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4-Traders Homepage  >  Equities  >  Nyse  >  China Green Agriculture, Inc    CGA

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CHINA GREEN AGRICULTURE : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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11/14/2017 | 07:31pm CET
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the notes to those financial statements appearing elsewhere in
this report. This discussion and analysis contains forward-looking statements
that involve significant risks and uncertainties. As a result of many factors,
such as the slow-down of the global financial markets and its impact on economic
growth in general, the competition in the fertilizer industry and the impact of
such competition on pricing, revenues and margins, the weather conditions in the
areas where our customers are based, the cost of attracting and retaining highly
skilled personnel, the prospects for future acquisitions, and the factors set
forth elsewhere in this report, our actual results may differ materially from
those anticipated in these forward-looking statements. In light of these risks
and uncertainties, there can be no assurance that the forward-looking statements
contained in this report will in fact occur. You should not place undue reliance
on the forward-looking statements contained in this report.



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



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



Unless the context otherwise requires, all references to (i) "PRC" and "China"
are to the People's Republic of China; (ii) "U.S. dollar," "$" and "US$" are to
United States dollars; and (iii) "RMB", "Yuan" and Renminbi are to the currency
of the PRC or China.



Overview



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



The fertilizer business conducted by Jinong and Gufeng generated approximately
71.7% and 76.3% of our total revenues for the three months ended September 30,
2017 and 2016, respectively. The sales VIEs generated 25.5% and 21.5% of our
revenues for the three months ended September 30, 2017 and 2016, respectively.
Yuxing serves as a research and development base for our fertilizer products.



  20






Fertilizer Products



As of September 30, 2017, we had developed and produced a total of 720 different
fertilizer products in use, of which 136 were developed and produced by Jinong,
333 by Gufeng, and 251 by the VIE Companies.



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


           Three Months Ended
              September 30,            Change 2016 to 2017
            2017          2016          Amount           %
              (metric tons)
Jinong       14,525        9,680            4,845        50.1 %
Gufeng       54,608       45,531            9,077        19.9 %
             69,133       55,211           13,922




           Three Months Ended
              September 30,
            2017          2016
           (revenue per tons)
Jinong   $    1,980$ 3,272
Gufeng          374          347



For the three months ended September 30, 2017, we sold approximately 69,133
metric tons of fertilizer products, as compared to 55,211 metric tons for the
three months ended September 30, 2016. For the three months ended September 30,
2017, Jinong sold approximately 14,525 metric tons of fertilizer products, as
compared to 9,680 metric tons for the three months ended September 30, 2016. For
the three months ended September 30, 2017, Gufeng sold approximately 54,608
metric tons of fertilizer products, as compared to 45,531 metric tons for the
three months ended September 30, 2016.



Our sales of fertilizer products to customers in five provinces within China
accounted for approximately 56.2% of our fertilizer revenue for the three months
ended September 30, 2017. Specifically, the provinces and their respective
percentage contributing to our fertilizer revenues were: Hebei (19.1%), Shaanxi
(10.9%), Heilongjiang (8.7%), Liaoning (7.5%) and Inner Mongolia (5.4%).



As of September 30, 2017, we had a total of 1,931 distributors covering 22
provinces, 4 autonomous regions and 4 central government-controlled
municipalities in China. Jinong had 1,121 distributors in China. Jinong's sales
are not dependent on any single distributor or any group of distributors.
Jinong's top five distributors accounted for 2.92% of its fertilizer revenues
for the three months ended September 30, 2017. Gufeng had 312 distributors,
including some large state-owned enterprises. Gufeng's top five distributors
accounted for 69.9% of its revenues for the three months ended September 30,
2017.



Agricultural Products



Through Yuxing, we develop, produce and sell high-quality flowers, green
vegetables and fruits to local marketplaces and various horticulture and
planting companies. We also use certain of Yuxing's greenhouse facilities to
conduct research and development activities for our fertilizer products. The
three PRC provinces and municipalities that accounted for 76.3% of our
agricultural products revenue for the three months ended September 30, 2017 were
Shaanxi (61.8%), Sichuan (8.9%), and Zhejiang (5.6%).



