017:
|
|
|
|
Cash
Payment for
|
|
|
Principal
of Notes for
|
|
|
|
|
|
Acquisition
|
|
|
Acquisition
|
|
Company
Name
|
|
Business
Scope
|
|
(RMB[1])
|
|
|
(RMB)
|
|
Sunwu
County Xiangrong Agricultural Materials Co., Ltd.
|
|
Sales
of pesticides, agricultural chemicals, chemical fertilizers, agricultural materials; Manufacture and sales of mulches.
|
|
|
4,000,000
|
|
|
|
6,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Anhui
Fengnong Seed Co., Ltd.
|
|
Wholesale
and retail sales of pesticides; Sales of chemical fertilizers, packaged seeds, agricultural mulches, micronutrient fertilizers,
compound fertilizers and plant growth regulators
|
|
|
4,000,000
|
|
|
|
6,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
8,000,000
|
|
|
|
12,000,000
|
|
|
(1)
|
The
exchange rate between RMB and U.S. dollars on January 1, 2017 was RMB1=US$0.144, according
to the exchange rate published by Bank of China.
|
Pursuant
to the SAA and the ACN, the shareholders of the Targets, while retaining possession of the equity interests and continuing to
be the legal owners of such interests, agreed to pledge and entrust all of their equity interests, including the proceeds thereof
(but excluding any claims or encumbrances), and the operations and management of its business to Jinong, in exchange for an aggregate
amount of RMB45,000,000 (approximately $6,552,000), to be paid by Jinong within three days following the execution of the SAA,
ACN and the VIE Agreements, and convertible notes with an aggregate face value of RMB63,000,000 (approximately $9,172,800), with
an annual fixed compound interest rate of 3% and a 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, or breach of any the representations or warranties in the SAA, other than the direct and consequential damages that
may cause to Jinong, they are to pay RMB100,000 (approximately $14,560) as liquidated damages.
The
shareholders of the Targets also agreed to ensure that its management and principal technology employees enter into noncompetition
agreements prohibiting them from any direct or indirect operation or ownership of any business that is in competition with the
Targets.
The
shareholders of the Targets also represented that there are no claims or encumbrances against their interests, as defined in the
SAA, and that there are no actions or other legal proceedings pending against the Targets that would have a material adverse effect
on the Target’s capacity to fulfill their contractual obligations. The Targets are to have a minimum of 10% annual compound
growth rate (the “Growth Rate”) within the three years after the closing of the acquisitions (the “Closing”).
Pursuant
to the SAA, all the existing employees continue to be the employees of the Targets after the Closing based on their current employment
terms, subject to the decisions of the new Boards of Directors of the Targets to be formed after the Closing.
Under
the agreements relating to the convertible notes, each convertible note 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 stock Jinong issues in the future, in terms of interest and payments in the
event of any liquidation, dissolution or winding up of Jinong. On or after the third anniversary of the issuance date of each
note (the “Maturity Date”), noteholders may convert the notes into Common Stock of the Company. The noteholders may
not convert the notes prior to the Maturity Date. If a note is converted into the Company’s common stock, the noteholder
will become a holder of the Company’s common stock.
The
per share conversion price of the notes is the greater 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 levels of sales 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 Maturity Date of the note, the noteholder can (i) request Jinong to convert all or a part of the note; (ii) continue to hold
the note until the holder elects to deliver a conversion request; however, if the holder chooses to hold the note after the Maturity
Date, no interest accrues on the note after the three-year term.
In
the event that the actions of the Targets or noteholders materially impair Jinong or if any of the Targets fail to achieve the
Growth Rate, Jinong may request noteholders to redeem the shares they hold of the Targets for (i) an amount represented by the
convertible notes including the accrued interest and the cash payment Jinong made on the Closing of the 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
interest 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 can be summarized as follows:
Entrusted
Management Agreements
Pursuant
to the terms of certain Entrusted Management Agreements dated June 30, 2016 and January 1, 2017, between Jinong and the shareholders
of the sales VIE Companies (the “Entrusted Management Agreements”), the sales VIE Companies and their shareholders
agreed to entrust the operations and management of its business to Jinong. According to the Entrusted Management Agreement, Jinong
possesses the full and exclusive right to manage the sales VIE Companies’ operations, assets and personnel, has the right
to control all the sales VIE Companies’ cash flows through an entrusted bank account, is entitled to the sales VIE Companies’
net profits as a management fee, is obligated to pay all the sales VIE Companies’ payables and loan payments, and bears
all losses of the sales VIE Companies. The Entrusted Management Agreements will remain in effect until (i) the parties mutually
agree to terminate the agreement; (ii) the dissolution of the sales VIE Companies; or (iii) Jinong acquires all the assets or
equity of the sales VIE Companies (as more fully described below under “Exclusive Option Agreements”).
Exclusive
Technology Supply Agreements
Pursuant
to the terms of certain Exclusive Technology Supply Agreements dated June 30, 2016 and January 1, 2017, between Jinong and the
sales VIE companies (the “Exclusive Technology Supply Agreements”), Jinong is the exclusive technology provider to
the sales VIE companies. The sales VIE companies agreed to pay Jinong all fees payable for technology supply prior to making any
payments under the Entrusted Management Agreement. The Exclusive Technology Supply Agreements shall remain in effect until (i)
the parties mutually agree to terminate the agreement; (ii) the dissolution of the sales VIE companies; or (iii) Jinong acquires
the sales VIE companies (as more fully described below under “Exclusive Option Agreements”).
Shareholder’s
Voting Proxy Agreements
Pursuant
to the terms of certain Shareholder’s Voting Proxy Agreements dated June 30, 2016 and January 1, 2017, among Jinong and
the shareholders of the sales VIE companies (the “Shareholder’s Voting Proxy Agreements”), the shareholders
of the sales VIE companies irrevocably appointed Jinong as their proxy to exercise on such shareholders’ behalf all of their
voting rights as shareholders pursuant to PRC law and the Articles of Association of the sales VIE companies, including the appointment
and election of directors of the sales VIE companies. Jinong agreed that it shall maintain a board of directors, the composition
and appointment of which shall be approved by the Board of the Company. The Shareholder’s Voting Proxy Agreements will remain
in effect until Jinong acquires all the assets or equity of the sales VIE companies.
Exclusive
Option Agreements
Pursuant
to the terms of certain Exclusive Option Agreements dated June 30, 2016 and January 1, 2017, among Jinong, the sales VIE companies,
and the shareholders of the sales VIE companies (the “Exclusive Option Agreements”), the shareholders of the sales
VIE companies granted Jinong an irrevocable and exclusive purchase option (the “Option”) to acquire the sales VIE
companies’ equity interests and/or remaining assets, but only to the extent that the acquisition does not violate limitations
imposed by PRC law on such transactions. The Option is exercisable at any time at Jinong’s discretion so long as such exercise
and subsequent acquisition of the sales VIE companies does not violate PRC law. The consideration for the exercise of the Option
is to be determined by the parties and memorialized in the future by definitive agreements setting forth the kind and value of
such consideration. Jinong may transfer all rights and obligations under the Exclusive Option Agreements to any third parties
without the approval of the shareholders of the sales VIE companies so long as a written notice is provided. The Exclusive Option
Agreements may be terminated by mutual agreements or by 30 days written notice by Jinong.
Equity
Pledge Agreements
Pursuant
to the terms of certain Equity Pledge Agreements dated June 30, 2016 and January 1, 2017, among Jinong and the shareholders of
the sales VIE companies (the “Pledge Agreements”), the shareholders of the sales VIE companies pledged all of their
equity interests in the sales VIE companies to Jinong, including the proceeds thereof, to guarantee all of Jinong’s rights
and benefits under the Entrusted Management Agreements, the Exclusive Technology Supply Agreements, the Shareholder’ Voting
Proxy Agreements and the Exclusive Option Agreements. Prior to termination of the Pledge Agreements, the pledged equity interests
cannot be transferred without Jinong’s prior written consent. The Pledge Agreements may be terminated only upon the written
agreement of the parties.
Non-Compete
Agreements
Pursuant
to the terms of certain Non-Compete Agreements dated June 30, 2016 and January 1, 2017, among Jinong and the shareholders of the
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 partners, directors, shareholders,
managers, proxies or consultants) with by any profit making organizations with businesses that may compete with Jinong. They will
not solicit or interfere with any of Jinong’s customers, or solicit, induce, recruit or encourage any person engaged or
employed by Jinong to terminate his or her service or engagement.
Jinong
acquired the Targets using the VIE arrangement based on our need to further develop our business and comply with the regulatory
requirements under the PRC laws.
As
our business focuses on the production of fertilizer, all our business activities intertwine with those in the agriculture industry
in China. Specifically, we deal with compliance, regulation, safety, inspection, and licenses in fertilizer production, farm land
use and transfer, growing and distribution of agriculture goods, agriculture basic supplies, seeds, pesticides, and trades of
grains. It is an industry in which stringent regulations are 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 require that an offshore special
purpose vehicle controlled directly or indirectly by PRC companies or individuals and formed for purposes of overseas listing
through acquisition of PRC domestic interests held by such PRC companies or individuals obtain the approval of the China Securities
Regulatory Commission (the “CSRC”) prior to the listing and trading of such special purpose vehicle’s securities
on an overseas stock exchange. On September 21, 2006, the CSRC published procedures regarding its approval of overseas listings
by special purpose vehicles.
For
both e-commerce and agriculture industries, PRC regulators limit the investment from foreign entities and set particular 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 arrangements, however, provide feasibility for obtaining administrative approval process
and avoiding industry restrictions that may be imposed on an entity that is a wholly-owned subsidiary of a foreign entity. The
VIE agreements reduce uncertainty and the current limitation risk. It is our understanding that the VIE agreements, as well as
the control we obtained through VIE arrangement, are valid and enforceable. We believe that this 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 company can 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 us without consideration.
While
the VIE arrangement provides us with the feasibility to conduct our business in the e-commerce and agriculture industries, validity
and enforceability of VIE arrangement is subject to (i) any applicable bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or similar laws affecting creditors’ rights generally, (ii) possible judicial or administrative actions or any
PRC Laws affecting creditors’ rights, (iii) certain equitable, legal or statutory principles affecting the validity and
enforceability of contractual rights generally under concepts of public interest, interests of the State, national security, reasonableness,
good faith and fair dealing, and applicable statutes of limitation; (iv) any circumstance in connection with formulation, execution
or implementation of any legal documents that would be deemed materially mistaken, clearly unconscionable, fraudulent, coercive
at the conclusions thereof; and (v) judicial discretion with respect to the availability of indemnifications, remedies or defenses,
the calculation of damages, the entitlement to attorney’s fees and other costs, and the waiver of immunity from jurisdiction
of any court or from legal process. Validity and enforceability of VIE arrangements 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 the issued and outstanding capital stock of Green New Jersey, through a share exchange
(the “Share Exchange”). Because 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.
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.
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.
On
January 1, 2017, the Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition agreements and a
series of contractual agreements with the shareholders of the following two companies that are organized under the laws of the
PRC and would be deemed as our VIEs: Sunwu County Xiangrong Agricultural Materials Co., Ltd. and Anhui Fengnong Seed Co., Ltd.
On
November 30, 2017, the Company, through its wholly-owned subsidiary Jinong, discontinued the strategic acquisition agreements
and the series of contractual agreements with the shareholders of Zhenbai.
Our
principal executive offices are located at 3rd 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.
Our
current corporate structure is set forth in the following diagram:
Yuxing,
Lishijie, Jinyangguang, Wangtian, Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred to as “the
VIE Companies”; Lishijie, Jinyangguang, Wangtian, Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred
to as the “sales VIEs”
Industry
Analysis
Fertilizer
Market in China
Influenced
by the sluggish demand in domestic and international fertilizer markets, China’s fertilizer market is in a downturn during
this fiscal year. In terms of production, the growth of fertilizer output remained limited during the fiscal year. Meanwhile,
large inventories of fertilizer placed downward pressure on prices. Market prices of the raw material were volatile; the price
of fertilizer is uncertain and can be hard to increase. In terms of domestic consumption, though grain prices increased to some
extent, the domestic consumption capacity is limited; as for export, international markets are depressed continuously, resulting
from the declines in export prices. During this fiscal year, the fertilizer industry was in a downward trend as profits are compressed
again and the losses of enterprises are enlarged. Under the pressure of sluggish growth in the fertilizer market, industrial restructuring,
merger and reorganization activity in the industry increased, reducing the number of enterprises in the market. 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
phosphate were widely used, while new fertilizer products such as slow controlled release fertilizer and microbial fertilizer
have been rapidly developed and resulted in significant market expansion. In the last few years, 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 increases for farm products. China has seen another bumper year of grain production which added fertilizer
consumption scale to remain highly uncertain. The country has achieved consecutive years 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 appeared to help to ease the weakened market volatility. On the other hand,
the current oversupply problem is difficult to relieve. Mechanisms of price reform for raw materials (such as coal, natural gas,
sulfur phosphate ore, etc.) are accelerating, which caused pressure on production costs. A stricter export tariff policy is expected
to last for long, and the external economic situation may limit the operation and expansion of fertilizer enterprises in international
markets.
The
interaction of the above factors complicated the situation in fertilizer markets in 2017 and 2018.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
oriented product, service-oriented marketing and market-oriented raw materials dominated the developments in fertilizer market.
Additionally,
government support for the agriculture industry in China can 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 because of increase in food demand, decrease in arable land
and reduction of crop yields. The demand for fertilizers nationwide is continuously expected to increase by millions of tons of
nutrient, with an expected compound annual growth rate of 7.7% between 2016-2022.
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 can create “fertilizer burn”, the over-fertilization of a single nutrient
such as nitrogen, which can dry 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 is easily depleted by irrigation, rainfall and flooding. In addition,
the production of chemical fertilizers consumes a great deal of natural resources. For example, the production of synthetic ammonia,
a common chemical fertilizer, consumes about 5% of 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 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
is increasing and we expect this trend to continue in the coming years. Although we expanded business among other Asian and Southeast
Asian countries, 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,” raises 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 reached USD 5 billion in 2015, with an incremental 20 percent
increase year over year during the following years.
With
the rapid development of the organic food industry in China, an increasing number of companies have been entering into the green
food sector to 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 the “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, our research and development capability, along with the new sales segment 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
production portfolio of fertilizers includes 729 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. Regarding 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, are 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.
☐ Develop
proprietary sales segment. Our business started and was rooted in fertilizer production. Since 2016, we added a new business
segment, the sales of fertilizer and other agriculture material products, to the existing manufacturing segments. We believe adding
this sales segment will be beneficial to our manufacturing segments: this sales segment can provide supplemental revenue and earnings
by covering more market areas, and selling more products not only produced by ourselves but also by other manufacturers. In the
downstream of fertilizer value lines, a sales segment can offset the impact on profitability when the demand for our produced
fertilizer is softened; it also can mitigate the counterparty risk for manufacturers when the creditworthiness of a manufacturer’s
distributor is weakened. Thus, a sales segment is a natural hedge to manufacturing segments, as it improves product portfolio,
customer base, and capital structure. We had been developing the sales segment mainly by acquiring the control of eight established
VIE sales ventures to build this new segment rapidly.
