UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: March 31, 2013

 

or

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

 

For the transition period from ____________ to____________

 

Commission File Number: 333-174874

 

GELTOLOGY INC.

(Exact name of the registrant as specified in its charter)

 

Delaware		35-2379917
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
Room 801, Plaza B, Yonghe Building, No.28 AnDingMen East Street, Dongcheng District, Beijing, China.		Postal Code: 100007
(Address of principal executive offices)		(Zip Code)

 

Phone: +86-10-64097316

Fax: +86-10-64097026

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

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

 

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

 

Large accelerated filer	¨		Accelerated filer	¨
Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller Reporting Company	x

 

 

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

 

Number of shares of common stock outstanding as of May 7, 2013: 127,349,551

 

  

TABLE OF CONTENTS

 

		Page
PART I – FINANCIAL INFORMATION		3
ITEM 1. FINANCIAL STATEMENTS		3
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.		16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		29
ITEM 4. CONTROLS AND PROCEDURES		29
PART II – OTHER INFORMATION		30
ITEM 1. LEGAL PROCEEDINGS		30
ITEM 1A. RISK FACTORS		30
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		30
ITEM 3. DEFAULT UPON SENIOR SECURITIES		30
ITEM 4. MINE SAFETY DISCLOSURES		30
ITEM 5. OTHER INFORMATION		30
ITEM 6. EXHIBITS		30

  

 

PART I– FINANCIAL INFORMATION

 

ITEM 1.    FINANCIAL STATEMENTS

 

 

GELTOLOGY INC.

 

CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2013 AND 2012

 

(UNAUDITED)

  

 

 

GELTOLOGY INC.

Consolidated Financial Statements

March 31, 2013 and 2012

(Unaudited)

 

Table of Contents

 

	Page
Consolidated Balance Sheets	5
Consolidated Statements of Operations and Comprehensive Income	6
Consolidated Statements of Cash Flows	7
Notes to Consolidated Financial Statements	8

 

  

GELTOLOGY INC.

 

Consolidated Balance Sheets

 

		March 31,				September 30,
		2013				2012
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	1,459,236			$	351,045
Restricted cash			-				277,025
Accounts receivable			3,616,144				-
Inventory			2,062,248				3,592,468
Advance payments			436,539				37,699
Prepaid leases - current			2,322,992				1,559,648
Other current assets			30,614				20,679
Total current assets			9,927,773				5,838,564
Property and equipment, net			15,250,923				15,586,175
Other assets:
Intangible assets, net			156,555				157,096
Prepaid leases - non current			17,180,353				11,311,206
Total other assets			17,336,908				11,468,302
Total assets		$	42,515,604			$	32,893,041
Liabilities
Current liabilities:
Accounts payable and accrued expenses		$	609,232			$	559,646
Short-term bank loans			5,426,400				4,163,290
Due to related party			244,146				151,994
Customer deposits			1,532,160				1,393,040
Other current liabilities			181,895				45,709
Total current liabilities			7,993,833				6,313,679
Total liabilities			7,993,833				6,313,679
Stockholders’ Equity
Common stock, $0.0001 par value, 200,000,000 shares authorized 127,349,551 shares issued and outstanding at March 31, 2013 and September 30, 2012, respectively			12,735				12,735
Additional paid-in capital			4,898,429				4,898,429
Statutory reserve			2,803,970				2,079,158
Retained earnings			24,639,788				17,663,566
Accumulated other comprehensive income			2,166,849				1,925,474
Total stockholders’ equity			34,521,771				26,579,362
Total liabilities and stockholders’ equity		$	42,515,604			$	32,893,041

 

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

 

 

GELTOLOGY INC.

 

Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

 

		For the Three Months Ended March 31,								For the Six Months Ended March 31,
		2013				2012				2013				2012
Sales		$	8,377,564			$	8,168,730			$	15,818,241			$	16,073,946
Cost of sales			3,756,622				3,786,857				7,157,230				7,855,976
Gross profit			4,620,942				4,381,873				8,661,011				8,217,970
Operating expenses
Selling expenses			389,885				677,641				786,288				1,057,533
General and administrative expenses			113,065				170,383				325,068				527,309
Total operating expenses			502,950				848,024				1,111,356				1,584,842
Income from operations			4,117,992				3,533,849				7,549,655				6,633,128
Other income:
Government subsidy			144,943				8,132				256,264				59,284
Interest income			5,180				2,561				6,272				4,549
Interest expense			(81,223	)			(89,346	)			(134,000	)			(137,821	)
Other income, net			10,862				12,232				22,843				24,225
Total other income			79,762				(66,421	)			151,379				(49,763	)
Income before provision for income taxes			4,197,754				3,467,428				7,701,034				6,583,365
Provision for income taxes			-				-				-				-
Net income			4,197,754				3,467,428				7,701,034				6,583,365
Other comprehensive income
Foreign currency translation adjustment			180,884				115,907				241,375				287,594
Total comprehensive income		$	4,378,638			$	3,583,335			$	7,942,409			$	6,870,959
Earnings per share:
Basic and diluted		$	0.03			$	0.03			$	0.06			$	0.05
Weighted average number of shares outstanding:
Basic and diluted			127,349,551				125,112,803				127,349,551				125,112,803

 

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

 

 

GELTOLOGY INC.

 

Consolidated Statements of Cash Flows

(Unaudited)

 

		For the Six Months Ended March 31,
		2013				2012
Cash flows from operating activities:
Net Income		$	7,701,034			$	6,583,365
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			550,544				595,272
Prepaid leases amortized in current period			971,353				779,358
Changes in current assets and current liabilities:
Accounts receivable			(3,606,402	)			(3,634,091	)
Inventory			1,555,520				1,721,219
Advance payments			(397,457	)			27,085
Prepaid leases			(7,480,560	)			(9,654,988	)
Other current assets			(9,738	)			(6,251	)
Accounts payable and accrued expenses			46,589				412,485
Customer deposits			127,336				(472,170	)
Other current liabilities			135,444				115,881
Total adjustments			(8,107,371	)			(10,116,200	)
Net cash used in operating activities			(406,337	)			(3,532,835	)
Cash flows from investing activities:
Acquisition of property and equipment			(86,715	)			(91,997	)
Net cash used in investing activities			(86,715	)			(91,997	)
Cash flows from financing activities:
Restricted cash			278,548				(134,377	)
Proceeds from short-term bank loans			5,411,780				3,367,317
Repayment of short-term bank loans			(4,186,171	)			-
Due to related parties			91,245				(23,605	)
Net cash provided by financing activities			1,595,402				3,209,335
Effect of foreign currency translation			5,841				15,808
Net increase in cash and cash equivalents			1,108,191				(399,689	)
Cash and cash equivalents – beginning			351,045				770,267
Cash and cash equivalents – ending		$	1,459,236			$	370,578
Supplemental disclosure of cash flow information:
Cash paid for interest		$	134,000			$	137,821
Cash paid for income taxes		$	-			$	72,142

 

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

 

 

GELTOLOGY INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1 – Organization and Nature of Business

 

Geltology Inc. (“Gelt”) was established under the laws of the State of Delaware on March 24, 2010. The accompanying consolidated financial statements include the financial statements of Geltology Inc. and its subsidiaries (collectively, the “Company”). The Company is primarily engaged in planting, preserving, packaging and marketing premium navel oranges for distribution and sale throughout the People’s Republic of China (“PRC”).