Recent Developments



New Products



During the three months ended September 30, 2017, Jinong launched 2 new
fertilizer products and added 9 new distributors. During the three months ended
September 30, 2017, Gufeng launched 1 new fertilizer products and added 5 new
distributors.



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").



  21






June 30, 2016:



                                                                      Cash         Principal of
                                                                  Payment for        Notes for
                                                                  Acquisition       Acquisition
Company Name      Business Scope                                    (RMB[1])           (RMB)
Shaanxi           Sales of pesticides, agricultural chemicals,
Lishijie          chemical fertilizers, agricultural materials;
Agrochemical      Manufacture and sales of mulches.
Co., Ltd.                                                           10,000,000         3,000,000

Songyuan          Promotion and consulting services regarding
Jinyangguang      agricultural technologies; Retail sales of
Sannong Service   chemical fertilizers (including compound
Co., Ltd.         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    Cultivation of crops; Storage, sales,
Zhenbai           preliminary processing and logistics
Agriculture       distribution of agricultural by-products;
Co., Ltd.         Promotion and application of agricultural
                  technologies; Purchase and sales of
                  agricultural materials; Electronic commerce.       3,000,000        12,000,000

Weinan City Promotion and application of new agricultural Linwei District technologies; Professional prevention of Wangtian plant diseases and insect pests; Sales of Agricultural plant protection products, plastic mulches, Materials Co., material, chemical fertilizers, pesticides, Ltd.

              agricultural medicines, micronutrient
                  fertilizers, hormones, agricultural machinery
                  and medicines, and gardening tools.                6,000,000        12,000,000

Aksu Xindeguo     Wholesale and retail sales of pesticides;
Agricultural      Sales of chemical fertilizers, packaged
Materials Co.,    seeds, agricultural mulches, micronutrient
Ltd.              fertilizers, compound fertilizers, plant
                  growth regulators, agricultural machineries,
                  and water economizers; Consulting services
                  for agricultural technologies; Purchase and
                  sales of agricultural by- products.               10,000,000        12,000,000

Xinjiang          Sales of chemical fertilizers, packaged
Xinyulei          seeds, agricultural mulches, micronutrient
Eco-agriculture   fertilizers, organic fertilizers, plant
Science and       growth regulators, agricultural machineries,
Technology Co.,   and water economizers; Purchase and sales of
Ltd               agricultural by-products; Cultivation of
                  fruits and vegetables; Consulting services
                  and training for agricultural technologies;
                  Storage services; Sales of articles of daily
                  use, food and oil; On-line sales of the
                  above-mentioned products.

Total                                                               37,000,000        51,000,000



(1) The exchange rate between RMB and U.S. dollars on June 30, 2016 is RMB1=US$0.1508, according to the exchange rate published by Bank of China.


January 1, 2017:



                                                                     Cash         Principal of
                                                                 Payment for        Notes for
                                                                 Acquisition       Acquisition
Company Name     Business Scope                                    (RMB[1])

(RMB)

Sunwu County Sales of pesticides, agricultural chemicals, Xiangrong chemical fertilizers, agricultural materials; Agricultural Manufacture and sales of mulches. Materials Co., Ltd.

4,000,000 6,000,000

Anhui Fengnong Wholesale and retail sales of pesticides; Seed Co., Ltd. Sales of chemical fertilizers, packaged

                 seeds, agricultural mulches, micronutrient
                 fertilizers, compound fertilizers and plant
                 growth regulators                                  4,000,000         6,000,000

Total                                                               8,000,000        12,000,000



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


  22






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



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



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



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



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



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



  23






Results of Operations



Three Months ended September 30, 2017 Compared to the Three Months ended
September 30, 2016.