Products
Our
principal products are our own fertilizers, which consist of liquid, granular and powdered fertilizers and various kinds of compound
fertilizers developed to increase crop yields. We can manufacture 729 fertilizer products from humic acid-based fertilizers to
compound fertilizers. In Yuxing, we produce high quality agricultural products such as fruits, vegetables and flowers for commercial
sale. In sales segment, we sell various products such as fertilizers, pesticides, and seeds. These products are either manufactured
by ourselves or by other manufacturers.
Fertilizer
Products
Fertilizer
manufacturing is our core business, which accounts for approximately 80.6% of total revenues. The self-manufactured fertilizers
are produced and sale through Jinong, Gufeng, and sales VIEs. 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 729 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, 2019, 2018, and 2017, we recorded $237,212,740, $210,706,415, and $211,088,271, respectively,
in gross revenues from sales of our fertilizer products, representing 80.6%, 73.1%, and 74.1% of our total revenues for such periods.
Gufeng and Tianjuyuan manufacture a total of 334 fertilizer products. 52.7% of Gufeng’s fertilizer revenue came from humic
acid compound fertilizers and 47.3% from compound fertilizer for the fiscal year ended June 30, 2019.
Agricultural
Products
Our
subsidiary, Yuxing, one of Jinong’s VIEs, produces 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, 2019, 2018 and 2017, were
$10,101,051, $10,485,030, and $8,517,231, respectively, representing 3.4%, 3.7%, and 3.0% 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.
Sales
Products
Our
sales segment, consisting of seven sales VIEs we acquired control of since 2016, procure various agriculture materials that farmers
need, such as, fertilizers, pesticides, seeds, mulches, and soil conditioners etc., from different manufacturers and wholesalers.
In turn, they sell these materials to their customers: farmers, distributors, and other parties. The gross revenues from the sales
segment for the fiscal years ended June 30, 2019 were $71,440,026, representing 24.3% of our total revenues.
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 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 454,763 metric tons of fertilizer products during the fiscal year ended June 30, 2019.
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 a key
raw material because it is abundant and economical for production. We have been sourcing the humic acid from different regions
including Shaanxi and Shanxi provinces, and Inner Mongolia Autonomous Region.
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. Gufeng sources these supplies
largely from neighboring provinces and regions, such as Hebei and Shaanxi provinces, and the Municipality of Beijing, for the
economical transportation costs.
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 appropriate inventory levels, which keep inventory
costs reasonable. We purchase raw materials and packaging materials based on demands and business forecasts. Products, in various
formulas and different batches, with customized volumes, are shipped to distributors and users after production in response to
the orders if we received.
For
our agricultural products, we maintain corresponding inventory to both the anticipated demand from customers and other needs,
as we often use certain agricultural products to serve our product testing base for research and development purpose.
Return
Policy
The
Company accepts returns of defective fertilizer products. During the fiscal year ended June 30, 2019, the Company did not experience
any significant returns.
Seasonality
The
peak season to sell fertilizer products is from January through June. However, during the fiscal year ended June 30, 2019, Jinong
did not experience significant seasonal variation with respect to its fertilizer sales since approximately 48.4% of its annual
sales revenue occurred in the third fiscal quarter (winter) and the fourth fiscal quarter (spring). Usually, Gufeng’s sales
of compound fertilizer undergoes significant seasonal variation in China. Correspondingly, during the fiscal year ended June 30,
2019, Gufeng experienced seasonal variation. 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 and economical,
Gufeng may choose to place larger orders for raw materials as its export business offsets the seasonality when exports are made
to southern Asia, such as India is needed, where their selling season corresponds to the non-peak season in China.
The
peak selling season for our agricultural products is from October until March, namely our second fiscal quarter (fall) and the
third fiscal quarter (winter). This is primarily due to the strong demand for high-end fruits and decorative flowers during the
holiday seasons.
Marketing,
Distribution and Customers
Overview
We
currently market our own fertilizer products to private wholesalers and retailers of agricultural farm products in 22 provinces,
4 autonomous regions and 4 central government-controlled municipalities in China. For the fiscal year 2019, the following five
PRC provinces collectively accounted for 60.0% of our fertilizer manufacturing revenue: Hebei (26.2%), Heilongjiang (9.5%), Shaanxi
(8.5%), Inner Mongolia (7.9%) and Liaoning (7.9%). We believe this geographically diverse distribution 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
export through contracted distributors in foreign countries, including India and Africa. Total revenues from exported products
accounted for approximately 0.1% of our total fertilizer revenues in fiscal 2019.
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 allow us to tailor products to meet specific farming needs in considering different factors
such as crops species, humidity, weather and soil conditions.
The
sales segment utilizes each sales VIE’s distribution network to deliver various agriculture materials from upstream providers
such as manufacturers and wholesalers to downstream users and retailers. We aim to expand the sales VIEs network and integrate
them together to better meet customer’s demands with improved distribution efficiencies.
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 can 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, most 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 self-manufactured fertilizers, based on revenues for the fiscal year ended June 30, 2019, are listed below:
|
|
|
|
|
|
|
|
|
|
Percent
of
|
|
|
|
|
|
Volume
|
|
|
Revenues
|
|
|
Fertilizer
|
|
Ranking
|
|
Product
Names
|
|
(Tons)
|
|
|
(USD)
|
|
|
Sales
|
|
1
|
|
Organic/Inorganic
Compound Fertilizer (humic acid) NPK46%
|
|
|
185,072
|
|
|
|
68,622,704
|
|
|
|
28.9
|
%
|
2
|
|
Compound
Fertilizer NPK40%
|
|
|
182,827
|
|
|
|
60,291,907
|
|
|
|
25.4
|
%
|
3
|
|
Jinong
FHF Fertilizer (humic acid)
|
|
|
30,432
|
|
|
|
6,154,735
|
|
|
|
2.6
|
%
|
4
|
|
Jinong
Guangpu Fertilizer (humic acid)
|
|
|
1,717
|
|
|
|
5,655,882
|
|
|
|
2.4
|
%
|
5
|
|
Jinong
HXSGJ Fertilizer (humic acid)
|
|
|
1,086
|
|
|
|
4,117,881
|
|
|
|
1.7
|
%
|
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, 2019, we sold our products through a nationwide constructed network of about 2,043 distributors covering 22 provinces,
4 autonomous regions and 4 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, 2019, self-manufactured sales to our top five distributors accounted for approximately 34.4% of
our revenues. As we do not depend on specific 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.
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 authorized retailers. With the Pilot Program, we have worked closely
with our distributors, with each distributor’s outlet having an assigned territory in order not to compete with other existing
distributors. We have entered into agreements with these retailers 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.
Sales
Segment
Strategically,
supplemental to our manufacturing business, we added a new business segment, the sales of fertilizer and other agriculture material
products, to our business since 2016. The sales segment had provided supplemental revenue and earnings by covering more market
areas, and selling more products not only produced by ourselves but also by other manufacturers. We had been developing the sales
segment mainly by acquiring control of established sales ventures and continue to grow them. The sales segment utilizes the distribution
network acquired from the sales ventures to deliver various agriculture materials. For the fiscal year ended June 30, 2019, the
sales segment sold $71,440,026 of agriculture materials, and accounted for 24.3% of our revenues.
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’s humic
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, net of accumulated depreciation, were approximately $9,624,639,
$11,031,011 and $12,124,940 during the fiscal years ending of June 30, 2019, 2018 and 2017, respectively. The research and development
center helps expanding our output of high quality agricultural products for commercial sale while providing an advanced testing
field for new products. The facility at Yuxing enhances 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, 2019, we sold approximately $10,101,051 of these agricultural products.
|
|
FY 2019
|
|
|
FY 2018
|
|
|
FY 2017
|
|
Machines, Buildings and Equipment
|
|
$
|
9,563,328
|
|
|
$
|
10,967,437
|
|
|
$
|
12,120,687
|
|
Construction in Progress
|
|
$
|
61,301
|
|
|
$
|
63,574
|
|
|
$
|
63,253
|
|
Total
|
|
$
|
9,624,639
|
|
|
$
|
11,031,011
|
|
|
$
|
12,124,940
|
|
New
Product
With
our research and development capabilities, we have developed 729 products and continued to develop new products. During the fiscal
year ended June 30, 2019, we developed 3 new products, among which include 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
We
hold the following trademarks registered with the PRC Trademark Offices of National Industrial and Commerce Administrative Bureau
(the “PRC Trademark Offices”):
Trademark
|
|
Registration
Number
|
|
Valid
term
|
Huang
Cheng Gen
|
|
No.5219720
|
|
June
28, 2009 to June 27, 2019
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Mei
Er An
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No.1508004
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January
21, 2011 to January 20, 2021
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KEBA
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No.10045980
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December
07, 2012 to December 06, 2022
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KEBA
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No.10046405
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December
14, 2012 to December 13, 2022
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KEBA
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No.10045898
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March
07, 2013 to March 06, 2023
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KEBA
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No.10046344
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March
07, 2013 to March 06, 2013
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AGR
GFJ
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No.3320281
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May
28, 2014 to May 27, 2024
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SPR
HOP
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No.3320282
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May
28, 2014 to May 27, 2024
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T.J.Y
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No.3320283
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May
28, 2014 to May 27, 2024
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KEBA
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No.760379
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August
14, 2005 to August 13, 2025
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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, if 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.
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Inventor’s
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Date
of
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Patent/Pending
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Patent
No.
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Name
and
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Date
of
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Publication
and
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Patent
Application
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Type
of Patent
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/Application
No.
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Patent
Holder
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Application
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Term
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Patent:
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Utility
Model
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Patent
No.: ZL
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Inventor:
Tao Li
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May
29, 2007
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May
14, 2008;
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Production
facility of Humic Acid Products
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Patent
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NL
2007 20031884.2
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Patent
Holder:
Jinong
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10
Years
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Patent:
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Utility
Model
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Application
No.:
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Applicant:
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February
1, 2007
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November
24,
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Method
and recipe of the water soluble humic acid fertilizers
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Patent
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ZL200710017334.x
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Jinong
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2010;
20 years
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Patent:
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Utility
Model
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Application
No.:
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Applicant:
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September
22, 2011
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December
4, 2013;
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Production
method of Organic Fertilizer
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Patent
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ZL201110282544.8
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Jinong
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20
years
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Patent:
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Utility
Model
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Application
No.:
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Applicant:
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January
17, 2014
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October
19, 2014;
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Production
method of Multifunctional liquid calcium fertilizer
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Patent
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NL
201410020442.2
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Jinong
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20
Years
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The
PRC Patent Law was adopted by the PRC National People’s Congress in 1984 and was subsequently amended in 1992 and 2000.
Under the PRC Patent Law, an invention patent is valid for a term of 20 years and a utility or design patent is valid for a term
of 10 years. Both of our registered patents are all utility patents. Any use of our patent without consent or a proper license
from 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 2,043 distributors nationwide
across 22 provinces, 4 autonomous regions and 4 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 can reduce costs without sacrificing accurate results. During the fiscal year ended June 30, 2019, we generated approximately
$10,101,051 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 intelligent greenhouses over an 88-acre parcel of land relating to
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 developed seven technologies:
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(1)
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Drying
fan for urea-based compound fertilizer;
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(2)
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Heat
balance control system for flexible compound fertilizer;
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(3)
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Automatic
control system for the anti-block of compound fertilizer;
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(4)
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Water
control technology for low nitrogen, low potassium and high phosphorus compound fertilizer;
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(5)
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Manufacturing
technology for salt-alkaline resistance and soil improvement of compound fertilizer (The company won the third prize for “Progress
in Science and Technology in Pinggu District Beijing” with this technology);
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(6)
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Manufacturing
technology for compound HA fertilizer with high density (NPK ≥ 51%);
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(7)
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Manufacturing
technology for the sustained release of blending and compound fertilizer
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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 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
Brands. We believe customers have strong brand recognition and make purchase decisions 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”, “Mei Er 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 organic/inorganic compound fertilizer (humic acid) with NPK ≥ 40%, and organic /inorganic compound fertilizer
(humic acid) with NPK ≥ 48%.
Automated
Production Line and Process. All Jinong’s major production procedures are controlled by a centralized computer system
only accessible by authorized personnel. Jinong’s production lines are fully automated to ensure that content in each product
is measured exactly according to its recipe by linking the computer server with the electronic weights on each material input
bin. In addition, spectral analysis is used to accurately check the composition of materials. During the fiscal year 2018, Jinong’s
highly advanced production lines can manufacture a multi-tiered line of 142 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
can produce 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. We believe we are among the large 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 directly compete with Gufeng.
The
smaller competitors of ours are generally producers of amino acid compound fertilizers, which are very price competitive.
However,
lacking adequate quality or process control technologies, these companies often 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 growers in the flowers and flower seedlings businesses are largely local based. 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 competitors is Kunming Anthura Horticulture Co., Ltd. Some
of our products, such as red photiniaserrulata, are also 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 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 renewed in 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 dates of 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 certain regions and better established local distribution channels. We also
compete with large national competitors in the PRC. Although we have advanced automated humic acid-based fertilizer production
lines and greenhouse supported research and development centers, we cannot assure 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.
Many
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
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 $145,190,160
as of June 30, 2019, as compared to $174,460,937 and $139,596,455 as of June 30, 2018 and 2017, respectively, decreases of $29,270,777
and increases of $34,864,4823, or 16.8% and 25.0% year over year. The decrease was primarily due to the decreased credit sales
of our fertilizer products and higher allowance for bad debts for VIEs. 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 59.8% of its revenues, with its largest distributor accounting for 13.1% of total revenues
for the 2019 fiscal year. Jinong’s top five distributors accounted for 3.5% of its fertilizer revenues for the fiscal year
ended June 30, 2019. 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 like 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 fifty 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 monthly. 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 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 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 year. Jinong has 16 formal registration certificates. Gufeng and Tianjuyuan have 19 interim fertilizer
certificates and 259 formal certificates. We plan to apply for formal certificates for each of our interim certificates before
the applicable expiration dates.
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 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 notice in advance. 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 reliance upon Mr. Zhuoyu 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 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. Zhuoyu Li, our Chairman and CEO may not devote all his time
to our business.
Our Chairman and CEO, Mr. Zhuoyu 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, and Chairman and CEO of Xi’an Techteam Investment Holding (Group) Co., Ltd, a holding company for certain
entities such as Gem Grain. 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 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.
While
Gufeng had sales revenues of $136,285,236, for its fiscal year ended June 30, 2019, Gufeng’s net income for such period
was $10,191,675. 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 $5,169). 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 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 2019 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 our assets and operations are in the PRC, and substantially all 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. 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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expropriation
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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 our operations are conducted in the PRC and substantially all 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
soon. 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 3.0%, 5.2%, and 2.7% in 2016, 2017 and 2018, 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. 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 the VIE companies. Because 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 our common stock.
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 our common stock.
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 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 regarding their direct establishment
or indirect control of an offshore entity, for 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 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 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 be assured you that the PRC regulatory authorities, MOFCOM,
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 be assured that 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 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 our operations on agriculture products, and generate substantially all 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 our
property, facilities and other assets relating to the operation of our agriculture products business, and employs the personnel
for substantially all 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 considering 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.