 

On July 11, 2012, Gelt completed a reverse acquisition of General Red Holding, Inc. (“GRH”), which was established under the laws of the State of Delaware on January 18, 2011. To accomplish the Share Exchange Agreement, Gelt issued to GRH an aggregate of 125,112,803 shares of the common stock of Gelt, at par value of $0.0001 per share. Gelt was delivered with zero assets and zero liabilities at time of closing. Immediately prior to the Share Exchange, Gelt had 6,750,000 shares of Common Stock issued and outstanding. Simultaneously with the transaction, the two principal shareholders of Gelt surrendered for cancellation an aggregate of 4,513,252 shares of Common Stock beneficially owned by them. The transaction was regarded as a reverse merger whereby GRH was considered to be the accounting acquirer. Although the Company is the legal parent company, the share exchange was treated as a recapitalization of GRH. Thus, GRH is the continuing entity for financial reporting purposes. The financial statements have been prepared as if GRH had always been the reporting company and then on the share exchange date, had reorganized its capital stock.

 

On September 30, 2011, GRH entered into a Share Transfer and Issuance Agreement (the “Agreement”) with Han Glory International Investment Limited (“Han Glory International”), a company incorporated on April 28, 2011 under the laws of British Virgin Islands and Hua Mei Investments Limited (“Hua Mei”), a company incorporated on April 26, 2011 under the laws of the British Virgin Islands. Under the Agreement, GRH issued 74,814,862 shares to Hua Mei, the sole stockholder of Han Glory International, in exchange for all shares and beneficial interest of Han Glory International. This transaction is treated as a reverse merger, and therefore, after the share exchange, Han Glory International became the wholly owned subsidiary of GRH.

 

On May 18, 2011, Han Glory International purchased all shares of Greater China International Investment Limited (“Greater China International”), a company incorporated on December 4, 2009 under the laws of Hong Kong, from Zhihao Zhang, the sole stockholder of Greater China International, for $1,290 (HK$10,000). As a result, Greater China International became the wholly owned subsidiary of Han Glory International.

 

On January 13, 2010, Greater China International formed Nanchang Hanxin Agriculture Technology Co., Ltd, a wholly foreign-owned enterprise (“WFOE”) in the city of Nanchang, Jiangxi Province, the People’s Republic of China (“PRC”).

 

On February 5, 2010, WFOE purchased all shares of Xingguo General Fruit Industry Development Co., Ltd (“General Fruit”) from Jiangjun Hong Group Co., Ltd., Xingping Hou and Jiefeng Ren for $293,400. As a result, WFOE acquired 100% interest in General Fruit. This transaction was a capital transaction in substance. That is, the transaction was a reverse recapitalization, equivalent to the issuance of stock by General Fruit for the net monetary assets of WFOE accompanied by a recapitalization.

 

General Fruit was formed in Xingguo County, Jiangxi Province, under the corporate laws of PRC on March 5, 2003. The primary business of General Fruits is to grow and sell navel oranges. On July 14, 2008, after a series of equity transfer agreements, General Fruits acquired 90% interest in Xingguo General Red Navel Orange Preservation Company, Ltd. (“General Preservation”). On July 25, 2010, General Fruits purchased the remaining 10% interest in General Preservation from Xingping Hou, the minority stockholder, for $295,000 (RMB 2,000,000) and owns 100% of General Preservation thereafter.

 

General Preservation, a citrus fruits company primarily engaged in preserving, packaging and marketing premium navel oranges, was formed as a limited liability company in Xingguo County, Jiangxi Province under PRC laws on November 22, 2005. General Preservation provides wholesale, retail, and institutional customers in China and several other countries with premium navel orange fruits under the trademark of “General Red”.

 

 

GELTOLOGY INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1 – Organization and Nature of Business (continued)

 

On September 26, 2011, GRH purchased all shares of Sheng Da Holding Limited (“Sheng Da BVI”), a company incorporated on May 18, 2011 under the laws of the British Virgin Islands, from General Red Company, Ltd (“General Red BVI”), a limited liability company incorporated on August 28, 2008 under the laws of British Virgin Islands, for $23,000. As a result, Sheng Da BVI became the wholly owned subsidiary of GRH. On September 29, 2011, Sheng Da BVI entered into a series of new agreements to terminate the old agreements with General Preservation, which were originally signed between General Red BVI and General Preservation on November 17, 2008, amended on June 10, 2011, and transferred to Sheng Da BVI by General Red BVI on June 30, 2011. The old agreements included a Consultation Agreement, an Operating Agreement, a Share Pledge Agreement, a Proxy Agreement and an Option Agreement. Upon the entry of these new agreements, General Preservation is no longer the Variable Interest Entity of Sheng Da BVI.

 

Note 2 – Summary of Significant Accounting Policies

 

Basis Of Presentation and Consolidation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United Stated of America (“US GAAP”). The consolidated financial statements include the accounts of Gelt and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited financial statements have been prepared in accordance with US GAAP applicable to interim financial information and the requirements of Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by US GAAP for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included.

 

In preparing the accompanying consolidated financial statements, the Company evaluated the period from March 31, 2013 through the date the financial statements were issued for material subsequent events requiring recognition or disclosure. No such events were identified for this period.

 

Interim Financial Statements

 

These interim financial statements should be read in conjunction with the audited consolidated financial statements for the transition period ended September 30, 2012, as not all disclosures required by US GAAP for transition period financial statements are presented. The consolidated interim financial statements follow the same accounting policies and method of computations as the audited financial statements for the transition period ended September 30, 2012.