                                               2017             2016           Change $        Change %
Sales
Jinong                                       26,773,760       31,427,720       (4,653,960 )        -14.8 %
Gufeng                                       18,222,066       15,809,514        2,412,552           15.3 %
Yuxing                                        1,792,643        1,355,411          437,232           32.3 %
Sales VIEs                                   15,980,034       13,291,977        2,688,057           20.2 %
Net sales                                    62,768,503       61,884,622          883,881            1.4 %
Cost of goods sold
Jinong                                       13,112,756       13,269,230         (156,474 )         -1.2 %
Gufeng                                       15,986,429       13,385,077        2,601,352           19.4 %
Yuxing                                        1,392,553        1,045,608          346,945           33.2 %
Sales VIEs                                   13,208,764       10,753,679        2,455,085           22.8 %
Cost of goods sold                           43,700,502       38,453,594        5,246,908           13.6 %
Gross profit                                 19,068,001       23,431,028       (4,363,027 )        -18.6 %
Operating expenses
Selling expenses                              5,179,004        5,012,068          166,936            3.3 %
Selling expenses - amortization of
deferred asset                                                 6,108,782       (6,108,782 )       -100.0 %
General and administrative expenses           6,972,622        3,231,487        3,741,135          115.8 %
Total operating expenses                     12,151,626       14,352,337       (2,200,711 )        -15.3 %
Income from operations                        6,916,375        9,078,691       (2,162,316 )        -23.8 %
Other income (expense)
Other income (expense)                           (7,231 )        (40,057 ) 
       32,826          -81.9 %
Interest income                                  87,914           76,622           11,292           14.7 %
Interest expense                               (179,575 )       (138,545 )        (41,030 )         29.6 %
Total other income (expense)                    (98,892 )       (101,980 )          3,088           -3.0 %
Income before income taxes                    6,817,483        8,976,711       (2,159,228 )        -24.1 %
Provision for income taxes                    1,722,655        1,624,131           98,524            6.1 %
Net income                                    5,094,828        7,352,580       (2,257,752 )        -30.7 %
Other comprehensive income (loss)
Foreign currency translation gain (loss)        240,218       (1,205,884 )      1,446,102         -119.9 %
Comprehensive income (loss)                   5,335,046        6,145,696   

(810,650 ) -13.2 %

Basic weighted average shares
outstanding                                  38,185,277       37,648,605          536,672            1.4 %
Basic net earnings per share                       0.13             0.20            (0.07 )        -34.5 %
Diluted weighted average shares
outstanding                                  38,185,277       37,648,605          536,672            1.4 %
Diluted net earnings per share                     0.13             0.20   
        (0.07 )        -34.5 %




  24






Net Sales



Total net sales for the three months ended September 30, 2017 were $62,768,503,
an increase of $883,881 or 1.4%, from $61,884,622 for the three months ended
September 30, 2016. This increase was primarily due to an increase in sales
VIE's and Yuxing's net sales.



For the three months ended September 30, 2017, Jinong's net sales decreased
$4,653,960, or 14.8%, to $26,773,760 from $31,427,720 for the three months ended
September 30, 2016. This decrease was mainly attributable to the decrease in
Jinong's sales volume in the last three months.



For the three months ended September 30, 2017, Gufeng's net sales were
$18,222,066, an increase of $2,412,552, or 15.3% from $15,809,514 for the three
months ended September 30, 2016. This increase was mainly attributable to the
increase in market demand during the last three months.



For the three months ended September 30, 2017, Yuxing's net sales were
$1,792,643, an increase of $437,232 or 32.3%, from $1,355,411 for the three
months ended September 30, 2016. The increase was mainly attributable to the
increase in market demand and the higher prices on Yuxing's top grade flowers
during the three months ended September 30, 2017.



Cost of Goods Sold


Total cost of goods sold for the three months ended September 30, 2017 was
$43,700,502, an increase of $5,246,908, or 13.6%, from $38,453,594 for the three
months ended September 30, 2016. The increase was mainly due to the increase in
sales VIE's and Gufeng's cost of goods sold which increased 22.8% and 19.4%
respectively.



Cost of goods sold by Jinong for the three months ended September 30, 2017 was
$13,112,756, a decrease of $156,474, or 1.2%, from $13,269,230 for the three
months ended September 30, 2016. The decrease in cost of goods was primarily
attributable to the 14.8% decrease in net sale during the last three months.