If
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. Licenses and permits issued or granted to us by relevant governmental
bodies may be revoked later 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 environmental laws and regulations may adversely impact on our business.
Our
manufacturing operations are subject to numerous environmental 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 relating to 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 near 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 soon, 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 be assured 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 to be 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 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 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 our present officers and directors reside outside of the United States. In addition, our operating subsidiaries are in the
PRC and substantially all 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 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:
|
●
|
food,
feed, and energy demand including liquid fuels and crude oil;
|
|
●
|
agricultural,
financial, energy and renewable energy and trade policies;
|
|
●
|
input
and output pricing due to market factors and regulatory policies;
|
|
●
|
production
and crop progress due to adverse weather conditions, equipment deliveries, and water and irrigation conditions; and
|
|
●
|
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 a 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:
|
●
|
actual
or anticipated fluctuations in our quarterly operations results;
|
|
●
|
filing
of a class action lawsuit against us and certain of our current and former officers;
|
|
●
|
changes
in financial estimates by securities research analysts;
|
|
●
|
conditions
in foreign or domestic fertilizer and agricultural markets;
|
|
●
|
changes
in the economic performance or market valuations of other companies in the same industry;
|
|
●
|
announcements
by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments;
|
|
●
|
addition
or departure of key personnel;
|
|
●
|
fluctuations
of exchange rates between the RMB and the U.S. dollar;
|
|
●
|
intellectual
property litigation;
|
|
●
|
general
economic or political conditions in the PRC; and
|
|
●
|
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 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:
|
●
|
limit
our ability to pay dividends or require us to seek consent for the payment of dividends;
|
|
●
|
increase
our vulnerability to general adverse economic and industry conditions;
|
|
●
|
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
|
|
●
|
limit
our flexibility in planning for, or reacting to, changes in our business and our industry.
|
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. 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 dividends in the future.
We
paid a 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 soon, 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.
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.
We may become involved in legal proceedings
and some of these outcomes could adversely affect our business, financial condition and results of operations.
Our business requires compliance with
many laws and regulations. Failure to achieve compliance could subject us to lawsuits and other proceedings, and lead to damage
awards, fines, penalties, and remediation costs. We are, or may become involved, in a number of legal proceedings and audits including
grand jury investigations, government and agency investigations, and consumer, employment, tort, unclaimed property laws, and other
litigation. We cannot predict with certainty the outcomes of these proceedings and other contingencies, including environmental
remediation and other proceedings commenced by governmental authorities. The outcome of some of these proceedings, unclaimed property
laws, and other contingencies could require us to take, or refrain from taking, actions which could negatively affect our operations
or could require us to pay substantial amounts of money, adversely affecting our financial condition and results of operations.
Additionally, defending against these lawsuits and proceedings may involve significant expense and diversion of management's attention
and resources.
Item
1B.
|
Unresolved
Staff Comments
|
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, 2018 at monthly rent of RMB24,480
(approximately $3,588) 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 occupy 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 term
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 $5,202). 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 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
|
|
Address
|
|
Area (square meters/ square
feet)
|
|
Ownership Status and
Term
|
|
|
|
|
|
|
|
Xi’an
– Fertilizers (Jinong)
|
|
Yang
Ling Agriculture High- tech Demonstration Zone, No. 6 Guhua 5 Road, Yangling, Xi’an, Shaanxi province
|
|
30,947
sq. m.
(333,111
sq. ft.)
|
|
Land
use right (Certificate #006012633) expires in January 2051* (1)
|
|
|
|
|
|
|
|
Xi’an
– Fertilizers (Jinong)
|
|
Yang
Ling Agriculture High- tech Demonstration Zone, Guhua 5 Road, Yangling, Xi’an, Shaanxi province
|
|
6,495
sq. m. No. 6
(69,911
sq. ft.)
|
|
Building
Ownership Certificate (Certificate # 20050722) * (1)
|
|
|
|
|
|
|
|
Xi’an
– research and development center (Yuxing)
|
|
North
Xin’an Village, Weifeng, Hu County, Shaanxi Province
|
|
353,000
sq. m.
(3,799,660
sq. ft.)
|
|
Land
use right (Certificate #006001700) expires in August 2059
|
|
|
|
|
|
|
|
Beijing
– fertilizers (Tianjuyuan & Gufeng)
|
|
South
of Nanzhangdai Village, Donggaocun Town, Ping Gu District, Beijing
|
|
42,726
sq. m.
(459,898
sq. ft.)
|
|
Land
use right (Certificate #2003189) expires in August
2053 *(1)
|
|
|
|
|
|
|
|
Beijing
– fertilizers (Tianjuyuan & Gufeng)
|
|
South
of Nanzhangdai Village, Donggaocun Town, Ping Gu District, Beijing
|
|
17,930
sq. m.
(192,997
sq. ft.)
|
|
Building
Ownership Certificate# 33142 * (1)
|
|
|
|
|
|
|
|
Beijing
– fertilizers (Tianjuyuan & Gufeng)
|
|
South
of Nanzhangdai Village, Donggaocun Town, Ping Gu District, Beijing
|
|
47,333
sq. m.
(509,488
sq. ft.)
|
|
Lease
from February 2004 to January 2054
|
|
*
|
(1)
As of June 30, 2019, the encumbrances over our land use right and building ownership
are summarized as below:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
Contract
|
|
Type
of
|
|
Rate
|
|
|
Property
under
|
No.
|
|
Loan
Amount
|
|
Lending
Institution
|
|
Period
|
|
Guarantee
|
|
(Per Annum)
|
|
|
Mortgage
|
1
|
|
RMB
5 million
|
|
Bank
of Beijing-
|
|
June
28, 2019-
|
|
Mortgage
|
|
|
5.22
|
%
|
|
Tianjuyuan’s
land
|
|
|
($728,000)
|
|
Pinggu
Branch
|
|
June
27, 2020
|
|
|
|
|
|
|
|
|
2
|
|
RMB
20 million
|
|
Postal
Saving Bank of China-
|
|
Jun
3, 2019-
|
|
Mortgage
|
|
|
6.31
|
%
|
|
Tianjuyuan’s
land
|
|
|
($2,912,000)
|
|
Pinggu
Branch
|
|
Jun
2, 2020
|
|
|
|
|
|
|
|
|
Item
3.
|
Legal
Proceedings
|
From time to time, the
Company is a party to various legal actions or disputes that arise in the ordinary course of our business.
On October 9, 2019, a lawsuit
was filed against us and certain of our officers in the United States District Court for the District of Nevada (the "Nevada
Federal Court") by Plaintiff Glenn Little. The current version of the complaint alleges us and certain of our officers for
breach of fiduciary duty and shareholder oppression.
Item
4.
|
Mine
Safety Disclosures.
|
This
item is not applicable to us.
PART
III
Item
10.
|
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.
|
|
|
|
|
|
Term
as
|
|
|
|
|
|
|
Director
of
|
Name
|
|
Position
with the Company
|
|
Age
|
|
Company
|
|
|
|
|
|
|
|
Zhuoyu
Li
|
|
Chairman
of the Board of Directors, Chief Executive Officer, President
|
|
27
|
|
2017
- Present
|
|
|
|
|
|
|
|
Yongcheng
Yang
|
|
Chief
Financial Officer
|
|
54
|
|
2017
- Present
|
|
|
|
|
|
|
|
Ale
Fan
|
|
Director
|
|
39
|
|
2015
- Present
|
|
|
|
|
|
|
|
Daqing
Zhu
|
|
Director
|
|
54
|
|
2017
- Present
|
|
|
Chairman
of the Audit Committee
|
|
|
|
|
|
|
Compensation
Committee Member
|
|
|
|
|
|
|
Nominating
Committee Member
|
|
|
|
|
|
|
|
|
|
|
|
Lianfu
Liu
|
|
Director
|
|
80
|
|
2007
- Present
|
|
|
Chairman
of the Nominating Committee
|
|
|
|
|
|
|
Audit
Committee Member
|
|
|
|
|
|
|
Compensation
Committee Member
|
|
|
|
|
|
|
|
|
|
|
|
Jinjun
Lu
|
|
Director
|
|
46
|
|
2017
- Present
|
|
|
Chairman
of the Compensation Committee
|
|
|
|
|
|
|
Audit
Committee Member
|
|
|
|
|
|
|
Nominating
Committee Member
|
|
|
|
|
Name
|
|
Position
with the Company and Principal Occupations
|
|
|
|
Zhuoyu
Li
|
|
Chairman of the Board of Directors and Chief Executive Officer since 2017. Mr. Li was President of the Company
until the death of his father, Tao Li, in December 2017, at which time he was appointed to serve as Chairman of the Board of Directors
and Chief Executive Officer. Mr. Li has six years of experience in 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. Mr. Li 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’s practical
experience from serving as President of the Company and with 900LH.com qualify him to serve as Chairman of the Board of Directors
of the Company.
|
|
|
|
Yongcheng
Yang
|
|
Chief
Financial Officer. Mr. Yang has served as the Chief Financial Officer of our company since 2017. He served as Senior Vice
President of Finance since January 2016. Before that, Mr. Yang served as the chief financial officer of the Company’s
wholly-owned subsidiary, Beijing Gufeng Chemical Products Co., Ltd. (“Gufeng”) since July 2010. Earlier, Mr. Yang
had served various senior, and executive level positions in finance for the Company and the Company’s affiliate, Xi’an
Techteam Investment Holding (Group) Co., Ltd, since 2002. Mr. Yang started his career in accounting and finance at Shaanxi
Weidong Chemistry Co., Ltd from 1989 to 2002. Mr. Yang graduated from Xi’an Jiaotong University in 1989 with his Bachelor’s
degree in accounting.
|
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.
|
|
|
|
Daqing
Zhu
|
|
Director,
Chairman of the Audit Committee, Compensation Committee Member and Nominating Committee Member. Mr. Zhu has served as
the president of Shaanxi Aisuo Consulting Co. Ltd., a company specializing in providing professional management and finance
services, since 2014. In 2004, Mr. Zhu founded Shaanxi Xintianyou Auto Dealership Co. Ltd, a dealership of auto sales and
services for various brands, including BYD Auto, and had served as its CEO and Chairman of the Board until 2014. In addition
to founding and developing commercial businesses, Mr. Zhu had also worked in the public sector since the 1990s. His public
administration experience includes working at various agencies and offices of the Shaanxi provincial government from 1990
to 2004. Earlier in his career, in the 1980’s, Mr. Zhu was a corporate banking officer at Industrial and Commercial
Bank of China in Xi’an. As the corporate leader with responsibility for all aspects of business management, Mr. Zhu
has executive level experience in financial management, internal control, marketing to individuals and small businesses, sales,
customer care, operations, product management, electronic commerce, financial services, executive compensation, strategic
planning, technology, and mergers and acquisitions.
|
|
|
|
Jinjun
Lu
|
|
Director,
Chairman of Compensation Committee, Audit Committee Member and Nominating Committee Member. Mr. Lu is the co-founder of
Shaanxi Jinfenghui Technology Co. Ltd (“Jinfenghui”) since he started in 2014. Drawing on years of
entrepreneurial experience, Mr. Lu plans to grow Jinfenghui into one of the largest mobile terminal device manufacturers in
northwestern China. At Jinfenghui, Mr. Lu oversees corporate growth plans, budgets capital expenditures, seeks investment
funds, and designs marketing strategies for Jinfenghui products to penetrate target markets. Before founding Jinfenghui, in
1998 he founded Xinjiang Yongan Engineering Co. Ltd in Xinjiang Uyghur Autonomous Region, a provincial-level autonomous
region of China in the northwest of the country. Earlier in the 1990s, Mr. Lu began his entrepreneurship career as a
distributor for Lining-branded garment products in Henan Province, which he grew into the largest wholesale venture for
Lining in the region. As a founder of several enterprises and a seasoned entrepreneur, Mr. Lu not only has executive
experience in strategic management, marketing and sales, and technology, but also brings his experience as a founder from
different industries.
|
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
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, 2019, 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.
Code
of Ethics
We
have adopted a Code of Ethics that applies to all 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 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.
Daqing Zhu, Lianfu Liu, and Jinjun Lu, 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. Zhu qualifies as an Audit Committee Financial Expert under applicable SEC Rules. The Chairman
of the Audit Committee is Mr. Zhu. The Audit Committee held four meetings during the fiscal year ended June 30, 2019. 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. Jinjun Lu, Lianfu Liu and
Daqing Zhu. The Chairman of the Compensation Committee is Ms. Lu. The Compensation Committee held one meeting during the fiscal
year ended June 30, 2019. 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.
Jinjun Lu, Lianfu Liu and Daqing Zhu. The Chairman of the Nominating Committee is Mr. Lu. The Nominating Committee held one meeting
during the fiscal year ended June 30, 2019. 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 and his family’s influence 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 most 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 Mr. Daqing Zhu 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
can 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. Relating to 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, 2019. Accordingly, our “Named Executive Officers” are Mr. Zhuoyu Li, our Chairman, and
Chief Executive Officer and Mr. Yongcheng Yang, 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 individual’s
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. 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, 2017,
effective December 30, 2016, the Compensation Committee granted (i) 400,000 shares of restricted stock to Mr. Tao Li, then the
Company’s CEO; (ii) 200,000 shares to Mr. Zhuoyu Li, the Company’s President, (iii) 200,000 shares to Mr. Ken Ren,
then the Company’s Chief Financial Officer. Also, the Compensation Committee granted 30,000 shares to Ms. Yiru Shi, 20,000
shares to Mr. Jianlei Shen and 20,000 shares to Mr. Lianfu Liu, each of whom was then an independent director of the Company. The
Stock Grants were vested immediately for then the CEO, CFO and the three independent directors.
During
the fiscal year ended June 30, 2016, on June 29, 2016, the Company granted (i) 400,000 shares of restricted stock to Mr. Tao Li,
then the Company’s CEO; (ii) 200,000 shares of restricted stock to Mr. Ken Ren, then the CFO, and (iii) 30,000 shares of
restricted stock to Ms. Yiru Shi. Also, the Compensation Committee granted 20,000 shares of restricted stock to Mr. Jianlei Shen
and 20,000 shares of restricted stock to Mr. Lianfu Liu, each of whom was then an independent director of the Company. The Stock
Grants were vested immediately for then the CEO, CFO and the 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.
During
the fiscal year ended June 30, 2015, 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, then the CEO; (ii) 100,000 shares of restricted stock to Mr. Ken Ren, then 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 of whom was then 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 then the CFO and the three independent directors, until June 30, 2015 for then 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 issued 118,778 shares of common stock at the market price of $4.42 per share
to Mr. Tao Li ($525,000 in total), then the Company’s Chairman and Chief Executive Officer under the ESPP on September 26,
2013. The Company also 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 then
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, 2019, 2018 and 2017
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 more
than $100,000 during each of the three fiscal years ended June 30, 2019, 2018, and 2017.