 

Change In Fiscal Year

 

On September 28, 2012, the Company’s board of directors approved a change in fiscal year-end from December 31 to September 30. The fiscal year-end change became effective September 30, 2012 and thus resulted in a nine months transition period from December 31, 2011 through September 30, 2012. Accordingly, the financial statements and financial comparisons included in Form 10-Q relate to the six months ended March 31, 2013 and 2012 and the financial results for the six months ended March 31, 2012 have been recast to allow for comparison based on the new fiscal periods.

 

Seasonal Nature of Operations

 

The Company’s operations are seasonal based on the maturity stage of its products. Sales are concentrated during the months from October through December and from January through March, corresponding to the Company’s product maturity cycle which begins in the month of October when the products mature and are ready for sale.

 

 

GELTOLOGY INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 3 – Accounts Receivable

 

Trade accounts receivable are stated at original invoice amount less allowance for doubtful receivables based on management’s periodic review of aging of outstanding balances and customer credit history. As of March 31, 2013 and September 30, 2012, no allowance was deemed necessary as all receivables were aged less than six months.

 

Note 4 – Inventory

 

Inventories as of March 31, 2013 and September 30, 2012 by major categories are summarized as follows:

 

		March 31, 2013				September 30, 2012
Raw materials		$	495,778			$	143,651
Work in process			1,286,453				3,448,817
Finished goods			280,017				-
Total		$	2,062,248			$	3,592,468

 

Work in process consists of depreciation of navel orange orchards, rental, salary, fertilizer, utility, labor spent in cultivating and producing navel oranges. Work in process is posted to finished goods after the navel oranges are harvested. The harvest season of navel oranges usually started in October.

 

Note 5 – Advance Payments

 

Advance payments as of March 31, 2013 and September 30, 2012 consist of the following:

 

		March 31, 2013				September 30, 2012
Advances to suppliers		$	432,191			$	-
Others			4,348				37,699
Total		$	436,539			$	37,699

 

Upon execution of purchase contracts with local farmer collectives, as a measure to secure title in the navel oranges to be purchased, the Company usually makes an advance payment equivalent to approximately 10% to 20% of the total contract price. Between the signing dates and the navel orange delivery dates, the Company usually makes additional advances to encourage prompt delivery from local farmers. Upon receipt of navel oranges, these advance payments are applied against related invoices. As of March 31, 2013, approximately RMB 2,735,207 ($436,539) has been advanced to local farmer collectives. As of September 30, 2012, the Company had made no advance payments for purchases of navel oranges as the Company’s operating cycle starts from October to March of the following year.

 

Note 6 – Property and Equipment

 

Property and equipment as of March 31, 2013 and September 30, 2012 consist of the following:

 

		March 31, 2013				September 30, 2012
Electronic equipment		$	101,217			$	110,100
Vehicles			318,775				316,178
Machinery and equipment			2,041,255				2,004,449
Buildings and improvements			7,593,843				7,462,284
Navel orange orchards			10,401,435				10,316,711
Subtotal			20,456,525				20,209,722
Less: Accumulated depreciation			5,494,926				4,904,449
			14,961,599				15,305,273
Add: Construction in progress			289,324				280,902
Total		$	15,250,923			$	15,586,175

 

Depreciation expense was $274,663 and $265,329 for the three months ended March 31, 2013 and 2012, respectively, and $548,718 and $593,458 for the six months ended March 31, 2013 and 2012, respectively.

 

 

GELTOLOGY INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 7 – Intangible Assets

 

Intangible assets as of March 31, 2013 and September 30, 2012 consist of the following:

 

		March 31, 2013				September 30, 2012
Land use rights		$	183,105			$	181,613
Less: Accumulated amortization			26,550				24,517
Total		$	156,555			$	157,096

 

Amortization expense was $914 and $911 for the three months ended March 31, 2013 and 2012, respectively, and $1,826 and $1,814 for the six months ended March 31, 2013 and 2012, respectively.

 

Note 8 – Prepaid Leases

 

Prepaid leases as of March 31, 2013 and September 30, 2012 consist of the following:

 

		March 31, 2013				September 30, 2012
Current		$	2,322,992			$	1,559,648
Non current			17,180,353				11,311,206
Total		$	19,503,345			$	12,870,854

 

On April 1, 2011, General Fruit entered into lease contracts with a group of individual orchard owners, pursuant to which General Fruit was authorized to operate the orchards for 10 years starting January 1, 2011. The lease terms are effective from January 1, 2011 through December 31, 2020. The aggregate lease amount is approximately RMB 98,524,800 ($15,507,803) and pursuant to the contract terms, as of September 30, 2012, the Company paid off the entire lease amount using cash generated from operations.

 

On December 30, 2012 and January 1, 2013, General Fruit entered into lease contracts with a group of individual orchard owners, pursuant to which General Fruit was authorized to operate the orchards for 10 years starting January 1, 2013. The lease terms are effective from January 1, 2013 through December 31, 2022. The aggregate lease amount is approximately RMB 46,997,300 ($7,453,772) and pursuant to the contract terms, as of March 31, 2013, the Company paid off the entire lease amount using cash generated from operations.

 

These leases are accounted for as operating leases in accordance with FASB ASC 840-20 and the aggregate lease amounts will be expensed each year on a straight-line basis over the lease terms. Lease expense was approximately $579,529 and $391,688 for the three months ended March 31, 2013 and 2012, respectively, and approximately $971,353 and $779,358 for the six months ended March 31, 2013 and 2012, respectively.

 

Lease expense attributable to future periods is as follows:

 

Twelve months ended September 30:
2013		$	1,561,815
2014			1,561,815
2015			1,561,815
2016			1,561,815
2017			1,561,815
Thereafter			5,061,779
		$	12,870,854

 

 

GELTOLOGY INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 9 – Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses as of March 31, 2013 and September 30, 2012 consist of the following:

 

		March 31, 2013				September 30, 2012
Accounts payable		$	431,826			$	333,444
Accrued expenses			177,406				226,202
Total		$	609,232			$	559,646

 

The carrying value of accounts payable and accrued expenses approximates their fair value due to the short-term nature of these obligations.

 

Note 10 – Customer Deposits

 

As of March 31, 2013 and September 30, 2012, the Company had customer deposits of $1,532,160 and $1,393,040, respectively. Based on the sales contract, the Company’s sales distributors are required to make security deposits. These deposits are non interest bearing.