Cost of goods sold by Gufeng for the three months ended September 30, 2017 was
$15,986,429, an increase of $2,601,352, or 19.4%, from $13,385,077 for the three
months ended September 30, 2016. This increase was primarily attributable to the
more products sold during the last three months.



For three months ended September 30, 2017, cost of goods sold by Yuxing was
$1,392,553, an increase of $346,945, or 33.2%, from $1,045,608 for the three
months ended September 30, 2016. This increase was mainly due to the increase in
Yuxing's net sales and the labor costs.



Gross Profit


Total gross profit for the three months ended September 30, 2017 decreased by
$4,363,027, or 18.6%, to $19,068,001, as compared to $23,431,028 for the three
months ended September 30, 2016. Gross profit margin was 30.4% and 37.9% for the
three months ended September 30, 2017 and 2016, respectively.



Gross profit generated by Jinong decreased by $4,497,486, or 24.8%, to
$13,661,004 for the three months ended September 30, 2017 from $18,158,490 for
the three months ended September 30, 2016. Gross profit margin from Jinong's
sales was approximately 51.0% and 57.8% for the three months ended September 30,
2017 and 2016, respectively. The decrease in gross profit margin was mainly due
to higher raw material cost and higher packaging cost.



For the three months ended September 30, 2017, gross profit generated by Gufeng
was $2,235,637, a decrease of $188,800, or 7.8%, from $2,424,437 for the three
months ended September 30, 2016. Gross profit margin from Gufeng's sales was
approximately 12.3% and 15.3% for the three months ended September 30, 2017 and
2016, respectively. The decrease in gross profit percentage was mainly due to
the increase in product costs and the decrease in sales prices.



For the three months ended September 30, 2017, gross profit generated by Yuxing
was $400,090, an increase of $90,287, or 29.1% from $309,803 for the three
months ended September 30, 2016. The gross profit margin was approximately 22.3%
and 22.9% for the three months ended September 30, 2017 and 2016, respectively,
which is slightly decreased.



Gross profit generated by VIEs increased by $232,972, or 9.2%, to $2,771,270 for
the three months ended September 30, 2017 from $ 2,538,298 for the three months
ended September 30, 2016. Gross profit margin from VIE's sales was approximately
17.3% and 19.1% for the three months ended September 30, 2017 and 2016,
respectively. The decrease in gross profit margin was mainly due to the increase
in product costs and the decrease in sales prices.



  25






Selling Expenses



Our selling expenses consisted primarily of salaries of sales personnel,
advertising and promotion expenses, freight-out costs and related compensation.
Selling expenses were $5,179,004, or 8.3%, of net sales for the three months
ended September 30, 2017, as compared to $5,012,068, or 8.1% of net sales for
the three months ended September 30, 2016, an increase of $166,936, or 3.3%.



The selling expenses of Yuxing were $9,646 or 0.5% of Yuxing's net sales for the
three months ended September 30, 2017, as compared to $7,711 or 0.6% of Yuxing's
net sales for the three months ended September 30, 2016. The selling expenses of
Gufeng were $95,776 or 0.5% of Gufeng's net sales for the three months ended
September 30, 2017, as compared to $145,328 or 0.9% of Gufeng's net sales for
the three months ended September 30, 2016. The selling expenses of Jinong for
the three months ended September 30, 2017 were $4,843,178 or 18.1% of Jinong's
net sales, as compared to selling expenses of $4,505,121 or 14.2% of Jinong's
net sales for the three months ended September 30, 2016. The increase in
Jinong's selling expenses was due to Jinong's expanded marketing efforts.



Selling Expenses - amortization of deferred assets



Our selling expenses - amortization of our deferred assets were $649,496 for the
three months ended September 30, 2017, as compared to $6,108,782, or 9.8% of net
sales for the three months ended September 30, 2016. This decrease was due to
the fact that the deferred assets were fully amortized and therefore no
amortization was recorded on the fully amortized assets during the three months
ended September 30, 2017.