SUMMARY
COMPENSATION TABLE
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Nonqualified
|
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Name
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Non-Equity
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Deferred
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and
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Stock
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Option
|
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Incentive Plan
|
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|
Compensation
|
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All
Other
|
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|
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Principal
|
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|
|
Salary
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Bonus
|
|
|
Awards
|
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Awards
|
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|
Compensation
|
|
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Earnings
|
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Compensation
|
|
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Total
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Position
|
|
Year Ended
|
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($)
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($)
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(1)($)
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($)
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($)
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|
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($)
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|
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($)
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|
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($)
|
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Zhuoyu
Li
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Chief Executive
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June
30, 2019
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$
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300,000
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|
$
|
120,000
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|
|
—
|
|
|
|
—
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|
|
|
—
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|
|
—
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|
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—
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$
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420,000
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Officer, and Chairman
|
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June
30, 2018
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$
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300,000
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|
$
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102,000
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—
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—
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|
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|
—
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—
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—
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|
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$
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402,000
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of
the Board (2)
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June
30, 2017
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|
$
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100,000
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|
|
$
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44,000
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|
|
$
|
240,000
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|
|
|
—
|
|
|
|
—
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|
|
|
—
|
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—
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$
|
384,000
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Yongcheng
Yang
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June
30, 2019
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$
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180,000
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$
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63,000
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—
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—
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—
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—
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—
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$
|
243,000
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Chief Financial Officer
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June
30, 2018
|
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180,000
|
|
|
$
|
16,800
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—
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|
|
|
—
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|
|
|
—
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|
|
|
—
|
|
|
|
—
|
|
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$
|
196,800
|
|
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June
30, 2017
|
|
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—
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|
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—
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—
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—
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|
|
|
—
|
|
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—
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—
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—
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(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 realized or that may be realized by our Named Executive Officers.
|
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
During
the year ended June 30, 2019, the Company granted no plan-based equity awards to Named Executive Officers. The following table
sets forth information regarding grants of awards to Named Executive Officers during the year ended June 30, 2019:
GRANTS
OF PLAN-BASED AWARDS
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All
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Other
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All
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Stock
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Other
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Grant
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Awards:
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Option
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Date
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Number
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Awards:
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Exercise
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Fair
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Estimated
Future Payouts
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of
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Number
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or
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Value
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Under
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Estimated
Future Payouts
|
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Shares
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of
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Base
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of Stock
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Non-Equity
Incentive Plan
|
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Under
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of
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Securities
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Price
of
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And
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Awards
|
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Equity
Incentive Plan Awards
|
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Stock
or
|
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Underlying
|
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|
Option
|
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Option
|
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Grant
|
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Threshold
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Target
|
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Maximum
|
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Threshold
|
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Target
|
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Maximum
|
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Units
|
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Options
|
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|
Awards
|
|
|
Awards
|
|
Name
|
|
Date
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
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(#)
|
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(#)
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($)
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(#)
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(#)
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($
/Sh)
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($)(1)
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|
Zhuoyu Li
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—
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—
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—
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—
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—
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—
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—
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—
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—
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—
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Yongcheng
Yang
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—
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—
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—
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—
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—
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—
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—
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—
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—
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—
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|
(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
Agreements
Zhuoyu Li. Pursuant to an Employment
agreement between the Company and Zhuoyu Li when he was appointed by the Board of Directors effective May 19, 2016, Mr. Li received
an annual base salary of $100,000 and a bonus up to 40% for serving as the Company’s President. In addition, Mr. Li receives
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 is 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.
On December 18, 2017, following the death of Tao Li, the Company’s Board of Directors appointed the Company’s President, Mr.
Zhuoyu Li, as its new Chairman and CEO. For serving as the Company’s Chairman and CEO, Mr. Zhuoyu Li receives the same
compensation of Mr. Tao Li. In total, Mr. Zhuoyu Li receives an annual base salary of $300,000 with a bonus of up to 40% and stock
awards under the Company’s 2009 Equity Incentive Plan.
Yongcheng
Yang. Subsequent to the periods covered by this Report, on December 19, 2017, the Company entered into an Employment
Agreement with Mr. Yongcheng Yang effective as of December 19, 2017. Pursuant to the terms of the Employment Agreement, Mr. Yang
will serve as our Chief Financial Officer for a term of one year at an annual salary of $180,000. Mr. Yang is eligible for a yearly
bonus at the discretion of our Board of Directors. The Employment Agreement will be automatically extended for additional one-year
terms unless either party provides a written notice of termination sixty (60) days prior to the end of the prior term. Either
party may terminate the Employment Agreement upon thirty (30) days written notice, or, at our discretion, we may terminate the
Employment Agreement immediately and substitute thirty (30) days salary in lieu of written notice. In the event of a breach of
the Employment Agreement by Mr. Yang, or in the event Mr. Yang is terminated for “cause” (as defined therein), the
Employment Agreement may be terminated immediately without notice and without further payments.
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, 2019.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
|
|
Option
Awards
|
|
|
|
Stock
Awards
|
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Equity
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Incentive
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Equity
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Plan
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Incentive
|
|
|
|
Awards:
|
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Plan
|
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Market
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Awards:
|
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Or
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Equity
|
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Number
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Payout
|
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Incentive
|
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Number
|
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Market
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of
|
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Value
of
|
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Plan
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of
|
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Value of
|
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Unearned
|
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Unearned
|
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|
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Awards:
|
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Shares
|
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|
|
Shares
|
|
|
|
Shares,
|
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|
|
Shares,
|
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|
Number
of
|
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|
Number
of
|
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|
Number
of
|
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|
|
|
|
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|
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|
or
Units
|
|
|
|
or
Units
|
|
|
|
Units
or
|
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|
|
Units
or
|
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|
|
|
Securities
|
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|
|
Securities
|
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|
Securities
|
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of Stock
|
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|
of
Stock
|
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Other
|
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Other
|
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Underlying
|
|
|
|
Underlying
|
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|
Underlying
|
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|
|
|
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|
That
|
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|
That
|
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|
|
Rights
|
|
|
|
Rights
|
|
|
|
|
Unexercised
|
|
|
|
Unexercised
|
|
|
|
Unexercised
|
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|
|
Option
|
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|
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|
Have
|
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|
Have
|
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|
That
|
|
|
|
That
|
|
|
|
|
Options
|
|
|
|
Options
|
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|
|
Unearned
|
|
|
|
Exercise
|
|
|
|
Option
|
|
|
|
Not
|
|
|
|
Not
|
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|
|
Have
Not
|
|
|
|
Have
Not
|
|
|
|
|
(#)
|
|
|
|
(#)
|
|
|
|
Options
|
|
|
|
Price
|
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|
|
Expiration
|
|
|
|
Vested
|
|
|
|
Vested
|
|
|
|
Vested
|
|
|
|
Vested
|
|
Name
|
|
|
Exercisable
|
|
|
|
Unexercisable
|
|
|
|
(#)
|
|
|
|
($)
|
|
|
|
Date
|
|
|
|
(#)
|
|
|
|
($)
|
|
|
|
(#)
|
|
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhuoyu
Li
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
|
|
|
|
|
Yongcheng
Yang
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Option
Exercises and Stock Vested During the Fiscal Year
OPTION
EXERCISES AND STOCK VESTED DURING THE FISCAL YEAR
|
|
Option
Awards
|
|
|
Stock
Awards
|
|
|
|
Number of
|
|
|
|
|
|
Number
of
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
|
Acquired
|
|
|
Realized
|
|
|
Acquired
|
|
|
Realized
|
|
|
|
on
Exercise
|
|
|
on
Exercise
|
|
|
on
Vesting
|
|
|
on
Vesting
|
|
Name
|
|
(#)
|
|
|
($)
|
|
|
(#)
|
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhuoyu
Li
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yongcheng
Yang
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
Securities
Authorized for Issuance Under Equity Compensation Plans
As
of June 30, 2019, 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, 2019.
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
available for
|
|
|
|
Number of
|
|
|
|
|
|
Future
|
|
|
|
securities to
|
|
|
|
|
|
Issuance
|
|
|
|
be issued
|
|
|
Weighted-
|
|
|
Under
|
|
|
|
upon
|
|
|
average
|
|
|
Equity
|
|
|
|
exercise
|
|
|
exercise
|
|
|
compensation
|
|
|
|
of
|
|
|
price of
|
|
|
Plans
|
|
|
|
outstanding
|
|
|
outstanding
|
|
|
(excluding
|
|
|
|
options,
|
|
|
options,
|
|
|
securities
|
|
|
|
warrants
|
|
|
warrants
|
|
|
reflected in
|
|
|
|
and rights
|
|
|
and rights
|
|
|
column (a))
|
|
Plan category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity compensation plans approved by security holders
|
|
|
—
|
|
|
$
|
—
|
|
|
|
431,078
|
|
Equity compensation plans not approved by security holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
—
|
|
|
$
|
—
|
|
|
|
431,078
|
|
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, 2019.
|
|
Fees
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Earned
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
Qualified
|
|
|
|
|
|
|
|
|
|
or
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
Paid
in
|
|
|
Stock
|
|
|
Option
|
|
|
Plan
|
|
|
Compensation
|
|
|
Other
|
|
|
All
|
|
|
|
Cash
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Compensation
|
|
|
Total
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
Daqing
Zhu
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Lianfu
Liu
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Jinjun
Lu
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Ale
Fan
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
The
directors will also be reimbursed for all 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, 2019 were Messrs. Jinjun Lu, Daqing Zhu, and Lianfu
Liu. During the fiscal year ended June 30, 2019:
|
☐
|
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, 2019, and (2) assuming a change in control on June 30, 2019.
|
|
Termination
|
|
|
|
|
|
|
Without
|
|
|
Change
in
|
|
Name
|
|
Cause(1)
|
|
|
Control(2)
|
|
|
|
|
|
|
|
|
|
|
Zhuoyu
Li
|
|
$
|
25,000
|
|
|
|
—
|
|
(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 28, 2019,
i.e., $5.54 per share, multiplied by the number of unvested shares.
|
Termination
Clauses in Employment Agreements
Zhuoyu
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 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 9, 2019, 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 9, 2019, an aggregate of 4,977,479 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Zhuoyu
Li
|
|
|
971,891
|
(3)
|
|
|
19.5
|
%
|
Common
Stock
|
|
Shaanxi
Baoyu Science and Technology Investment Company
|
|
|
971,000
|
|
|
|
19.5
|
%
|
|
|
Directors
and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Zhuoyu
Li
Chief Executive Officer
and Chairman of the Board
|
|
|
971,891
|
|
|
|
19.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Daqing
Zhu
Director
|
|
|
0
|
|
|
|
—
|
*
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Jinjun
Lu
Director
|
|
|
0
|
|
|
|
—
|
*
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Ale
Fan
Director
|
|
|
0
|
|
|
|
—
|
*
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Lianfu
Liu
Director
|
|
|
10,083
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
executive officers and directors as a group
|
|
|
981,974
|
|
|
|
19.7
|
%
|
|
*
|
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. The address of Shaanxi Baoyu Science and Technology Investment Company is 86
Gaoxin Road B-1-6F, Xi’an, Shaanxi Province 710075, People’s Republic of China.
|
(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 4,977,479 shares
of common stock outstanding as of October 9, 2019, 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 880,442 shares
that Mr. Zhuoyu Li inherited from the estate of his father, Mr. Tao Li, of which 41,449 shares were held by Mr. Zhuoyu Li’s
mother.
|
Securities Authorized for Issuance Under Equity Compensation
Plans
On October 27, 2009, our Board of Directors
(the “Board”) adopted the Company’s 2009 Equity Incentive Plan (the “Incentive Plan”). On December
11, 2009, our stockholders approved the Incentive Plan. The Incentive Plan gives us the ability to grant stock options, stock appreciation
rights (SARs), restricted stock and other stock-based awards to our employees, consultants and to non-employee members of our advisory
board or our Board or the board of directors of any of our subsidiaries. On October 3, 2012, October 25, 2013 and May 15, 2015,
our Board approved the amendment to increase the shares covered by the Incentive Plan by three million shares. On April 23, 2019,
our Board approved the fourth amendment to increase the shares covered by the Incentive Plan by 3.9 million shares and an extension
of the Plan for an additional ten years. All four amendments were approved by our stockholders on the annual meetings held on December
15, 2012, December 22, 2013, June 30, 2015, and June 22, 2019 respectively. As a result, a total of 0.43 million shares of Common
Stock have been reserved under the Incentive Plan.
As of June 30, 2019, there was no outstanding
options to purchase shares of common stock granted under the Plan. Options granted in the future under the Incentive Plan are within
the discretion of our Board or our compensation committee, as delegated by the Board. The following table summarizes the number
of shares of our Common Stock authorized for issuance under our Incentive Plan as of June 30, 2019.
Item
13.
|
Certain
Relationships and Related Transactions, and Director Independence
|
Certain
Relationships and Related Transactions
As of June 30, 2019, and June 30, 2018,
the amount due to related parties was $3,641,945 and $3,271,619, respectively. As of June 30, 2019, and June 30, 2018, $1,019,200
and $1,057,000, respectively were amounts that Gufeng borrowed from a related party, Xi’an Techteam Science & Technology
Industry (Group) Co. Ltd., a company controlled by Mr. Zhuoyu Li, Chairman and CEO of the Company, representing unsecured, non-interest
bearing loans that are due on demand. These loans are not subject to written agreements.
On
July 1, 2018, Jinong signed an office lease with Kingtone Information Technology Co., Ltd. (“Kingtone Information”),
of which Mr. Zhuoyu Li, Chairman and CEO of the Company, served as Chairman. Pursuant to the lease, Jinong rented 612 square meters
(approximately 6,588 square feet) of office space from Kingtone Information. The lease provides for a two-year term effective
as of July 1, 2018 with monthly rent of RMB24,480 (approximately $3,588).
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.
If
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 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 the Secretary to the Board of Directors, at nonmgtdirectors@cgagri.com and
indicating the intended recipient in the subject line, or by writing to the Board at the Board of Directors, 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. Daqing Zhu, Jinjun Lu, 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 regarding 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, 2019. In addition, the Board unanimously approved ten
written consents on matters between meetings. During the fiscal year ended June 30, 2019, 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, 2019 and 2018:
|
|
Years Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Audit Fees
|
|
$
|
340,000
|
|
|
$
|
340,000
|
|
Audit related fees
|
|
|
|
|
|
|
|
|
Tax fees
|
|
|
—
|
|
|
|
—
|
|
All Other Fees
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
340,000
|
|
|
$
|
340,000
|
|
Audit
Fees
On
April 19, 2017, Kabani & Company, Inc. resigned as independent registered public accounting firm for the Company. On April
20, 2017, the Company engaged KSP Group, Inc. (“KSP”) as the Company’s independent registered public accounting
firm. The aggregate fees billed by KSP 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 regarding statutory and regulatory filings or engagements
were $340,000 and $340,000 for the fiscal years ended June 30, 2019 and 2018 respectively.
Audit-Related
Fees
The
aggregate fees billed by our principal accountants for audit-related services was $0 for the fiscal years ended June 30, 2019,
and 2018, 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 KSP for our consolidated financial statements
as of and for the year ended June 30, 2019.
The
Company’s principal accountant, KSP Group, Inc., did not engage any other persons or firms other than the principal accountant’s
full-time, permanent employees.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2019
NOTE 1 – ORGANIZATION AND DESCRIPTION
OF BUSINESS
China Green Agriculture, Inc. (the “Company”,
“Parent Company” or “Green Nevada”), through its subsidiaries, is engaged in the research, development,
production, distribution and sale of humic acid-based compound fertilizer, compound fertilizer, blended fertilizer, organic compound
fertilizer, slow-release fertilizers, highly-concentrated water-soluble fertilizers and mixed organic-inorganic compound fertilizer
and the development, production and distribution of agricultural products.