 

Note 11 – Short-Term Bank Loans

 

Short-term bank loans as of March 31, 2013 and September 30, 2012 consist of the following:

 

		March 31,				September 30,
		2013				2012
On November 17, 2011, the Company obtained a loan from Agricultural Development Bank of China, the principal of which was repaid in full on November 16, 2012. The interest was calculated using an annual fixed interest rate of 6.56% and paid monthly. The loan was secured by the Company’s property.		$	-			$	4,163,290
On November 30, 2012 and December 21, 2012, the Company obtained a loan from Agricultural Development Bank of China, the principal of which will be repaid on November 19, 2013. The interest was calculated using an annual fixed interest rate of 6.00% and paid monthly. The loan was secured by the Company’s property and equipment and guaranteed by the CEO.		$	5,426,400			$	-
Total		$	5,426,400			$	4,163,290

 

Note 12 – Due to Related Party

 

As of March 31, 2013 and September 30, 2012, the Company had outstanding debts from a related party, Hua Mei Investments Limited (“Hua Mei”), of $244,146 and $151,994, respectively.

 

These debts are non-interest bearing and payable on demand. The proceeds of these debts were utilized as working capital. During the nine months period ended September 30, 2012, Hua Mei and the Company entered into an agreement to convert a debt in the amount of $307,720, owed to Greater China International to equity. Pursuant to the agreement, the additional paid in capital of the Company increased to $4,898,429 after the conversion.

 

 

GELTOLOGY INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 13 – Income Taxes

 

The Company is a Delaware corporation and conducts all of its business through its Chinese subsidiaries, which operate in the PRC only. The Company’s U.S. holding company does not generate any U.S. income and accordingly there is no provision or benefit for U.S. income tax purposes.

 

Han Glory International is not subject to tax on income or capital gains under the laws of British Virgin Islands.

 

Under the Corporate Income Tax Law of the PRC, the corporate income tax rate is 25%. However, as an agricultural company engaged in cultivation, General Fruit has been approved for tax exemption since its formation. General Preservation was also approved for such exemption from income tax for the years 2011 and 2012. As a result, for the six months ended March 31, 2013 and 2012, there was no income tax provision for the Company.

 

Note 14 – Stock Authorization and Issuance

 

On July 11, 2012, the Company entered into a Share Exchange Agreement with General Red Holding, Inc., another Delaware company (“GRH”) and acquired all of the outstanding capital stock of GRH. In connection with the Share Exchange Agreement, the Company issued to GRH an aggregate of 125,112,803 shares of the common stock of the Company, at par value of $0.0001 per share. Immediately prior to the Share Exchange, the Company had 6,750,000 shares of Common Stock issued and outstanding. In connection with the transaction, the two principal shareholders of the Company surrendered for cancellation an aggregate of 4,513,252 shares of Common Stock beneficially owned by them.

 

Note 15 – Statutory Reserve

 

The Company is required to make appropriations to statutory reserve, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (the “PRC GAAP”). Appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the entities’ registered capital. For the six months ended March 31, 2013, for the nine months ended September 30, 2012 and for the twelve months ended December 31, 2011 and 2010, statutory reserve activity was as follows:

 

Balance – December 31, 2010		$	968,127
Addition to statutory reserve			793,915
Balance – December 31, 2011			1,762,042
Addition to statutory reserve			317,116
Balance – September 30, 2012			2,079,158
Addition to statutory reserve			724,812
Balance – March 31, 2013		$	2,803,970

 

Note 16 – Government Subsidy Income

 

The Company obtained government subsidy in cash from local governments, such as bank loan interest discount and eco-irrigation subsidy. The amount obtained each year differed. For the six months ended March 31, 2013 and 2012, the government subsidy received was $256,264 and $59,284, respectively.

 

 

GELTOLOGY INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 17 – Earnings Per Share

 

The Company reports earnings per share in accordance with the provisions of the FASB’s related accounting standard. This standard requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution, but includes vested restricted stocks and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.

 

The following is a reconciliation of the basic and diluted earnings per share computation:

 

		For the Three Months Ended March 31,
		2013				2012
Net income		$	4,197,754			$	3,467,428
Weighted average common shares (denominator for basic earnings per share)			127,349,551				125,112,803
Effect of diluted securities:			-				-
Weighted average common shares (denominator for diluted earnings per share)			127,349,551				125,112,803
Basic earnings per share		$	0.03			$	0.03
Diluted earnings per share		$	0.03			$	0.03

 

		For the Six Months Ended March 31,
		2013				2012
Net income		$	7,701,034			$	6,583,365
Weighted average common shares (denominator for basic earnings per share)			127,349,551				125,112,803
Effect of diluted securities:			-				-
Weighted average common shares (denominator for diluted earnings per share)			127,349,551				125,112,803
Basic earnings per share		$	0.06			$	0.05
Diluted earnings per share		$	0.06			$	0.05

 

Note 18 – Risk Factors

 

The Company's operations are carried out 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 as well as by the general state of the PRC’s economy. The Company's business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

Note 19 – Risk of Concentration and Credit Risk

 

For the six months ended March 31, 2013, four vendors accounted for approximately 63% of the Company’s raw materials, while for the six months ended March 31, 2012, four vendors accounted for approximately 72% of the Company’s raw materials. Purchases from these vendors were $2,020,410 and $3,180,326 for the six months ended March 31, 2013 and 2012, respectively.

 

 

GELTOLOGY INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 19 – Risk of Concentration and Credit Risk (continued)

 

For the six months ended March 31, 2013, two customers accounted for $3,079,638 in sales, or approximately 20% of the Company’s total sales. For the six months ended March 31, 2012, no single customer accounted for more than 10% of the Company’s total sales.

  

  

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion of the financial condition and results of operation of Geltology Inc. for the three and six months ended March 31, 2013 and March 31, 2012 should be read in conjunction with the selected consolidated financial data, the financial statements and the notes to those statements that are included elsewhere in this Quarterly Report on Form 10-Q (the “ Report”). In addition to historical information, the following discussion contains certain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as “may”, “will”, “could”, “expect”, “anticipate”, “intend”, “believe”, “estimate”, “plan”, “predict”, and similar terms or terminology, or the negative of such terms or other comparable terminology. Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bound of our knowledge of our business, our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of the Company's Transition Report on Form 10-KT filed with the SEC on December 28, 2012. We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future.

 

Our financial statements are prepared in U.S. Dollars and in accordance with accounting principles generally accepted in the United States. See “Critical Accounting Policies and Estimates - Foreign currency translation” below for information concerning the exchanges rates at which Renminbi were translated into U.S. Dollars at various pertinent dates and for pertinent periods. In this Report, references to “we”, “our”, “us”, the “Company” or the “Registrant” refer to Geltology Inc., a Delaware corporation, and its subsidiaries and affiliated companies.