General and Administrative Expenses



General and administrative expenses consisted primarily of related salaries,
rental expenses, business development, depreciation and travel expenses incurred
by our general and administrative departments and legal and professional
expenses including expenses incurred and accrued for certain litigation. General
and administrative expenses were $6,972,622, or 11.1% of net sales for the three
months ended September 30, 2017, as compared to $3,231,487, or 5.2%, of net
sales for the three months ended September 30, 2016, an increase of $3,741,135,
or 115.8%.



Total Other Expenses



Total other expenses consisted of income from subsidies received from the PRC
government, interest income, interest expenses and bank charges. Total other
expense for the three months ended September 30, 2017 was $98,892, as compared
to $101,980 for the three months ended September 30, 2016, a decrease in expense
of $3,088, or 3.0%. The decrease in total other expense was largely resulted
from a net gain of $79,343 on fair value change of derivative liabilities in the
convertible notes during the three months ended September 30, 2017 as compared
to a lesser net gain of $2,924 during the three months ended September 30, 2016,
offset by the increase in net interest expenses.



Income Taxes



Jinong is subject to a preferred tax rate of 15% as a result of its business
being classified as a High-Tech project under the PRC Enterprise Income Tax Law
("EIT") that became effective on January 1, 2008. Jinong incurred income tax
expenses of $1,013,134 for the three months ended September 30, 2017, as
compared to $987,512 for the three months ended September 30, 2016, an increase
of $25,622, or 2.6%.



Gufeng is subject to a tax rate of 25%, incurred income tax expenses of $534,686
for the three months ended September 30, 2017, as compared to $307,735 for the
three months ended September 30, 2016, an increase of $228,311, or 74.2%, which
was primarily due to Gufeng's increased net income.



Yuxing has no income tax for the three months ended September 30, 2017 and 2016
as a result of being exempted from paying income tax due to its products fall
into the tax exemption list set out in the EIT.



Net Income


Net income for the three months ended September 30, 2017 was $5,094,828, a
decrease of $2,256,752, or 30.7%, compared to $7,351,580 for the three months
ended September 30, 2016. Net income as a percentage of total net sales was
approximately 8.1% and 11.9% for the three months ended September 30, 2017
and
2016, respectively.


Discussion of Segment Profitability Measures

As of September 30, 2017, we were engaged in the following businesses: the
production and sale of fertilizers through Jinong and Gufeng, the production and
sale of high-quality agricultural products by Yuxing, and the sales of
agriculture materials by the sales VIEs. For financial reporting purpose, our
operations were organized into four main business segments based on locations
and products: Jinong (fertilizer production), Gufeng (fertilizer production) and
Yuxing (agricultural products production) and the sales VIEs. Each of the
segments has its own annual budget about development, production and sales.

  26






Each of the four operating segments referenced above has separate and distinct
general ledgers. The chief operating decision maker ("CODM") makes decisions
with respect to resources allocation and performance assessment upon receiving
financial information, including revenue, gross margin, operating income and net
income produced from the various general ledger systems; however, net income by
segment is the principal benchmark to measure profit or loss adopted by the
CODM.



For Jinong, the net income decreased by $394,802, or 7.4% to $5,741,090 for three months ended September 30, 2017, from $5,346,288 for the three months ended September 30, 2016. The decrease was principally due to decreased net sales and higher selling expenses.

For Gufeng, the net income increased by $887,571 or 123.9% to $1,604,057 for three months ended September 30, 2017 from $716,486 for three months ended September 30, 2016. The increase was principally due to the increase in net sales.

For Yuxing, the net income increased $18,310 or 11.7% to $175,390 for three months ended September 30, 2017 from $157,080 for three months ended September 30, 2016. The increase was mainly due to the increase in net sales.

For the sales VIEs, the net income was $-2,112,936 for year ended September 30,
2017, decreased by $3,590,784 or 243%, from $1,477,848 for three months ended
September 30, 2016. The decrease was mainly due to the increase in general and
administrative expenses for the sales VIEs.



Liquidity and Capital Resources

Our principal sources of liquidity include cash from operations, borrowings from
local commercial banks and net proceeds of offerings of our securities
consummated in July 2009 and November/December 2009 (collectively the "Public
Offerings").