Unless the context indicates otherwise,
as used in this Report, the following are the references herein of all the subsidiaries of the Company (i) Green Agriculture Holding
Corporation (“Green New Jersey”), a wholly-owned subsidiary of Green Nevada, incorporated in the State of New Jersey;
(ii) Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd. (“Jinong”), a wholly-owned subsidiary of Green New Jersey
organized under the laws of the PRC; (iii) Xi’an Hu County Yuxing Agriculture Technology Development Co., Ltd. (“Yuxing”),
a Variable Interest Entity (“VIE”) in the in the People’s Republic of China (the “PRC”) controlled
by Jinong through a series of contractual agreements; (iv) Beijing Gufeng Chemical Products Co., Ltd., a wholly-owned subsidiary
of Jinong in the PRC (“Gufeng”), and (v) Beijing Tianjuyuan Fertilizer Co., Ltd., Gufeng’s wholly-owned subsidiary
in the PRC (“Tianjuyuan”).
On June 30, 2016 the Company, through
its wholly-owned subsidiary Jinong, entered into strategic acquisition agreements and a series of contractual agreements with
the shareholders of the following six companies that are organized under the laws of the PRC and would be deemed VIEs: Shaanxi
Lishijie Agrochemical Co., Ltd. (“Lishijie”), Songyuan Jinyangguang Sannong Service Co., Ltd. (“Jinyangguang”),
Shenqiu County Zhenbai Agriculture Co., Ltd. (“Zhenbai”), Weinan City Linwei District Wangtian Agricultural Materials
Co., Ltd. (“Wangtian”), Aksu Xindeguo Agricultural Materials Co., Ltd. (“Xindeguo”), and Xinjiang Xinyulei
Eco-agriculture Science and Technology co., Ltd. (“Xinyulei”). On January 1, 2017, the Company, through its wholly-owned
subsidiary Jinong, entered into strategic acquisition agreements and a series of contractual agreements with the shareholders
of the following two companies that are organized under the laws of the PRC and would be deemed VIEs, Sunwu County Xiangrong Agricultural
Materials Co., Ltd. (“Xiangrong”), and Anhui Fengnong Seed Co., Ltd. (“Fengnong”).
On November 30, 2017, the Company, through
its wholly-owned subsidiary Jinong, discontinued the strategic acquisition agreements and the series of contractual agreements
with the shareholders of Zhenbai.
Yuxing, Lishijie, Jinyangguang, Wangtian,
Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred to as the “the VIE Companies”; Lishijie,
Jinyangguang, Wangtian, Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred to as “the sales VIEs”
or “the sales VIE companies”.
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
The Company’s current corporate structure as of is set
forth in the diagram below:
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principle of consolidation
The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries, Green New Jersey, Jinong, Gufeng, Tianjuyuan,
and the VIE Companies. All significant inter-company accounts and transactions have been eliminated in consolidation.
Effective June 16, 2013, Yuxing was converted
from being a wholly-owned foreign enterprise 100% owned by Jinong to a domestic enterprise 100% owned 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 performs a
qualitative analysis, which requires certain subjective decisions regarding its assessments, including, but not limited to, the
design of the entity, the variability that the entity was designed to create and pass along to its interest holders, the rights
of the parties, and the purpose of the arrangement. If the Company cannot conclude after a qualitative analysis whether an entity
is a VIE, it performs a quantitative analysis. The qualitative analysis considered the design of the entity, the risks that cause
variability, the purpose for which the entity was created, and the variability that the entity was designed to pass along to its
variable interest holders. When the primary beneficiary could not be identified through a qualitative analysis, we used internal
cash flow models to compute and allocate expected losses or expected residual returns to each variable interest holder based upon
the relative contractual rights and preferences of each interest holder in the VIE’s capital structure.
Use of estimates
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the amount of revenues and expenses during the reporting
periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual
results could differ materially from those results.
Cash and cash equivalents and concentration of cash
For statement of cash flows purposes,
the Company considers all cash on hand and in banks, certificates of deposit with state owned banks in the 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, 2019 and 2018 was $72,178,448 and $150,785,737, respectively. There
is no insurance securing these deposits in China. In addition, the Company also had $81,356 and $19,902 in cash in two banks in
the United States as of June 30, 2019 and 2018 respectively. 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.
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
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, 2019, and 2018, the Company had accounts receivable of $145,190,160 and $174,460,937, net of allowance for doubtful
accounts of $33,515,410 and $24,551,796, 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 party other than the counterparties of the business contracts and trades that the Company and the subsidiaries entered.
The Company had none other receivable during the year ended Jun 30, 2019 and the year ended June 30, 2018.
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, 2019 and 2018 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 relating to 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 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, 2019
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, 2019 and 2018 the Company determined that there were no impairments of its long-lived assets.
Deferred assets
Deferred assets represent amounts that
the distributors owed to the Company in their marketing efforts and developing standard stores to expand the Company’s products’
competitiveness and market shares. The amount owed to the Company to assist its distributors will be expensed over three years
which is the term as stated in the cooperation agreement, if the distributors are actively selling the Company’s products.
For the years ended June 30, 2019 and 2018 the Company amortized 0 and $864,070, 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, 2020 is 0 since all deferred assets are fully
amortized.
The deferred assets consist of items inside
the distributors’ stores such as furniture, racks, cabinets, and display units, and items outside or attached to the distributors’
stores such as signage and billboards. These types of assets would be capitalized as fixed assets if the Company actually owned
the stores or utilized the assets for its own operations. These assets would also be capitalized as leasehold improvements if
the Company leased these stores from the distributors. Therefore, the Company believes that under U.S. generally accepted accounting
principles, these types of asset purchases are properly capitalized. In addition, the Company believes that these assets are properly
classified as deferred assets because if a distributor breaches, defaults, or terminates the agreement with the Company within
a three-year period, a proportionate amount expended by the Company is to be repaid by the distributor.
The assets inside the distributors’
stores are custom made to fit the layout of each individual store and the signage and billboards are also custom designed to fit
the specific location. The assets were purchased by the Company directly from the manufacturers and installed in the distributors’
stores. The Company wants to maintain control over the quality of the items being purchased as well as making them uniform among
all the distributor locations.
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Total Deferred Assets
|
|
$
|
0
|
|
|
$
|
11,580,304
|
|
Less: accumulated amortization
|
|
$
|
0
|
|
|
$
|
(11,580,304
|
)
|
Total
|
|
$
|
0
|
|
|
$
|
0
|
|
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, 2019 and 2018 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 comparable 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, 2019, and
2018, 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, 2019
Summary of changes in goodwill by reporting segments is as
follows:
|
|
Balance at
|
|
|
|
|
|
Foreign
|
|
|
Balance at
|
|
|
|
June 30,
|
|
|
Additions
|
|
|
Currency
|
|
|
June 30,
|
|
Segment
|
|
2018
|
|
|
/Deletion
|
|
|
Adjustment
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gufeng
|
|
$
|
4,838,681
|
|
|
|
|
|
|
$
|
(173,039
|
)
|
|
|
4,665,642
|
|
Acquisition of VIE Companies
|
|
|
3,327,786
|
|
|
|
|
|
|
|
(119,007
|
)
|
|
|
3,208,779
|
|
|
|
$
|
8,166,467
|
|
|
$
|
|
|
|
$
|
(292,046
|
)
|
|
$
|
7,874,421
|
|
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 following table presents the Company’s
assets and liabilities required to be reflected within the fair value hierarchy as of June 30, 2019.
|
|
Fair Value
|
|
|
Fair Value Measurements at
|
|
|
|
As of
June 30,
|
|
|
June 30,
2019
|
|
Description
|
|
2019
|
|
|
Using Fair Value Hierarchy
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liability
|
|
$
|
18,162
|
|
|
$
|
|
|
|
$
|
18,162
|
|
|
$
|
-
|
|
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, 2019, 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 $18,162 is recorded as a derivative liability at June 30, 2019. The fair value was determined using
a binomial option pricing model with the following assumptions:
Risk-free rate
|
|
|
3.1
|
%
|
Volatility
|
|
|
214.9
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
Country risk premium
|
|
|
90
|
%
|
Liquidity risk premium
|
|
|
3.0
|
%
|
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Revenue recognition
The Company adopted Accounting Standards
Codification (“ASC”) 606. ASC 606, Revenue from Contracts with Customers, establishes principles for reporting information
about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide
goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of services to
customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those services
recognized as performance obligations are satisfied.
The Company has assessed the impact of
the guidance by performing the following five steps analysis:
Step 1: Identify
the contract
Step 2: Identify
the performance obligations
Step 3: Determine
the transaction price
Step 4: Allocate
the transaction price
Step 5: Recognize
revenue
Based on the assessment, the Company concluded
that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606
and therefore there were no material changes to the Company’s consolidated financial statements upon adoption of ASC 606.
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 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, 2019 and 2018, the Company had customer deposits of $6,514,619
and $7,251,967, 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, 2019 and 2018. 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 is included in the results
of operations as incurred.
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
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 way management disaggregates a company.
As of June 30, 2019, the Company, through
its subsidiaries is engaged into four main business segments based on location and product: Jinong (fertilizer production), Gufeng
(fertilizer production) and Yuxing (agricultural products production) and the seven sales VIEs that the Company acquired on June
30, 2016 and January 1, 2017. As of June 30, 2019, the Company maintained four main business segments.
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 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,
|
|
|
|
2019
|
|
|
2018
|
|
Net Income for Basic Earnings Per Share
|
|
$
|
11,590,395
|
|
|
$
|
(6,931,225
|
)
|
Basic Weighted Average Number of Shares
|
|
|
3,388,529
|
|
|
|
3,219,314
|
|
Net Income Per Share – Basic
|
|
$
|
3.42
|
|
|
$
|
(2.16
|
)
|
Net Income for Diluted Earnings Per Share
|
|
$
|
11,590,395
|
|
|
$
|
(6,931,225
|
)
|
Diluted Weighted Average Number of Shares
|
|
|
3,388,529
|
|
|
|
3,219,314
|
|
Net Income Per Share – Diluted
|
|
$
|
3.42
|
|
|
$
|
(2.16
|
)
|
Reclassification
Certain reclassifications have been made
to the prior year consolidated financial statements to conform to the 2019 consolidated financial statement presentation. Such
reclassifications did not affect total revenues, operating income or net income or cash flows as previously reported.
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Recent accounting pronouncements
Leases:
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-2”), which provides guidance on lease
amendments to the FASB Accounting Standard Codification. This ASU will be effective for us beginning in May 1, 2019. We are currently
in the process of evaluating the impact of the adoption of ASU 2016-2 on our consolidated financial statements.
Financial Instruments
- Credit Losses: In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): The
amendments in this Update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented
at the net amount expected to be collected. The amendments broaden the information that an entity must consider in developing its
expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates
more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements.
ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those
fiscal years. Early adoption is allowed as of the fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. The Company is still evaluating the effect that this guidance will have on the Company’s consolidated
financial statements and related disclosures.
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.
Income Tax:
In March 2018, the FASB issued ASU 2018-05 which amends ASC 740, “Income Taxes,” to provide guidance on accounting
for the tax effects of the Tax Cuts and Jobs Act enacted on December 22, 2017 (the “Tax Act”) pursuant to Staff Accounting
Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), which
provides guidance on accounting for the tax effects of the Tax Act. Under SAB 118, companies are able to record a reasonable estimate
of the impact of the Tax Act if one is able to be determined and report it as a provisional amount during the measurement period.
The measurement period is not to extend beyond one year from the enactment date.
NOTE 3 – INVENTORIES
Inventories consisted of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
102,268,620
|
|
|
$
|
13,154,465
|
|
Supplies and packing materials
|
|
$
|
496,138
|
|
|
$
|
566,254
|
|
Work in progress
|
|
$
|
390,708
|
|
|
$
|
417,130
|
|
Finished goods
|
|
$
|
58,858,423
|
|
|
$
|
39,646,965
|
|
Total
|
|
$
|
162,013,889
|
|
|
$
|
53,784,814
|
|
During the year ended June 30, 2019, the
Company sold compound fertilizers (finished goods) to certain parties at market price, and purchased equivalent amount of simple
fertilizers (raw material) from the same parties also at market price. The simple fertilizers purchased, along with other materials
were used in the Company’s production facility to manufacture compound fertilizers. While nonmonetary, the sales and purchase
transactions were consummated independently under separate agreements at different times, and measured at the prevailing market
value. The total amount of nonmonetary sales and purchases amounted to $134,655,878 during the year ended June 30, 2019. No gain
or loss incurred as the result of the nonmonetary transactions.
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Building and improvements
|
|
$
|
38,877,508
|
|
|
$
|
40,319,393
|
|
Auto
|
|
|
3,391,040
|
|
|
|
3,504,028
|
|
Machinery and equipment
|
|
|
18,125,539
|
|
|
|
18,765,192
|
|
Agriculture assets
|
|
|
741,044
|
|
|
|
768,528
|
|
Total property, plant and equipment
|
|
|
61,135,130
|
|
|
|
63,357,141
|
|
Less: accumulated depreciation
|
|
|
(34,465,192
|
)
|
|
|
(32,462,458
|
)
|
Total
|
|
$
|
26,669,938
|
|
|
$
|
30,894,683
|
|
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
NOTE 5 – INTANGIBLE ASSETS
Intangible assets consisted of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Land use rights, net
|
|
$
|
9,341,327
|
|
|
$
|
9,930,420
|
|
Technology patent, net
|
|
|
3,004
|
|
|
|
3,570
|
|
Customer relationships, net
|
|
|
2,174,564
|
|
|
|
3,578,724
|
|
Non-compete agreement
|
|
|
436,634
|
|
|
|
659,500
|
|
Trademarks
|
|
|
5,925,920
|
|
|
|
6,145,700
|
|
Total
|
|
$
|
17,881,449
|
|
|
$
|
20,317,914
|
|
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 $10,655,721). The intangible asset is being amortized over the grant
period of 50 years using the straight-line method.
On August 13, 2003, Tianjuyuan was granted
a certificate of Land Use Right for a parcel of land of approximately 11 acres (42,726 square meters or 459,898 square feet) at
Ping Gu District, Beijing. The purchase cost was recorded at RMB1, 045,950 (or $152,290). 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 $1,060,710). The intangible asset is being amortized over the grant period of 50 years.
The Land Use Rights consisted of the following:
|
|
June 30,
2018
|
|
|
Foreign Currency Adjustment
|
|
|
Amortization
|
|
|
June 30,
2019
|
|
Land use rights
|
|
$
|
12,308,907
|
|
|
|
(440,186
|
)
|
|
|
|
|
|
|
11,868,721
|
|
Less: accumulated amortization
|
|
|
(2,378,488
|
)
|
|
|
|
|
|
|
(148,906
|
)
|
|
|
(2,527,394
|
)
|
Total land use rights, net
|
|
$
|
9,930,419
|
|
|
|
(589,092
|
)
|
|
|
|
|
|
|
9,341,327
|
|
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 $855,410) 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 $1,339,520) and is amortized over the remaining useful life of six years using the straight-line method. As of June
30, 2019, this technology patent is fully amortized.