 

COMPANY OVERVIEW

 

Getlology Inc. (“GELT”) was incorporated under the laws of the State of Delaware on March 24, 2010. The accompanying consolidated financial statements include the financial statements of Geltology, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). The Company is primarily engaged in planting, preserving, packaging and marketing premium navel oranges for distribution and sale throughout the People’s Republic of China (“PRC”).

 

On July 11, 2012, GELT completed a reverse acquisition of General Red Holding, Inc. (“GRH”), which was established under the laws of the State of Delaware on January 18, 2011, entered into a share exchange agreement (the “Exchange Agreement”) with GRH and acquired all of the outstanding capital stock of GRH. Pursuant to the Exchange Agreement, GELT issued to GRH an aggregate of 125,112,803 shares of the common stock of GELT, at par value of $0.0001 per share (“Common Stock”) (such transaction is hereinafter referred to as the “Share Exchange”). GELT was delivered with zero assets and zero liabilities at time of closing.

 

 

Immediately prior to the Share Exchange, GELT had 6,750,000 shares of Common Stock issued and outstanding. Simultaneously with the transaction, the two principal shareholders of GELT surrendered for cancellation an aggregate of 4,513,252 shares of Common Stock beneficially owned by them. The transaction was regarded as a reverse merger whereby GRH was considered to be the accounting acquirer. Although the Company is the legal parent company, the share exchange was treated as a recapitalization of GRH. Thus, GRH is the continuing entity for financial reporting purposes. The financial statements have been prepared as if GRH had always been the reporting company and then on the share exchange date, had reorganized its capital stock.

 

Upon completion of the Share Exchange, the shareholders of GELT owned approximately 98.24% of the fully diluted outstanding shares of the Company prior to the issuance of the shares to the investors. Accordingly, GRH became the wholly owned subsidiary of GELT.

 

On September 30, 2011, GRH entered into an Agreement and Plan of Reorganization with Han Glory International Investment Limited (“Han Glory International”), a company incorporated on April 28, 2011 under the laws of British Virgin Islands and Hua Mei Investments Limited (“Hua Mei”), a company incorporated on April 26, 2011 under the laws of the British Virgin Islands. Under the agreement, GRH issued 74,814,862 shares to Hua Mei, the sole stockholder of Han Glory International, in exchange for all shares and beneficial interest of Han Glory International. This transaction is treated as a reverse merger, and therefore, after the share exchange, Han Glory International became the wholly owned subsidiary of GRH.

 

On May 18, 2011, Han Glory International purchased all shares of Greater China International Investment Limited (“Greater China International”), a company incorporated on December 4, 2009 under the laws of Hong Kong, from Zhihao Zhang, the sole stockholder of Greater China International, for $1,290 (HK$10,000). As a result, Greater China International became the wholly owned subsidiary of Han Glory International.

 

On January 13, 2010, Greater China International formed Nanchang Hanxin Agriculture Technology Co., Ltd (“WFOE”) in the city of Nanchang, Jiangxi Province, the PRC.

 

On February 5, 2010, WFOE purchased all shares of Xingguo General Fruit Industry Development Co., Ltd (“General Fruit”) from Jiangjun Hong Group Co., Ltd., Xingping Hou and Jiefeng Ren for $293,400. As a result, WFOE acquired 100% interest in General Fruit. This transaction was a capital transaction in substance. That is, the transaction was a reverse recapitalization, equivalent to the issuance of stock by General Fruit for the net monetary assets of WFOE accompanied by a recapitalization.

 

 

General Fruit was formed in Xingguo County, Jiangxi Province, under the corporate laws of the PRC. On March 5, 2003. The primary business of General Fruit is to grow and sell navel oranges. On July 14, 2008, after a series of equity transfer agreements, General Fruit acquired 90% interest in Xingguo General Red Navel Orange Preservation Company, Ltd. (“General Preservation”). On July 25, 2010, General Fruit purchased the remaining 10% interest in General Preservation from Xingping Hou, the minority stockholder, for $295,000 (RMB 2,000,000) and owns 100% of General Preservation thereafter.

 

General Preservation, a citrus fruits company primarily engaged in preserving, packaging and marketing premium navel oranges, was formed as a limited liability company in Xingguo County, Jiangxi Province under PRC laws on November 22, 2005. General Preservation provides wholesale, retail, and institutional customers in China and several other countries with premium navel orange fruits under the trademark of “General Red”.

 

On September 26, 2011, GRH purchased all shares of Sheng Da Holding Limited (“Sheng Da BVI”), a company incorporated on May 18, 2011 under the laws of the British Virgin Islands, from General Red Company, Ltd (“General Red BVI”), a limited liability company incorporated on August 28, 2008 under the laws of British Virgin Islands, for $23,000. As a result, Sheng Da BVI became the wholly owned subsidiary of GRH. On September 29, 2011, Sheng Da BVI entered into a series of new agreements to terminate the old agreements with General Preservation, which were originally signed between General Red BVI and General Preservation on November 17, 2008, amended on June 10, 2011, and transferred to Sheng Da BVI by General Red BVI on June 30, 2011. The old agreements included a Consultation Agreement, an Operating Agreement, a Share Pledge Agreement, a Proxy Agreement and an Option Agreement. Upon the entry of these new agreements, General Preservation is no longer the Variable Interest Entity of Sheng Da BVI.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, inventories, recovery of long-lived assets, income taxes, and the valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements.

 

 

While our significant accounting policies are fully described in Note 2 to our consolidated financial statements forthree and six months ended March 31, 2013 and 2012, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management’s discussion and analysis.

 

Variable interest entities

 

The accounting standards require a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which we, through contractual arrangements, bear the risk of, and enjoy the rewards normally associated with ownership of the entity, and therefore we are the primary beneficiary of the entity. On September 29, 2011, Sheng Da BVI entered into a series of new agreements to terminate the VIE agreements.

 

Seasonal nature of operations

 

Typically the first (April to June) and fourth (January to March) quarters of our fiscal year are better in terms of profitability because of the maturity stage of the Company's products, which is usually from the month of October to March in the next year.