As of September 30, 2017, cash and cash equivalents were $133,909,463, an increase of $10,858,915, or 8.8%, from $123,050,548 as of June 30, 2017.



We intend to use some of the remaining net proceeds from the Public Offerings,
as well as other working capital if required, to acquire new businesses, upgrade
production lines and complete Yuxing's new greenhouse facilities for agriculture
products located on 88 acres of land in Hu County, 18 kilometers southeast of
Xi'an city. Yuxing purchased a set of agricultural products testing equipment
for the year of 2016. We believe that we have sufficient cash on hand and
positive projected cash flow from operations to support our business growth for
the next twelve months to the extent we do not have further significant
acquisitions or expansions. However, if events or circumstances occur and we do
not meet our operating plan as expected, we may be required to seek additional
capital and/or to reduce certain discretionary spending, which could have a
material adverse effect on our ability to achieve our business objectives.
Notwithstanding the foregoing, we may seek additional financing as necessary for
expansion purposes and when we believe market conditions are most advantageous,
which may include additional debt and/or equity financings. There can be no
assurance that any additional financing will be available on acceptable terms,
if at all. Any equity financing may result in dilution to existing stockholders
and any debt financing may include restrictive covenants.



The following table sets forth a summary of our cash flows for the periods
indicated:



                                                                     Three Months Ended
                                                                        September 30,
                                                                   2017              2016
Net cash provided by operating activities                      $  12,095,373$   5,146,213
Net cash used in investing activities                                (17,209 )         (71,470 )
Net cash provided by (used in) financing activities               (1,353,800 )         300,000
Effect of exchange rate change on cash and cash equivalents          134,551          (150,170 )
Net increase in cash and cash equivalents                         10,858,915         5,224,573
Cash and cash equivalents, beginning balance                     123,050,548       102,896,486
Cash and cash equivalents, ending balance                      $ 133,909,463$ 108,121,059




Operating Activities



Net cash provided in operating activities was $12,095,373 for the three months
ended September 30, 2017, an increase of $6,949,140, or 135.0% from cash
provided by operating activities of $5,146,213 for the three months ended
September 30, 2016. The increase was mainly attributable to an increase in
accounts payable, decrease in advances to suppliers and decrease in inventories
during the three months ended September 30, 2017 as compared to the same period
in 2016.



  27






Investing Activities


Net cash used in investing activities for the three months ended September 30,
2017 was $17,209, compared to cash used in investing activities of $71,470 for
the three months ended September 30, 2016. The different was due to Company
purchased less plant, property and equipment during the last three months
compared to the same period last year.



Financing Activities


Net cash used by financing activities for the three months ended September 30,
2017 was $1,353,800, compared to $300,000 net cash provided in financing
activities for the three months ended September 30, 2016, which was largely due
to $3,156,300 in repayment of loans for the three months ended September 30,
2017, compared to $1,499,940 in the same period last year.



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



                             September 30,       June 30,
                                 2017              2017
Short term loans payable:   $     6,327,630$ 7,678,111
Total                       $     6,327,630$ 7,678,111




Accounts Receivable



We had accounts receivable of $103,953,170 as of September 30, 2017, as compared
to $141,665,179 as of June 30, 2017, a decrease of $37,712,009 or 26.6%. The
decrease was primarily attributable to Gufeng's accounts receivable. As of
September 30, 2017, Gufeng's accounts receivable was $24,481,326, a decrease of
$40,682,102 or 62.4% compared to $65,163,428 as of June 30, 2017.



Allowance for doubtful accounts in accounts receivable for the three months
ended September 30, 2017 was $14,124,387, from $9,457,423 as of June 30, 2017.
And the allowance for doubtful accounts as a percentage of accounts receivable
was 12.0% as of September 30, 2017 and 6.3% as of June 30, 2017.