On June 30, 2016, the Company acquired Xingyulei
and Xindeguo. The fair value on the acquired technology patent was estimated to be RMB26, 648 (or $3,880) and RMB3, 000(or $437)
respectively.
The technology know-how consisted of the
following:
|
|
June 30,
|
|
|
Foreign Currency
|
|
|
|
|
|
June 30,
|
|
|
|
2018
|
|
|
Adjustment
|
|
|
Amortization
|
|
|
2019
|
|
Technology know-how
|
|
$
|
2,281,296
|
|
|
|
(82,049
|
)
|
|
|
|
|
|
$
|
2,199,247
|
|
Less: accumulated amortization
|
|
|
(2,277,726
|
)
|
|
|
|
|
|
|
(81,484
|
)
|
|
|
(2,196,243
|
)
|
Total technology know-how, net
|
|
$
|
3,570
|
|
|
|
|
|
|
|
(565
|
)
|
|
$
|
3,004
|
|
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
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 $9,464,000) and is amortized over the remaining useful life of ten years. On June 30, 2016, and January 1, 2017 the Company
acquired the VIE Companies. The fair value of the acquired customer relationships was estimated to be RMB14,729,602 (or $2,144,630)
and is amortized over the remaining useful life of seven to ten years.
|
|
June 30,
|
|
|
Foreign Currency
|
|
|
|
|
|
June 30,
|
|
|
|
2018
|
|
|
Adjustment
|
|
|
Amortization
|
|
|
2019
|
|
Customer relationships
|
|
$
|
12,039,169
|
|
|
|
(430,540
|
)
|
|
|
|
|
|
$
|
11,608,629
|
|
Less: accumulated amortization
|
|
|
(8,460,445
|
)
|
|
|
|
|
|
|
(973,620
|
)
|
|
|
(9,434,065
|
)
|
Total customer relationships, net
|
|
$
|
3,578,724
|
|
|
|
(430,540
|
)
|
|
|
(973,620
|
)
|
|
$
|
2,174,564
|
|
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 $192,192) and is amortized over the remaining useful life of five years using the straight-line method. On June 30, 2016,
and January 1, 2017 the Company acquired the VIE Companies. The fair value of the acquired non-compete agreements was estimated
to be RMB6,843,439 (or $996,405) and is amortized over the remaining useful life of five years using the straight-line method.
|
|
June 30,
|
|
|
Foreign Currency
|
|
|
|
|
|
June 30,
|
|
|
|
2018
|
|
|
Adjustment
|
|
|
Amortization
|
|
|
2019
|
|
Non-compete agreement
|
|
$
|
1,232,680
|
|
|
|
(44,083
|
)
|
|
|
|
|
|
$
|
1,188,597
|
|
Less: accumulated amortization
|
|
|
(573,180
|
)
|
|
|
|
|
|
|
(178,783
|
)
|
|
|
(751,963
|
)
|
Total non-compete agreement, net
|
|
$
|
659,500
|
|
|
|
(44,083
|
)
|
|
|
(178,783
|
)
|
|
$
|
436,634
|
|
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 $5,925,920) and is subject to an annual impairment test. On June 30, 2016, and January 1, 2017 the Company acquired the VIE
Companies. The fair value of the acquired trademarks was estimated to be RMB29,648 (or $4,317) and is subject to an annual impairment
test.
AMORTIZATION EXPENSE
Estimated amortization expenses of intangible
assets for the next five twelve months periods ended June 30, are as follows:
Years Ending June 30,
|
|
Expense ($)
|
|
2020
|
|
|
1,803,730
|
|
2021
|
|
|
834,921
|
|
2022
|
|
|
602,511
|
|
2023
|
|
|
564,438
|
|
2024
|
|
|
409,885
|
|
NOTE 6 – OTHER NON-CURRENT ASSETS
Other non-current assets mainly include
advance payments related to lease the land use for the Company. As of June 30, 2019, the balance of other non-current assets was
$15,307,325, which was the lease fee advances for agriculture lands that the Company engaged in Shiquan County from 2019 to 2027.
In March 2017, Jinong entered into the
lease agreement for approximately 3,400 mu, and 2600 hectare agriculture lands in Shiquan County, Shaanxi Province. The lease
was from April 2017 and was renewable for every ten-year period up to 2066. The aggregate leasing fee was approximately RMB 13
million per annum, The Company had made 10-year advances of leasing fee per lease terms. The Company has amortized $2.0 million
as expenses for the year ended June 30, 2019.
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Estimated amortization expenses of the
lease advance payments herein for the next four twelve-month periods ended June 30 and thereafter are as follows:
Years ending June 30,
|
|
|
|
2020
|
|
$
|
1,954,680
|
|
2021
|
|
$
|
1,954,680
|
|
2022
|
|
$
|
1,954,680
|
|
2023
|
|
$
|
1,954,680
|
|
2024 and thereafter
|
|
$
|
7,488,605
|
|
NOTE 7 – ACCRUED EXPENSES AND
OTHER PAYABLES
Accrued expenses and other payables consisted of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Payroll payable
|
|
$
|
24,891
|
|
|
$
|
13,788
|
|
Welfare payable
|
|
|
149,479
|
|
|
|
155,023
|
|
Accrued expenses
|
|
|
6,847,041
|
|
|
|
5,368,348
|
|
Other payables
|
|
|
4,886,202
|
|
|
|
4,543,261
|
|
Other levy payable
|
|
|
122,109
|
|
|
|
126,638
|
|
Total
|
|
$
|
12,029,722
|
|
|
$
|
10,207,058
|
|
NOTE 8 – AMOUNT DUE TO RELATED
PARTIES
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 $3,712,800). During the year ended June 30, 2019 and 2018 Yuxing has sold approximately $604,073
and $673,111 products to 900LH.com.
The amount due from 900LH.com to Yuxing was 0 and $235,551 as
of June 30, 2019 and 2018, respectively.
As of June 30, 2019, and June 30, 2018,
the amount due to related parties was $3,641,945 and $3,271,619, respectively. As of June 30, 2019, and June 30, 2018, $1,019,200
and $1,057,000, respectively were amounts that Gufeng borrowed from a related party, Xi’an Techteam Science & Technology
Industry (Group) Co. Ltd., a company controlled by Mr. Zhuoyu Li, Chairman and CEO of the Company, representing unsecured, non-interest
bearing loans that are due on demand. These loans are not subject to written agreements.
As of June 30, 2019, the Company’s subsidiary, Jinong,
owed 900LH.com. $400,225.
On July 1, 2018, Jinong signed an office
lease with Kingtone Information Technology Co., Ltd. (“Kingtone Information”), of which Mr. Zhuoyu Li, Chairman and
CEO of the Company, served as Chairman. Pursuant to the lease, Jinong rented 612 square meters (approximately 6,588 square feet)
of office space from Kingtone Information. The lease provides for a two-year term effective as of July 1, 2018 with monthly rent
of RMB24,480 (approximately $3,588).
NOTE 9 – LOAN PAYABLES
As of June 30, 2019, the short-term loan
payables consisted of four loans which mature on dates ranging from June 3, 2019 through June 27, 2020 with interest rates ranging
from 5.22% to 6.31%. No. 1 and 2 below are collateralized by Tianjuyuan’s land use right and building ownership right. Loan
No. 2 is also guaranteed by the cash deposit.
No.
|
|
Payee
|
|
Loan period per agreement
|
|
Interest Rate
|
|
|
June 30,
2019
|
|
1
|
|
Postal Saving Bank of China - Pinggu Branch
|
|
June 3, 2019-June 2, 2020
|
|
|
6.31
|
%
|
|
|
2,912,000
|
|
2
|
|
Agriculture Bank -Pinggu Branch
|
|
June 28, 2019-June 27, 2020
|
|
|
5.22
|
%
|
|
|
728,000
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
3,640,000
|
|
The interest expense from short-term loans
was $318,122 and $592,153 for the year ended June 30, 2019 and 2018 respectively.
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
NOTE 10 – CONVERTIBLE NOTES PAYABLE
Relating to the acquisition of the VIE
Companies, the Company subsidiary, Jinong, issued to the VIE Companies shareholders convertible notes payable twice, in the aggregate
notional amount of RMB 51,000,000 ($7,425,600) with a term of three years and an annual interest rate of 3%.
No.
|
|
Related Acquisitions of Sales VIEs
|
|
Issuance Date
|
|
Maturity Date
|
|
Notional Interest Rate
|
|
|
Conversion Price
|
|
|
Notional Amount
(in RMB)
|
|
1
|
|
Wangtian, Lishijie, Xindeguo, Xinyulei, Jinyangguang
|
|
June 30, 2016
|
|
June 30, 2019
|
|
|
3
|
%
|
|
$
|
5.00
|
|
|
|
39,000,000
|
|
2
|
|
Fengnong, Xiangrong
|
|
January 1, 2017
|
|
December 31, 2019
|
|
|
3
|
%
|
|
$
|
5.00
|
|
|
|
12,000,000
|
|
The convertible notes take priority over
the preferred stock and common stock of Jinong, and any other class or series of capital 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. Due to the discontinuation of VIE agreements with Zhenbai’s shareholders,
certain convertible notes issued on June 30, 2016 with a face amount of RMB 12,000,000 ($1,747,200) were tendered back to the
Company. All outstanding balance of unpaid principal and accrued interest in the tendered convertible notes were forfeited.
The Company determined that the fair value
of the convertible notes payable was RMB 51,629,859 ($7,517,307) and RMB 48,820,525 ($7,371,899) as of June 30, 2019 and June
30, 2018, respectively. Aside from the forfeiture of the convertible notes previously issued to Zhenbai’s shareholders,
the difference between the fair value of the notes and the face amount of the notes is being amortized to accretion implied interest
expense over the three-year life of the notes. As of June 30, 2019, the accumulated amortization of this discount into accretion
expenses was $1,333,792.
NOTE 11 – TAXES PAYABLE
Enterprise Income Tax
Effective January 1, 2008, the Enterprise
Income Tax (“EIT”) law of the PRC replaced the tax laws for Domestic Enterprises (“DEs”) and Foreign Invested
Enterprises (“FIEs”). The EIT rate of 25% replaced the 33% rate that was applicable to both DEs and FIEs. The two-year
tax exemption and three-year 50% tax reduction tax holiday for production-oriented FIEs was eliminated. Since January 1, 2008,
Jinong became subject to income tax in China at a rate of 15% as a high-tech company, because of the expiration of its tax exemption
on December 31, 2007. Accordingly, it made provision for income taxes for the years ended June 30, 2019 and 2018 of $6,497,340
and $3,501,354, respectively, which is mainly due to the operating income from Gufeng. Gufeng is subject to 25% EIT rate and thus
it made provision for income taxes of $3,482,862 and $2,471,593 for the years ended June 30, 2019 and 2018, respectively.
Value-Added Tax
All of the Company’s fertilizer
products that are produced and sold in the PRC were subject to a Chinese Value-Added Tax (VAT) of 13% of the gross sales price.
On April 29, 2008, the PRC State of Administration of Taxation (SAT) released Notice #56, “Exemption of VAT for Organic
Fertilizer Products”, which allows certain fertilizer products to be exempt from VAT beginning June 1, 2008. The Company
submitted the application for exemption in May 2009, which was granted effective September 1, 2009, continuing through December
31, 2015. On August 10, 2015 and August 28, 2015, the SAT released Notice #90. “Reinstatement of VAT for Fertilizer Products”,
and Notice #97, “Supplementary Reinstatement of VAT for Fertilizer Products”, which restore the VAT of 13%
of the gross sales price on certain fertilizer products includes non-organic fertilizer products starting from September 1, 2015,
but granted taxpayers a reduced rate of 3% from September 1, 2015 through June 30, 2016.
On April 28, 2017, the PRC State of Administration
of Taxation (SAT) released Notice 2017 #37, “Notice on Policy of Reduced Value Added Tax Rate,” under which,
effective July 1, 2017, all of the Company’s fertilizer products that are produced and sold in the PRC are subject to a Chinese
Value-Added Tax (VAT) of 11% of the gross sales price. The tax rate was reduced 2% from 13%.
On April 4, 2018, the PRC State of Administration
of Taxation (SAT) released Notice 2018 #32, “Notice on Adjustment of VAT Tax Rate,” under which, effective May
1, 2018, all of the Company’s fertilizer products that are produced and sold in the PRC are subject to a Chinese Value-Added
Tax (VAT) of 10% of the gross sales price. The tax rate was reduced 1% from 11%.
On March 20, 2019, the PRC State of Administration
of Taxation (SAT) released Notice 2019 #39, “Announcement on Policies Concerning Deepening the Reform of Value Added Tax,”
under which, Effective April 1, 2019, all of the Company’s fertilizer products that are produced and sold in the PRC are
subject to a Chinese Value-Added Tax (VAT) of 9% of the gross sales price. The tax rate was reduced 1% from 10%.
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Income Taxes and Related Payables
Taxes payable consisted of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
VAT provision
|
|
$
|
(424,535
|
)
|
|
$
|
(449,140
|
)
|
Income tax payable
|
|
|
1,550,830
|
|
|
|
554,065
|
|
Other levies
|
|
|
1,220,859
|
|
|
|
836,747
|
|
Total
|
|
$
|
2,347,154
|
|
|
$
|
941,672
|
|
The provision for income taxes consists of the following:
|
|
Years Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Current tax – foreign
|
|
$
|
6,497,340
|
|
|
$
|
6,841,592
|
|
Repatriation Tax
|
|
|
0
|
|
|
|
29,010,535
|
|
|
|
$
|
6,497,340
|
|
|
$
|
35,852,127
|
|
The components of deferred income tax assets and liabilities
are as follows:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
15,377,180
|
|
|
$
|
14,997,710
|
|
Total deferred tax assets
|
|
|
15,377,180
|
|
|
|
14,997,710
|
|
Less valuation allowance
|
|
|
(15,377,180
|
)
|
|
|
(14,997,710
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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, 2019, 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 $15.4 million valuation allowance
associated with its deferred tax assets.
U.S. Tax Cuts and Jobs Act and Provisional Estimates
On December 22, 2017, the TCJA was enacted
into law, which significantly changes existing U.S. tax law and includes numerous provisions that affect our business, such as
imposing a one-time transition tax on deemed repatriation of deferred foreign income, reducing the U.S. federal statutory tax
rate, and adopting a territorial tax system. The TCJA required us to incur a one-time transition tax on deferred foreign income
not previously subject to U.S. income tax at a rate of 15.5% for foreign cash and certain other net current assets, and 8% on
the remaining income. The TCJA also reduced the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018. For
fiscal year 2018, our blended U.S. federal statutory tax rate is 27.5%. This is the result of using the tax rate of 34% for the
first and second quarter of fiscal year 2018 and the reduced tax rate of 21% for the third and fourth quarter of fiscal year 2018.