 

Accounts receivable

 

We have a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in our existing accounts receivable. We periodically review our accounts receivable and other receivables to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

 

As a basis for accurately estimating the likelihood of collection has been established, we consider a number of factors when determining reserves for uncollectable accounts. We believe that we use a reasonably reliable methodology to estimate the collectability of our accounts receivable. We review our allowances for doubtful accounts on at least a quarterly basis. We also consider whether the historical economic conditions are comparable to current economic conditions. If the financial condition of our customers or other parties with which we have business were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

 

 

Inventories

 

Inventories, consisting of raw materials, work in process and finished goods related to our products are stated at the lower of cost or market utilizing the weighted average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, we will record additional reserves for the difference between the cost and the market value. These reserves are recorded based on estimates. We review inventory quantities on hand and on order and record, on a quarterly basis, a provision for excess and obsolete inventory, if necessary. If the results of the review determine that a write-down is necessary, we recognize a loss in the period in which the loss is identified, whether or not the inventory is retained. Our inventory reserves establish a new cost basis for inventory and are not reversed until we sell or dispose of the related inventory. Such provisions are established based on historical usage, adjusted for known changes in demands for such products, or the estimated forecast of product demand and production requirements.

 

Property and equipment

 

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets are as follows:

 

	Estimated Useful Life
Electronic equipment	5 years
Vehicles	10 years
Machinery and equipment	5-15 years
Buildings and improvements	5-20 years
Navel orange orchards	11-30 years

   

Revenue recognition

 

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. The Company recognizes revenues from the sale of navel oranges upon shipment and transfer of title.

 

Foreign currency translation

 

The Company has evaluated the determination of its functional currency based on the guidance in ASC Topic, “Foreign Currency Matters,” which provides that an entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash.

 

On its own, the Company raises financing in the U.S. dollar, pays its own operating expenses primarily in the U.S. dollar, paid dividends to its shareholders of common stock and expects to receive any dividends that may be declared by its subsidiaries in U.S. dollars.

 

 

Therefore, it has been determined that the Company’s functional currency is the U.S. dollar based on the expense and financing indicators, in accordance with the guidance in ASC 830-10-85-5.

 

The Company uses United States dollars (“U.S. Dollar” or “US$” or “$”) for financial reporting purposes. The subsidiaries within the Company maintain their books and records in Renminbi (“RMB”), the currency of the currency of China, the economic environment in which the Company’s primary subsidiaries conduct their operations. Assets and liabilities of the subsidiaries in RMB are translated into U.S. Dollars using the applicable exchange rates prevailing at the balance sheet date. Items on the statements of operations and comprehensive income and cash flows are translated at average exchange rates during the reporting period. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the Company’s financial statements are recorded as accumulated other comprehensive income.

 

Results of Operations for the Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012 and the Six Months Ended March 31, 2013 Compared to the Six Months Ended March 31, 2012.

 

Revenues.

 

For the three months ended March 31, 2013, we had net revenues of $8,377,564, as compared to net revenues of $8,168,730 for the three months ended March 31, 2012, an increase of approximately $208,834 or 2.6%. The increase in net revenues was primarily attributable to an increase in sales volume and an increase in our sales prices. The navel orange harvest season usually starts in early October. However, due to a variety of factors such as local weather, the maturity dates of navel oranges in Jiangxi Province were delayed for approximately ten days in the 2012 harvest season. Correspondingly, our navel orange harvest dates and sales delivery dates were delayed for approximately ten days. As a result, the sales reflected in the three months ended March 31, 2013 increased by 2.6% as compared to the three months ended March 31, 2012. On the other hand, as Jiangxi navel oranges have gained brand recognition among Chinese consumers, the navel orange market has become more favorable. The sale price per kg increased from $0.81 to $0.82 period over period.

 

Our sales volume increased by approximately 1.3% for the three months ended March 31, 2013, while the average sales price per kg increased by approximately 1.2%, as shown below:

 

Three months ended		Sales Volume (in KG)				Sale Price Per KG (in US$)				Total Sales  Revenue
March 31, 2013			10,216,541				0.82				8,377,564
March 31, 2012			10,084,851				0.81				8,168,730
Variance			131,690				0.01				208,834
% Variance			1.3	%			1.2	%			2.6	%

 

 

For the six months ended March 31, 2013, we had net revenues of $15,818,241, as compared to net revenues of $16,073,946 for the six months ended March 31, 2012, a decrease of approximately $255,705 or 1.6%. The decrease in net revenues was primarily attributable to a decrease in the total sales volume for the six months ended March 31, 2013 as compared to the six months ended March 31, 2012.

  

Six months ended		Sales Volume (in KG)				Sale Price Per KG (in US$)				Total Sales  Revenue
March 31, 2013			20,023,090				0.79				15,818,241
March 31, 2012			20,875,255				0.77				16,073,946
Variance			(852,165	)			0.02				255,705	)
% Variance			(4.1	)			2.6	%			(1.6	%)

 

Cost of sales.

 

Cost of sales decreased by $30,235, or 0.8%, from $3,786,857 for the three months ended March 31, 2012 to $3,756,622 for the three months ended March 31, 2013, as a result of a 1.4% increase in sales volume and cost reductions attributable to our increased cultivation of orange groves. Although the labor cost and prices we paid to our suppliers continued to increase, we were able to lower our costs by turning to more self-cultivation, which usually costs less than direct purchases of navel oranges. 

 

Cost of sales decreased by $698,746, or 0.9%, from $7,855,976 for the six months ended March 31, 2012 to $ 7,157,230 for the six months ended March 31, 2013.

 

Gross profit and gross margin. Our gross profit was $4,620,942 for the three months ended March 31, 2013 as compared to $4,381,873 for the three months ended March 31, 2012, representing a gross margin of 55% and 53.6%, respectively. The increase in our gross profit margin for the three months ended March 31, 2013 was mainly attributable to the increase of sales volume, the increase in sales price per kg and the decrease of our cost of sales during the three months ended March 31, 2013.

 

For the six months ended March 31, 2013, our gross profit was $8,661,011 as compared to $8,217,970 for the six months ended March 31, 2012; representing a gross margin of 55% and 51%, respectively. Although the total sales volume decreased for the six months ended March 31, 2013, our gross margin still increased because of the increase of sales price per kg and the decrease of cost of sales during the six months ended March 31, 2013.

 

 

Selling expenses.

 

Selling expenses were $389,885 and $677,641 for the three months ended March 31, 2013 and 2012, respectively. Selling expenses consisted of the following:

 

		For the three months ended				For the three months ended
		March 31, 2013				March 31, 2012				Increase/decrease
Shipping and handling		$	362,957			$	632,106				(42.6	)%
Compensations and related benefits			16,036				22,584				(29	)%
Advertising and promotion			10,892				17,268				(37	)%
Others			0				5,683				(100	)%
Total		$	389,885			$	677,641				(42	)%
Selling expense as % of revenues			4.7	%			8.3	%

 

Shipping and handling expenses decreased by $269,149 or 42.6%, as a result ofthe decrease in shipping volume.