Deferred assets


We had deferred assets of $213,289 as of September 30, 2017, as compared to
$864,070 as of June 30, 2017. During the three months, we assisted the
distributors in certain marketing efforts and developing standard stores to
expand our competitive advantage and market shares. Based on the distributor
agreements, the amount owed by the distributors in certain marketing efforts and
store development will be expensed over three years if the distributors are
actively selling our products. If a distributor defaults, breaches, or
terminates the agreement with us earlier than the contractual terms, the
unamortized portion of the amount owed by the distributor is payable to us
immediately.  The Company's Chairman, Mr. Li, has guaranteed repayment of any
amounts due to the Company remaining unpaid from distributors.



Inventories


We had inventories of $119,601,723 as of September 30, 2017, as compared to
$78,013,891 as of June 30, 2017, an increase of $41,587,823, or 53.3.0%. The
increase was primarily attributable to Jinong's inventory. As of September 30,
2017, Jinong's inventory was $1,213,208, compared to $980,159 as of June 30,
2017.



Advances to Suppliers



We had advances to suppliers of $18,756,906 as of September 30, 2017 as compared
to $24,023,062 as of June 30, 2017, representing a decrease of $5,266,156 or
21.9%. Our inventory level may fluctuate from time to time, depending how
quickly the raw material is consumed and replenished during the production
process, and how soon the finished goods are sold. The replenishment of raw
material relies on management's estimate of numerous factors, including but not
limited to, the raw materials future price, and spot price along with
it volatility, as well as the seasonal demand and future price of finished
fertilizer products. Such estimate may not be accurate, and the purchase
decision of raw materials based on the estimate can cause excessive inventories
in times of slow sales and insufficient inventories in peak times.



  28






Accounts Payable


We had accounts payable of $24,124,592 as of September 30, 2017 as compared to
$19,643,897 as of June 30, 2017, representing an increase of $4,480,695, or
22.8%. The increase was primarily due to the increase of accounts payable for
VIEs. They have accounts payable of $22,774,309 as of September 30, 2017 as
compared to $18,355,921 as of June 30, 2017, representing an increase of
$4,418,388, or 24.1%.



Unearned Revenue (Customer Deposits)

We had customer deposits of $5,849,222 as of September 30, 2017 as compared to
$7,046,570 as of June 30, 2017, representing a decrease of $1,197,348, or 17.0%.
The decrease was mainly attributable to VIE's $275,109 unearned revenue as of
September 30, 2017, compared to $1,375,785 unearned revenue as of June 30, 2017,
caused by the advance deposits made by clients. This decrease was due to
seasonal fluctuation and we expect to deliver products to our customers during
the next three months at which time we will recognize the revenue.



Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

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



Use of estimates



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

Revenue recognition



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



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



Cash and cash equivalents



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



Accounts receivable


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



  29






Deferred assets


Deferred assets represent amounts the Company advanced to the distributors in
their marketing and stores development to expand our competitive advantage and
market shares. Based on the distributor agreements, the amount owed by the
distributors in certain marketing efforts and store development will be expensed
over three years if the distributors are actively selling our products. If a
distributor defaults, breaches, or terminates the agreement with us earlier than
the realization of the contractual terms, the unamortized portion of the amount
owed by the distributor is to be refunded to us immediately. The Company's
Chairman, Mr. Li, has guaranteed repayment of any amounts due to the Company
remaining unpaid from distributors.



Segment reporting



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



As of September 30, 2017, we were organized into eleven main business units:
Jinong (fertilizer production), Gufeng (fertilizer production), Yuxing
(agricultural products production), Lishijie (agriculture sales), Jinyangguang
(agriculture sales), Zhenbai Agri (agriculture sales), Wangtian (agriculture
sales), Xindeguo (agriculture sales), Xinyulei (agriculture sales), Fengnong
(agriculture sales) and Xiangrong (agriculture sales). For financial reporting
purpose, our operations were organized into four main business segments based on
locations and products: Jinong (fertilizer production), Gufeng (fertilizer
production) and Yuxing (agricultural products production) and the sales VIEs.
Each of the segments has its own annual budget regarding development, production
and sales.

© Edgar Online, source Glimpses

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Managers
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Zhuo Yu Li President
Qing Xin Jiang Manager-New Business Development & Operations
Ken Ren CFO & Principal Accounting Officer
Lian Fu Liu Independent Director
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