The TCJA was effective in the second quarter
of fiscal year 2018. As of June 30, 2019, we have not completed our accounting for the estimated tax effects of the TCJA. During
fiscal year 2018, we recorded a provisional net charge of $29.0 million related to the TCJA based on reasonable estimates for
those tax effects. Due to the timing of the enactment and the complexity in applying the provisions of the TCJA, the provisional
net charge is subject to revisions as we continue to complete our analysis of the TCJA, collect and prepare necessary data, and
interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service (“IRS”), Financial
Accounting Standards Board, and other standard-setting and regulatory bodies. Adjustments may materially impact our provision
for income taxes and effective tax rate in the period in which the adjustments are made. During fiscal year 2018, we recorded
an estimated net charge of $29.0 million related to the TCJA, due to the impact of the one-time transition tax on the deemed repatriation
of deferred foreign income of $292.5 million.
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Tax Rate Reconciliation
Our effective tax rates were approximately
35.9% and 124.0% for years ended June 30, 2019 and 2018 respectively, with the effect of repatriation tax. Substantially all 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 21.0% and 27.5% to income before income taxes for the years ended June 30, 2019 and 2018 for the following reasons:
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
15% - 25%
|
|
|
21%
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss)
|
|
$
|
19,894,737
|
|
|
|
|
|
|
|
(1,807,002
|
)
|
|
|
|
|
|
$
|
18,087,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax expense (benefit)
|
|
|
4,973,684
|
|
|
|
25.0
|
%
|
|
|
(379,470
|
)
|
|
|
21.0
|
%
|
|
|
4,594,214
|
|
|
|
|
|
High-tech income benefits on Jinong
|
|
|
(697,062
|
)
|
|
|
(3.5
|
)%
|
|
|
-
|
|
|
|
-
|
|
|
|
(697,062
|
)
|
|
|
|
|
Losses from subsidiaries in which no benefit is recognized
|
|
|
2,220,717
|
|
|
|
11.2
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
2,220,717
|
|
|
|
|
|
Change in valuation allowance on deferred tax asset from US tax benefit
|
|
|
-
|
|
|
|
|
|
|
|
379,470
|
|
|
|
(21.0
|
)%
|
|
|
379,470
|
|
|
|
|
|
Actual tax expense
|
|
$
|
6,497,340
|
|
|
|
32.7
|
%
|
|
$
|
0
|
|
|
|
|
%
|
|
$
|
6,497,340
|
|
|
|
35.9
|
%
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
15% - 25%
|
|
|
27.5%
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss)
|
|
$
|
30,338,751
|
|
|
|
|
|
|
|
(1,417,849
|
)
|
|
|
|
|
|
$
|
28,920,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax expense (benefit)
|
|
|
7,584,688
|
|
|
|
25.0
|
%
|
|
|
(389,908
|
)
|
|
|
27.5
|
%
|
|
|
7,194,779
|
|
|
|
|
|
High-tech income benefits on Jinong
|
|
|
(3,501,354
|
)
|
|
|
(12.0
|
)%
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,501,354
|
)
|
|
|
|
|
Losses from subsidiaries in which no benefit is recognized
|
|
|
2,758,258
|
|
|
|
9
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
2,758,258
|
|
|
|
|
|
Change in valuation allowance on deferred tax asset from US tax benefit
|
|
|
-
|
|
|
|
|
|
|
|
389,908
|
|
|
|
(27.5
|
)%
|
|
|
389,908
|
|
|
|
|
|
Repatriation Tax
|
|
|
0
|
|
|
|
|
|
|
|
29,010,535
|
|
|
|
|
|
|
|
29,010,535
|
|
|
|
|
|
Actual tax expense
|
|
$
|
6,841,592
|
|
|
|
22.6
|
%
|
|
$
|
29,010,535
|
|
|
|
|
%
|
|
$
|
35,852,127
|
|
|
|
124.0
|
%
|
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
NOTE 12 – STOCKHOLDERS’ EQUITY
Common Stock
During the year ended June 30, 2018, the Company issued 345,680
shares of common stock for share-based compensation valued at $421,730. The shares were valued at the market price on the date
of issuance.
On April 25, 2019, the Company entered
into a Stock Purchase Agreement (the “SPA”) with certain non-US persons, as defined in Regulation S promulgated under
the Securities Act of 1933, in connection with a private placement offering of 6,000,000 shares of common stock, par value $0.001
per share, of the Company. The purchase price per share of the offering is $1.00. On April 26, 2019, the Company issued 6,000,000
Shares of the Company’s Common Stock, par value $0.001 per share, pursuant to the SPA. The Shares issued in the offering
are exempt from the registration requirements of the Securities Act, pursuant to Section 4(a)(2) of the Securities Act and/or
Regulation S promulgated thereunder.
On May 10, 2019, the Company sold 2,270,000
shares of common stock at the price of $1.00 per share for total proceeds of $2,270,000 to certain third-party individuals. The
issuances were completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities
Act of 1933, as amended.
On June 25, 2019, the Company approved
the amendment to its Articles of Incorporation to effect a 1 for 12 reverse stock split. The number of outstanding shares of the
registrant’s common stock on June 30, 2019, was 3,986,912.
During the year ended June 30, 2019, the
Company issued an aggregate of 650,000 shares of common stock to pay off consulting services under the 2009 Plan. The value of
the stock was $370,500 and is based on the fair value of the Company’s common stock on the grant date.
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, 2019, the Company has 20,000,000
shares of preferred stock authorized, with a par value of $.001 per share, of which no shares are issued or outstanding.
NOTE 13 – STOCK OPTIONS
There were no issuances of stock options during the years ended
June 30, 2019 and 2018.
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
NOTE 14 – CONCENTRATIONS AND LITIGATION
Market Concentration
All 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 from which the Company
purchased 10.8% and 10.6%, respectively, of its raw materials for fertilizer manufacturing during the year ended June 30, 2019.
Total purchases from these two vendors amounted to $51,459,699 as June 30, 2019.
There were two vendors from which the Company
purchased 8.5% and 7.1%, respectively, of its raw materials for fertilizer manufacturing during the year ended June 30, 2018. Total
purchase from these two vendors amounted to $20,020,959 as June 30, 2018.
Two customers accounted for an aggregate
amount of $35,303,527, or 7.4% and 7.3%, respectively, of the Company’s manufactured fertilizer sales for the year ended
June 30, 2019.
Two customers accounted for an aggregate
amount of $34,652,664, or 7.5% and 7.3%, respectively, of the Company’s manufactured fertilizer sales for the year ended
June 30, 2018.
NOTE 15 – SEGMENT REPORTING
As of June 30, 2019, the Company was organized
into four main business segments based on location and product: Jinong (fertilizer production), Gufeng (fertilizer production),
Yuxing (agricultural products production) and the sales VIEs. Each of the four operating segments referenced above has separate
and distinct general ledgers. The chief operating decision maker (“CODM”) receives financial information, including
revenue, gross margin, operating income and net income produced from the various general ledger systems to make decisions about
allocating resources and assessing performance; however, the principal measure of segment profitability or loss used by the CODM
is net income by segment.
|
|
Years Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues from unaffiliated customers:
|
|
|
|
|
|
|
Jinong
|
|
$
|
76,494,490
|
|
|
$
|
97,722,842
|
|
Gufeng
|
|
|
136,285,236
|
|
|
|
112,983,573
|
|
Yuxing
|
|
|
10,101,051
|
|
|
|
10,485,030
|
|
Sales VIEs
|
|
|
71,440,026
|
|
|
|
65,862,085
|
|
Consolidated
|
|
$
|
294,320,803
|
|
|
$
|
287,053,530
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
Jinong
|
|
$
|
7,288,789
|
|
|
$
|
23,471,811
|
|
Gufeng
|
|
|
14,076,655
|
|
|
|
10,151,272
|
|
Yuxing
|
|
|
(3,435,206
|
)
|
|
|
(506,077
|
)
|
Sales VIEs
|
|
|
2,681,521
|
|
|
|
(1,897,364
|
)
|
Reconciling item (1)
|
|
|
0
|
|
|
|
0
|
|
Reconciling item (2)
|
|
|
(1,807,011
|
)
|
|
|
(1,417,855
|
)
|
Reconciling item (3) --stock compensation
|
|
|
0
|
|
|
|
0
|
|
Consolidated
|
|
$
|
18,804,748
|
|
|
$
|
29,801,787
|
|
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Net income:
|
|
|
|
|
|
|
Jinong
|
|
$
|
5,925,025
|
|
|
$
|
19,841,004
|
|
Gufeng
|
|
|
10,191,675
|
|
|
|
7,172,837
|
|
Yuxing
|
|
|
(3,435,659
|
)
|
|
|
(484,398
|
)
|
Sales VIEs
|
|
|
729,023
|
|
|
|
(2,700,288
|
)
|
Reconciling item (1)
|
|
|
9
|
|
|
|
6
|
|
Reconciling item (2)
|
|
|
(1,807,009
|
)
|
|
|
(30,428,390
|
)
|
Reconciling item (3)
|
|
$
|
(12,668
|
)
|
|
$
|
(331,996
|
)
|
Consolidated
|
|
$
|
11,590,395
|
|
|
$
|
(6,931,225
|
)
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
Jinong
|
|
$
|
788,787
|
|
|
$
|
1,720,419
|
|
Gufeng
|
|
|
2,144,061
|
|
|
|
2,246,657
|
|
Yuxing
|
|
|
1,242,761
|
|
|
|
1,407,367
|
|
Sales VIEs
|
|
|
745,169
|
|
|
|
826,063
|
|
Consolidated
|
|
$
|
4,920,779
|
|
|
$
|
6,200,506
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Jinong
|
|
|
277,003
|
|
|
|
290,638
|
|
Gufeng
|
|
|
318,122
|
|
|
|
377,593
|
|
Yuxing
|
|
|
0
|
|
|
|
0
|
|
Sales VIEs
|
|
|
0
|
|
|
|
(76,078
|
)
|
Consolidated
|
|
$
|
595,125
|
|
|
$
|
592,153
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditure:
|
|
|
|
|
|
|
|
|
Jinong
|
|
$
|
6,862
|
|
|
$
|
7,212
|
|
Gufeng
|
|
|
47,096
|
|
|
|
7,800
|
|
Yuxing
|
|
|
9,653
|
|
|
|
5,448
|
|
Sales VIEs
|
|
|
0
|
|
|
|
20,655
|
|
Consolidated
|
|
$
|
63,610
|
|
|
$
|
41,114
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Identifiable assets:
|
|
|
|
|
|
|
Jinong
|
|
$
|
149,166,251
|
|
|
$
|
226,335,489
|
|
Gufeng
|
|
|
253,149,321
|
|
|
|
168,572,947
|
|
Yuxing
|
|
|
35,900,242
|
|
|
|
0
|
|
Sales VIEs
|
|
|
42,269,307
|
|
|
|
87,567,782
|
|
|
|
|
|
|
|
|
|
|
Reconciling item (1)
|
|
|
518,158
|
|
|
|
512,622
|
|
Reconciling item (2)
|
|
|
(2,879
|
)
|
|
|
(2,879
|
)
|
Consolidated
|
|
$
|
481,000,399
|
|
|
$
|
482,985,960
|
|
|
(1)
|
Reconciling
amounts refer to the unallocated assets or expenses of Green New Jersey.
|
|
(2)
|
Reconciling
amounts refer to the unallocated assets or expenses of the Parent Company.
|
|
(3)
|
Reconciling
amounts refer to the loss on discontinuing sales VIE of Shenqiu Zhenbai.
|
Total revenues from exported products
currently accounted for less than 1% of the Company’s total fertilizer revenues for the years ended June 30, 2019 and 2018
respectively.
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
NOTE 16 – COMMITMENTS AND CONTINGENCIES
On July 1, 2018, Jinong signed an office
lease with Kingtone Information Technology Co., Ltd. (“Kingtone Information”), of which Mr. Zhuoyu Li, Chairman and
CEO of the Company, served as Chairman. Pursuant to the lease, Jinong rented 612 square meters (approximately 6,588 square feet)
of office space from Kingtone Information. The lease provides for a two-year term effective as of July 1, 2018 with monthly rent
of RMB24,480 (approximately $3,588).
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 $434 (RMB 2,958).
Accordingly, the Company recorded an aggregate
of $48,257 and $$53,536 as rent expenses for the years ended June 30, 2019 and 2018 respectively. The contingent rent expenses
herein for the next five years ended June 30, are as follows:
Years ending June 30,
|
|
|
|
2020
|
|
|
48,257
|
|
2021
|
|
|
48,257
|
|
2022
|
|
|
48,257
|
|
2023
|
|
|
48,257
|
|
2024
|
|
|
48,257
|
|
NOTE 17 – VARIABLE INTEREST ENTITIES
In accordance with accounting standards
regarding consolidation of variable interest entities, VIEs are generally entities that lack sufficient equity to finance their
activities without additional financial support from other parties or whose equity holders lack adequate decision making ability.
All VIEs with which a company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the
VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.
Green Nevada through one of its subsidiaries,
Jinong, entered into a series of agreements (the “VIE Agreements”) with Yuxing for it to qualify as a VIE, effective
June 16, 2013.
The Company has concluded, based on the
contractual arrangements, that Yuxing is a VIE and that the Company’s wholly-owned subsidiary, Jinong, absorbs a majority
of the risk of loss from the activities of Yuxing, thereby enabling the Company, through Jinong, to receive a majority of Yuxing
expected residual returns.
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
On June 30, 2016 and January 1, 2017,
the Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition agreements and also into a series
of contractual agreements to qualify as VIEs with the shareholders of the sales VIE Companies.
Jinong, the sales VIE Companies, and the
shareholders of the sales VIE Companies also entered into a series of contractual agreements for the sales VIE Companies to qualify
as VIEs (the “VIE Agreements”).
On November 30, 2017, the Company, through
its wholly-owned subsidiary Jinong, exited the VIE agreements with the shareholders of Zhenbai.