 

Compensation and related benefits decreased by $6,548, or 29%, in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, due tothe implementation of automated planting starting in October 2012. 

 

Advertising and promotion expense decreased by $6,376 or 37%, as a result of the down-sizing of our marketing campaign in the three months ended March 31, 2013.

 

Other expense mainly includes customer entertainment, vehicle maintenance and miscellaneous office expenses.

 

Selling expenses were $786,288 and $1,057,533 for the six months ended March 31, 2013 and 2012, respectively. Selling expenses consisted of the following:

 

		For the six months ended				For the six months ended
		March 31, 2013				March 31, 2012				Increase/decrease
Shipping and handling		$	726,902			$	1,005,368				(28	)%
Compensations and related benefits			26,983				21,226				27	%
Advertising and promotion			28,042				25,256				11	%
Others			4,361				5,683				(23	)%
Total		$	786,288			$	1,057,533				(26	)%
Selling expense as % of revenues			5	%			6.6	%

 

Shipping and handling expenses decreased by $278,466 or 28 %, as a result, by the decrease in shipping volume..

 

Compensation and related benefits increased by $5,757, or 27%, in the six months ended March 31, 2013 compared to the six months ended March 31, 2012, due to the expansion of our sales force beginning in October 2012.

 

 

Advertising and promotion expense increased by $2,786 or 11%, as a result of the increase of the investment in our marketing campaign during the three months ended December 31, 2012 (although the investment in our marketing campaign decreased in the three months ended March 31, 2013).

 

Other expense mainly includes customer entertainment, vehicle maintenance and miscellaneous office expenses.

 

General and administrative expenses. General and administrative expenses amounted to $113,065 for the three months ended March 31, 2013, as compared to $170,383 for the same period in 2012, a decrease of $57,318 or 33.6%. General and administrative expenses consisted of the following:

 

		For the three months ended				For the three months ended
		March  31, 2013				March  31, 2012				Increase/decrease
Compensation and related benefits		$	70,112			$	80,935				(13	)%
Depreciation			23,604				25,746				(8	)%
Professional service							21,562				(100	)%
Office expense			12,268				21.040				(41	)%
Amortization of land use right			1,748								100	%
Other			5,333				21,100				(75	)%
Total		$	113,065			$	170,383				(33.6	)%
G&A expense as % of revenues			1.3	%			2	%

 

Compensation and related benefits decreased by $10,823 or13%, mainly because in October 2012, we laid off certain staff in our purchasing department and certain related supporting staff 

Depreciation expense decreased by $2,142, or 8%, in the three months ended March 31, 2013, as compared to the same period in 2012. The decrease was primarily due to within March 31,2013, some fixed assets have been finished the depreciation process in accounting period.

 

Professional service fees decreased by $21,562 mainly due to the decrease in the audit and legal fees.

 

Office expense decreased by $8,772, or 41%, in the three months ended March 31, 2013, as compared to the same period in 2012, as our Hanxin Agriculture, located in Nanchang, Jiangxi Province was able to cut down its office expense.

 

 

Amortization of land use right increased by $1,748, or 100%, in the three months ended March 31, 2013, as compared to the same period in 2012, due to the collective leases of the navel orange tree from local farmers in Jiangxi Province in 2013.

 

Other general and administrative expenses mainly include customer entertainment, utilities, repairs, telecommunication, insurance and certain low-value miscellaneous items. Their amounts varied period over period due to different circumstances.

 

General and administrative expenses amounted to $325,068 for the six months ended March 31, 2013, as compared to $527,309 for the same period in 2012, a decrease of $202,241 or 38%. General and administrative expenses consisted of the following:

 

		For the six months ended				For the six months ended
		March  31, 2013				March  31, 2012				Increase/decrease
Compensation and related benefits		$	144,980			$	320,567				(55	)%
Depreciation			67,893				42,940				58	%
Professional service			15,141				41,051				(63	)%
Office expense			41,516				48,602				(15	)%
Amortization of land use right			2,253				0				100	%
Tax			21,344				0				100	%
Other			31.941				74,149				(57	)%
Total		$	325,068			$	527,309				(38	)%
G&A expense as % of revenues			2.1	%			3.3	%

 

Compensation and related benefits decreased by $175,587 or55%, mainly because in October 2012, we laid off certain staff in our purchasing department and certain related supporting staff.

 

Depreciation expense increased by $24,953, or 58%, in the six months ended March 31, 2013, as compared to the same period in 2012. The increase was primarily due to the completion of construction of our Plastic Sorting Workshop worth approximately $132,000 and the addition of certain equipment in December 2011, for which we started to record depreciation of workshop and equipment in 2012. 

 

Professional service fees decreased by $25,910 mainly due to the decrease in audit and legal fees..

 

 

Office expense decreased by $7,086, or 15 %, in the three months ended March 31, 2013, as compared to the same period in 2012, as our Hanxin Agriculture, located in Nanchang, Jiangxi Province was able to cut down its office expense.

 

Amortization of land use right increased by $2,253, or 100%, in the three months ended March 31, 2013, as compared to the same period in 2012, due to the collective leases of the navel orange tree from local farmers in Jiangxi Province in 2013.

 

Tax expense mainly includes property tax and kept constant period over period.

 

Other general and administrative expenses mainly include customer entertainment, utilities, repairs, telecommunication, insurance and certain low-value miscellaneous items. Their amounts varied period over period due to different circumstances.

 

Income from operations. For the three months ended March 31, 2013, income from operations was $4,117,992, as compared to $3,533,849 for the three months ended March 31, 2012, an increase of $584,143 or 16.5%.

 

For the six months ended March 31, 2013, income from operations was $7,549,655, as compared to $6,633,128 for the six months ended March 31, 2012, an increase of $916,527 or 13.8%.

 

Other income (expenses). For the three months ended March 31, 2013, other income amounted to $79,762 as compared to other expense of $66,421 for the same period in 2012. For the three months ended March 31, 2013 and 2012, other income (expense) mainly included: (i) interest expense, which decreased by $8,123 or 9% period over period due to a decrease in the average balance of our bank loans, and (ii) certain government subsidies, such as bank loan interest discount and an eco-irrigation subsidy. In the three months ended March 31, 2013, we received government subsidies of approximately $144,943, as compared to $8,132 for the three months ended March 31, 2012. Government subsidies vary from time to time.

 

For the six months ended March 31, 2013, other income amounted to $151,379 as compared to other income of $49,763 for the same period in 2012. For the six months ended March 31, 2013 and 2012, other income (expense) mainly included: (i) interest expense, which decreased by $3,821 or3% period over period due to a decrease in the average balance of our bank loans, and (ii) certain government subsidies, such as bank loan interest discount and an eco-irrigation subsidy. In the six months ended March 31, 2013, we received government subsidies of approximately $256,264, as compared to $59,284 for the six months ended March 31, 2012. Government subsidies vary from time to time.

 

Income tax expense. For both the three months ended March 31, 2013 and 2012, and also for both the six months ended March 31, 2013 and 2012 income tax amounted to $0. We began enjoying an income tax exemption in January 2011 for processing agricultural commodities.

 

 

Net income. As a result of the factors described above, our net income for the three months ended March 31, 2013 was $4,197,754. For the three months ended March 31, 2012, we had net income of $3,467,428. In the mean time, for the six months ended March 31, 2013 and March 31, 2012, the net income was $7,701,034 and $6,583,365, respectively.

 

Foreign currency translation gain. The functional currency of our subsidiaries operating in the PRC is the Chinese Yuan or Renminbi (“RMB”). The financial statements of our subsidiaries are translated to U.S. dollars using period end rates of exchange for assets and liabilities, and average rates of exchange (for the period) for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. As a result of these translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $180,884 for the three months ended March 31, 2013 as compared to $115,907 for the same period in 2012. This non-cash gain had the effect of increasing our reported comprehensive income.

 

For the six months ended March 31, 2013 and same period in 2012, we reported a foreign currency translation gain of $241,375 and $287,594, respectively. This non-cash gain had the effect of increasing our reported comprehensive income.

 

Comprehensive income. For the three months ended March 31, 2013, comprehensive income of $4,378,638 is derived from the sum of our net income of $4,197,754 plus foreign currency translation gain of $180,884.

 

For the six months ended March 31, 2013, comprehensive income of $7,942,409 is derived from the sum of our net income of $7,701,034 plus foreign currency translation gain of $ 241,375.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of March 31, 2013, our balance of cash and cash equivalents was $1,459,236. As of March 31, 2012, our balance of cash and cash equivalents was $ 370,578.

 

The following summarizes the key components of the Company’s cash flows for the six months ended March 31, 2013 and 2012:

 

		For the Six months Ended
		March 31,				March 31,
		2013				2012
Net cash (used in) operating activities		$	(406,337	)		$	(3,532,835	)
Net cash (used in) investing activities			(86,715	)			(91,997	)
Net cash provided by financing activities			1,595,402				3,209,335
Effect of foreign currency translation			5,841				15,808
Net increase (decrease) in cash and cash equivalents		$	1,108,191			$	(399,689	)

 

 

The Company currently generates its cash flow through operations, which it believes will be sufficient to sustain current level operations for at least the next twelve months.

 

In summary, our cash flows were:

 

Net cash used in operating activities decreased in the six months ended March 31, 2013 by $3,126,498 to $406,337, from net cash used in operating activities of $3,532,835 for the six months ended March 31, 2012. These changes were mainly brought about by the following changes: an increase in net income of $1,117,669, a decrease in cash used in prepaid leases of $2,174,428, and an increase in cash provided by customer deposits of $599,506.

 

Net cash used in investing activity decreased by $5,282 in the six months ended March 31, 2013 compared to the same period ended in 2012, which is mainly due to less cash expenditures on property and equipment.

 

Net cash provided by financing activities decreased by $1,613,933 to $1,595,402 in the six months ended March 31, 2013 compared to $3,209,335 provided by financing activities at the same period ended in 2012. This was due to the repayment of short-term bank loans of $4,186,171.

 

Working capital at March 31, 2013 increased by $2,409,055 to $1,933,940 from $(475,115) at September 30, 2012.  In order to stay cost competitive in the long-run, we leased 134,278 additional orange trees within the past six months. Based on the lease rate of approximately $55.86(RMB350) per tree in 2013, the total spending is estimated to be no more than $7,500,769 (RMB46, 997,300).

 

As we are listed by the lending bank as a good credit customer, we believe that our short-term bank loans will be renewed at their maturity dates. On November 30 and December 21, 2012, as a replacement of an existing short-term bank loan that matured in November 16, 2012, the Company obtained a new bank loan of approximately $5,395,800 (RMB34, 0000, 000) from Agricultural Development Bank of China.

   

Although we will continue to invest in our business, with expected positive operating cash flow fueled by our profit, we believe our operating cash is sufficient to sustain current level operations for at least the next twelve months.

 

Off-Balance Sheet Financing Arrangements

 

We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or entered into any non-financial assets.

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company, we are not required to respond to this Item.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

Disclosure controls and procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer to allow timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness, as of the end of the period covered by this report, of our disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective.

 

Changes in internal control over financial reporting

 

During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

  

PART II– OTHER INFORMATION

 

ITEM 1.    LEGAL PROCEEDINGS

 

None.

 

ITEM 1A.    RISK FACTORS

 

As a smaller reporting company, we are not required to respond to this Item.

 

ITEM 2.      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None in the Quarterly Period ended March 31, 2013.

 

ITEM 3.      DEFAULT UPON SENIOR SECURITIES

 

None.

 

ITEM 4.      MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5.     OTHER INFORMATION

 

None.

 

ITEM 6.    EXHIBITS

 

Exhibit No.		Description
10.1		English Translation of the Standard Form of the Navel Orange Trees Leasing Agreement between Xingguo General Fruit Industry Development Co., Ltd and the individual owners of navel orange trees
31.1		Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

 

SIGNATURES

 

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

 

	GELTOLOGY INC.
Date: May 15, 2013	By:	/s/ Xingping Hou
	Name:	Xingping Hou
	Title:	Chief Executive Officer
		(Principal Executive Officer)
Date: May 15, 2013	By:	/s/ Shaokang Zeng
	Name:	Shaokang Zeng
	Title:	Chief Financial Officer
		(Principal Financial and Accounting Officer)

 

 

 

EXHIBIT INDEX

Exhibit No.		Description
10.1		English Translation of the Standard Form of the Navel Orange Trees Leasing Agreement between Xingguo General Fruit Industry Development Co., Ltd and the individual owners of navel orange trees
31.1		Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document