As a result of these contractual arrangements,
with Yuxing and the sales VIE Companies the Company is entitled to substantially all of the economic benefits of Yuxing and the
VIE Companies. The following financial statement amounts and balances of the VIEs were included in the accompanying consolidated
financial statements as of June 30, 2019 and June 30, 2018:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
818,312
|
|
|
$
|
982,312
|
|
Accounts receivable, net
|
|
|
29,933,837
|
|
|
|
38,295,505
|
|
Inventories
|
|
|
19,944,011
|
|
|
|
21,133,970
|
|
Other current assets
|
|
|
475,001
|
|
|
|
988,051
|
|
Related party receivable
|
|
|
(1,031
|
)
|
|
|
(359,005
|
)
|
Advances to suppliers
|
|
|
3,606,384
|
|
|
|
848,458
|
|
Total Current Assets
|
|
|
54,776,514
|
|
|
|
61,889,291
|
|
|
|
|
|
|
|
|
|
|
Plant, Property and Equipment, Net
|
|
|
9,753,039
|
|
|
|
11,206,667
|
|
Other assets
|
|
|
218,549
|
|
|
|
226,654
|
|
Intangible Assets, Net
|
|
|
10,212,668
|
|
|
|
11,348,180
|
|
Goodwill
|
|
|
3,208,779
|
|
|
|
3,319,732
|
|
Total Assets
|
|
$
|
78,169,549
|
|
|
$
|
87,990,524
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
17,250,276
|
|
|
$
|
25,584,614
|
|
Customer deposits
|
|
|
256,489
|
|
|
|
841,694
|
|
Accrued expenses and other payables
|
|
|
6,243,753
|
|
|
|
3,896,340
|
|
Amount due to related parties
|
|
|
42,680,723
|
|
|
|
43,339,286
|
|
Total Current Liabilities
|
|
|
66,431,241
|
|
|
|
73,661,934
|
|
Total Liabilities
|
|
$
|
66,431,241
|
|
|
|
73,661,934
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
11,738,308
|
|
|
|
14,328,590
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
78,169,549
|
|
|
$
|
87,990,524
|
|
|
|
Years Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
81,541,077
|
|
|
$
|
77,351,284
|
|
Expenses
|
|
|
84,247,714
|
|
|
|
80,535,970
|
|
Net income
|
|
$
|
(2,706,637
|
)
|
|
$
|
(3,184,686
|
)
|
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
NOTE 18 – BUSINESS COMBINATIONS
On June 30, 2016, the Company, through
its wholly-owned subsidiary Jinong, entered into strategic acquisition agreements and also into a series of contractual agreements
to qualify as VIEs with the shareholders of Shaanxi Lishijie Agrochemical Co., Ltd., Songyuan Jinyangguang Sannong Service Co.,
Ltd., Shenqiu County Zhenbai Agriculture Co., Ltd., Weinan City Linwei District Wangtian Agricultural Materials Co., Ltd., Aksu
Xindeguo Agricultural Materials Co., Ltd., and Xinjiang Xinyulei Eco-agriculture Science and Technology Co., Ltd.
Subsequently, on January 1, 2017, Jinong
entered into similar strategic acquisition agreements and a series of contractual agreements to qualify as VIEs with the shareholders
of Sunwu County Xiangrong Agricultural Materials Co., Ltd., and Anhui Fengnong Seed Co., Ltd.
On November 30, 2017, the Company, through
its wholly-owned subsidiary Jinong, discontinued the strategic acquisition agreements and the series of contractual agreements
with the shareholders of Zhenbai.
The VIE Agreements are as follows:
Entrusted Management Agreements
Pursuant to the terms of certain Entrusted
Management Agreements dated June 30, 2016 and January 1, 2017, between Jinong and the shareholders of the sales VIE Companies
(the “Entrusted Management Agreements”), the sales VIE Companies and their shareholders agreed to entrust the operations
and management of its business to Jinong. According to the Entrusted Management Agreement, Jinong possesses the full and exclusive
right to manage the sales VIE Companies’ operations, assets and personnel, has the right to control all the sales VIE Companies’
cash flows through an entrusted bank account, is entitled to the sales VIE Companies’ net profits as a management fee, is
obligated to pay all the sales VIE Companies’ payables and loan payments, and bears all losses of the sales VIE Companies.
The Entrusted Management Agreements will remain in effect until (i) the parties mutually agree to terminate the agreement; (ii)
the dissolution of the sales VIE Companies; or (iii) Jinong acquires all the assets or equity of the sales VIE Companies (as more
fully described below under “Exclusive Option Agreements”).
Exclusive Technology Supply Agreements
Pursuant to the terms of certain Exclusive
Technology Supply Agreements dated June 30, 2016 and January 1, 2017, between Jinong and the sales VIE companies (the “Exclusive
Technology Supply Agreements”), Jinong is the exclusive technology provider to the sales VIE companies. The sales VIE companies
agreed to pay Jinong all fees payable for technology supply prior to making any payments under the Entrusted Management Agreement.
The Exclusive Technology Supply Agreements shall remain in effect until (i) the parties mutually agree to terminate the agreement;
(ii) the dissolution of the sales VIE companies; or (iii) Jinong acquires the sales VIE companies (as more fully described below
under “Exclusive Option Agreements”).
Shareholder’s Voting Proxy Agreements
Pursuant to the terms of certain Shareholder’s
Voting Proxy Agreements dated June 30, 2016 and January 1, 2017, among Jinong and the shareholders of the sales VIE companies
(the “Shareholder’s Voting Proxy Agreements”), the shareholders of the sales VIE companies irrevocably appointed
Jinong as their proxy to exercise on such shareholders’ behalf all of their voting rights as shareholders pursuant to PRC
law and the Articles of Association of the sales VIE companies, including the appointment and election of directors of the sales
VIE companies. Jinong agreed that it shall maintain a board of directors, the composition and appointment of which shall be approved
by the Board of the Company. The Shareholder’s Voting Proxy Agreements will remain in effect until Jinong acquires all the
assets or equity of the sales VIE companies.
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Exclusive Option Agreements
Pursuant to the terms of certain Exclusive
Option Agreements dated June 30, 2016 and January 1, 2017, among Jinong, the sales VIE companies, and the shareholders of the
sales VIE companies (the “Exclusive Option Agreements”), the shareholders of the sales VIE companies granted Jinong
an irrevocable and exclusive purchase option (the “Option”) to acquire the sales VIE companies’ equity interests
and/or remaining assets, but only to the extent that the acquisition does not violate limitations imposed by PRC law on such transactions.
The Option is exercisable at any time at Jinong’s discretion so long as such exercise and subsequent acquisition of the
sales VIE companies does not violate PRC law. The consideration for the exercise of the Option is to be determined by the parties
and memorialized in the future by definitive agreements setting forth the kind and value of such consideration. Jinong may transfer
all rights and obligations under the Exclusive Option Agreements to any third parties without the approval of the shareholders
of the sales VIE companies so long as a written notice is provided. The Exclusive Option Agreements may be terminated by mutual
agreements or by 30 days written notice by Jinong.
Equity Pledge Agreements
Pursuant to the terms of certain Equity
Pledge Agreements dated June 30, 2016 and January 1, 2017, among Jinong and the shareholders of the sales VIE companies (the “Pledge
Agreements”), the shareholders of the sales VIE companies pledged all of their equity interests in the sales VIE companies
to Jinong, including the proceeds thereof, to guarantee all of Jinong’s rights and benefits under the Entrusted Management
Agreements, the Exclusive Technology Supply Agreements, the Shareholder’ Voting Proxy Agreements and the Exclusive Option
Agreements. Prior to termination of the Pledge Agreements, the pledged equity interests cannot be transferred without Jinong’s
prior written consent. The Pledge Agreements may be terminated only upon the written agreement of the parties.
Non-Compete Agreements
Pursuant to the terms of certain Non-Compete
Agreements dated June 30, 2016 and January 1, 2017, among Jinong and the shareholders of the sales VIE companies (the “Non-Compete
Agreements”), the shareholders of the sales VIE companies agreed that during the period beginning on the initial date of
their services with Jinong, and ending five (5) years after termination of their services with Jinong, without Jinong’s
prior written consent, they will not provide services or accept positions including but not limited to partners, directors, shareholders,
managers, proxies or consultants, provided by any profit making organizations with businesses that may compete with Jinong. They
will not solicit or interfere with any of the Jinong’s customers, or solicit, induce, recruit or encourage any person engaged
or employed by Jinong to terminate his or her service or engagement. If the shareholders of the sales VIE companies breach the
non-compete obligations contained therein, Jinong is entitled to all loss and damages; if the damages are difficult to determine,
remedies bore the shareholders of the sales VIE companies shall be no less than 50% of the salaries and other expenses Jinong
provided in the past.
The Company entered into these VIE Agreements
as a way for the Company to have more control over the distribution of its products. The transactions are accounted for as business
combinations in accordance with ASC 805. A summary of the purchase price allocations at fair value is below:
For acquisitions made on June 30, 2016:
Cash
|
|
$
|
708,737
|
|
Accounts receivable
|
|
|
6,422,850
|
|
Advances to suppliers
|
|
|
1,803,180
|
|
Prepaid expenses and other current assets
|
|
|
807,645
|
|
Inventories
|
|
|
7,787,043
|
|
Machinery and equipment
|
|
|
140,868
|
|
Intangible assets
|
|
|
270,900
|
|
Other assets
|
|
|
3,404,741
|
|
Goodwill
|
|
|
3,158,179
|
|
Accounts payable
|
|
|
(3,962,670
|
)
|
Customer deposits
|
|
|
(3,486,150
|
)
|
Accrued expenses and other payables
|
|
|
(4,653,324
|
)
|
Taxes payable
|
|
|
(16,912
|
)
|
Purchase price
|
|
$
|
12,385,087
|
|
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
A summary of the purchase consideration paid is below:
Cash
|
|
$
|
5,568,500
|
|
Convertible notes
|
|
|
6,671,769
|
|
Derivative liability
|
|
|
144,818
|
|
|
|
$
|
12,385,087
|
|
The cash component of the purchase price
for these acquisitions made on June 30, 2016 was paid in July and August 2016.
For acquisitions made on January 1, 2017:
Working Capital
|
|
$
|
941,192
|
|
Machinery and equipment
|
|
|
222,875
|
|
Intangible assets
|
|
|
1440
|
|
Goodwill
|
|
|
684,400
|
|
Customer Relationship
|
|
|
522,028
|
|
Non-compete Agreement
|
|
|
392,852
|
|
Purchase price
|
|
$
|
2,764,787
|
|
A summary of the purchase consideration paid is below:
Cash
|
|
$
|
1,201,888
|
|
Convertible notes
|
|
|
1,559,350
|
|
Derivative liability
|
|
|
3,549
|
|
|
|
$
|
2,764,787
|
|
The cash component of the purchase price
for these acquisitions made on January 1, 2017 was paid during March 2017.
On November 30, 2017, the Company, through
its wholly-owned subsidiary Jinong, discontinued the strategic acquisition agreements and the series of contractual agreements
with the shareholders of Zhenbai. In return, the shareholders of Zhenbai agreed to tender the whole payment consideration in the
SAA back to the Company with early termination penalties. The convertible notes paid to Zhenbai’s shareholders and the accrued
interest has been forfeited.
For the discontinuation of Zhenbai made
on November 30, 2017, the Company gave up the control of the following assets in Zhenbai:
Working Capital
|
|
$
|
1,179,352
|
|
Intangible assets
|
|
|
896,559
|
|
Customer Relationship
|
|
|
684,727
|
|
Non-compete Agreement
|
|
|
211,833
|
|
Goodwill
|
|
|
538,488
|
|
Total Asset
|
|
$
|
2,614,401
|
|
In return, the purchase consideration returned to the Company
from Zhenbai’s shareholders is summarized below:
Cash
|
|
$
|
461,330
|
|
Interest Payable
|
|
|
83,039
|
|
Convertible notes
|
|
|
1,724,683
|
|
Derivative liability
|
|
|
13,353
|
|
Total Payback
|
|
$
|
2,282,406
|
|
Net Loss
|
|
|
(331,995
|
)
|
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
NOTE 19 – 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, 2019 and 2018 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,
|
|
|
|
2019
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
78,406
|
|
|
$
|
16,952
|
|
Other current assets
|
|
|
71
|
|
|
|
71
|
|
Total Current Assets
|
|
|
78,476
|
|
|
|
17,022
|
|
|
|
|
|
|
|
|
|
|
Long-term equity investment
|
|
|
406,084,910
|
|
|
|
400,248,804
|
|
Total long-term assets
|
|
|
406,084,910
|
|
|
|
400,248,804
|
|
Total Assets
|
|
$
|
406,163,387
|
|
|
$
|
400,265,826
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
214,520
|
|
|
$
|
214,520
|
|
Amount due to related parties
|
|
|
2,592,986
|
|
|
|
2,183,756
|
|
Other payables and accrued expenses
|
|
|
6,800,194
|
|
|
|
5,319,763
|
|
Total Current Liabilities
|
|
|
9,607,701
|
|
|
|
7,718,039
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value, 115,197,165 shares authorized, 3,986,912 and 3,241,413 shares issued and outstanding as of June 30, 2019 and June 30, 2018, respectively
|
|
|
3,987
|
|
|
|
3,241
|
|
Additional paid in capital
|
|
|
138,012,445
|
|
|
|
129,372,691
|
|
Accumulated other comprehensive income
|
|
|
(19,821,211
|
)
|
|
|
(3,598,215
|
)
|
Retained earnings
|
|
|
278,360,465
|
|
|
|
266,770,070
|
|
Total Stockholders’ Equity
|
|
|
396,555,686
|
|
|
|
392,547,787
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
406,163,387
|
|
|
$
|
400,265,826
|
|
CHINA GREEN AGRICULTURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Condensed Statements of Operations
|
|
Year ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
General and administrative expenses
|
|
|
1,807,010
|
|
|
|
1,417,855
|
|
Interest income
|
|
|
9
|
|
|
|
6
|
|
Provision for tax
|
|
|
0
|
|
|
|
29,010,535
|
|
Equity investment in subsidiaries
|
|
|
13,397,397
|
|
|
|
23,497,159
|
|
Net income
|
|
$
|
11,590,395
|
|
|
$
|
(6,931,225
|
)
|
Condensed Statements of Cash Flows
|
|
Year Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(8,617,776
|
)
|
|
$
|
(29,438,540
|
)
|
Net cash provided by investing activities
|
|
|
-
|
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
8,679,230
|
|
|
|
195,013
|
|
Cash and cash equivalents, beginning balance
|
|
|
(29,103,559
|
)
|
|
|
139,969
|
|
Cash and cash equivalents, ending balance
|
|
$
|
(29,042,104
|
)
|
|
$
|
(29,103,559
|
)
|
Notes to Condensed Parent Company Financial Information
As of June 30, 2019, and 2018, 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.
NOTE 20 – SUBSEQUENT EVENTS
On July 2, 2019, the Company issued 59,567 shares of common
stock to pay off consulting services under the 2009 Plan. The value of the stock was $330,000 and was based on the fair value of
the Company’s common stock on the grant date.
On August 13, 2019, the Company sold 212,000
shares of common stock at the price of $10.00 per share for total proceeds of $2,120,000 to certain third-party individuals. The
issuances were completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities
Act of 1933, as amended.
On August 15, 2019, Shaanxi Baoyu Science
and Technology Investment Company, a limited liability investment company incorporated in the People’s Republic of China
(“Shaanxi Baoyu”), entered into a certain Stock Purchase Agreement (the “SPA”) pursuant to Regulation S
promulgated under the Securities Act of 1933 with the Company in connection with a private placement offering of 471,000 shares
of Common Stock, par value $0.001 per share, of the Company. The purchase price per share of the offering was $12.00 for total
proceeds of $5,652,000. On August 16, 2019, the Company issued 471,000 Shares of the Company’s Common Stock, par value $0.001
per share, to Shaanxi Baoyu, pursuant to the SPA. All securities reported in this schedule are owned by Shaanxi Baoyu.
On August 19, 2019, the Company sold 248,000
shares of common stock at the price of $10.00 per share for total proceeds of $2,480,000 to certain third-party individuals. The
issuances were completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities
Act of 1933, as amended.
On October 9, 2019, a lawsuit was filed
against us and certain of our officers in the United States District Court for the District of Nevada (the "Nevada Federal
Court") by Plaintiff Glenn Little. The current version of the complaint alleges us and certain of our officers for breach
of fiduciary duty and shareholder oppression.
F-30