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, 2014

 

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

 

GENERAL AGRICULTURE CORPORATION

(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 ¨ No x*

 

* The registrant is a voluntary filer of reports required to be filed by certain companies under Section 13 or 15(d) of the Securities Exchange Act of 1934 and has filed all reports that would have been required to have been filed by the registrant during the preceding 12 months had it been subject to such filing requirements during the entirety of such period.

 

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 8, 2014: 15,918,940

 

  

TABLE OF CONTENTS

 

	Page
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS	1
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	22
ITEM 4. CONTROLS AND PROCEDURES	22
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	23
ITEM 1A. RISK FACTORS	23
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	23
ITEM 4. MINE SAFETY DISCLOSURES	23
ITEM 5. OTHER INFORMATION	23
ITEM 6. EXHIBITS	23

 

 

PART I– FINANCIAL INFORMATION

 

ITEM 1.    FINANCIAL STATEMENTS

 

GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES

(FORMERLY GELTOLOGY INC.)

 

CONSOLIDATED FINANCIAL STATEMENTS

 

March 31, 2014 and 2013

 

(UNAUDITED)

 

Table of Contents

 

		Page
Consolidated Balance Sheets		2
Consolidated Statements of Operations and Comprehensive Income		3
Consolidated Statements of Cash Flows		4
Notes to Consolidated Financial Statements		5

 

 

GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

  

		March 31, 2014				September 30, 2013
ASSETS
Current Assets
Cash and Cash Equivalents		$	1,605,641			$	2,408,520
Accounts receivable			8,743,041				-
Inventory			1,728,983				4,074,166
Advance payments			493,519				24,438
Prepaid lease- current, net			3,389,432				2,372,480
Other current assets			409,333				15,625
Total Current Assets			16,369,949				8,895,229
Property and equipment, net			14,459,762				15,108,031
Other Assets
Intangibles, net			155,479				158,020
Prepaid leases – non current, net			23,886,499				18,000,267
Total Other Assets			24,041,978				18,158,287
TOTAL ASSETS		$	54,871,689			$	42,161,547
LIABILITIES
Current Liabilities
Short-term bank loans			5,518,200				5,542,000
Accounts payable and accrued expenses			277,960				208,325
Due to related parties			1,033,980				718,261
Customer deposits			1,515,783				-
Other current liabilities			240,386				45,865
Total Current Liabilities			8,586,309				6,514,451
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common stock
$0.0001 par value, 200,000,000 shares authorized 15,918,940 shares issued and outstanding at March 31, 2014 and September 30, 2013			1,592				1,592
Additional paid-in capital			4,909,572				4,909,572
Statutory reserves			3,295,298				2,508,735
Retained earnings			35,763,515				25,678,005
Accumulated other comprehensive income			2,315,403				2,549,192
Total stockholders’ equity			46,285,380				35,647,096
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	54,871,689			$	42,161,547

 

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

 

 

GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

  

		For theThree Months Ended								For the Six Months Ended
		March 31,								March 31,
		2014				2013				2014				2013
Sales		$	12,408,641				8,377,564			$	19,535,516			$	15,818,241
Cost of sales			4,993,860				3,756,622				8,267,124				7,157,230
Gross profit			7,414,781				4,620,942				11,268,392				8,661,011
Operating expenses
Selling expenses			32,638				389,885				91,772				786,288
General and administrative expenses			166,147				113,065				627,326				325,068
Total operating expenses			198,785				502,950				719,098				1,111,356
Income from operations			7,215,996				4,117,992				10,549,294				7,549,655
Other income (expenses):
Government subsidy			492,191				144,943				492,191				256,264
Interest income			4,272				5,180				4,981				6,272
Interest expense			(83,419	)			(81,223	)			(145,100	)			(134,000	)
Other income(expense), net			(39,511	)			10,862				(29,293	)			22,843
Total other income(expenses)			373,533				79,762				322,779				151,379
Income before provision for income taxes			7,589,529				4,197,754				10,872,073				7,701,034
Provision for income taxes			-				-				-				-
Net income			7,589,529				4,197,754				10,872,073				7,701,034
Other comprehensive income
Foreign currency translation adjustment			(376,232	)			180,884				(233,789	)			241,375
Total comprehensive income			7,213,297			$	4,378,638			$	10,638,284			$	7,942,409
Earnings per share:
Basic and diluted		$	0.48			$	0.26			$	0.68			$	0.48
Weighted average number of common stock outstanding
Basic and diluted			15,918,940				15,918,940				15,918,940				15,918,940

 

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

 

 

GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Six Months Ended March 31,
		2014				2013
Cash flows from operating activities:
Net Income		$	10,872,073			$	7,701,034
Adjustments to reconcile net income to net cash used in operating activities:
Prepaid leases amortized in current period			1,491,124				971,353
Depreciation and amortization			599,139				550,544
Changes in current assets and current liabilities:
Accounts receivable			(8,802,836	)			(3,606,402	)
Inventory			2,363,440				1,555,520
Advance payments			(472,395	)			(397,457	)
Prepaid leases			(8,525,743	)			(7,480,560	)
Other current assets			(400,334	)			(9,738	)
Accounts payable and accrued expenses			70,326				46,589
Customer deposits			1,526,150				127,336
Other current liabilities			196,051				135,444
Net cash used in operating activities			(1,083,005	)			(406,337	)
Cash flows from investing activities:
Acquisition of property and equipment			(9,886	)			(86,715	)
Net cash used in investing activities			(9,886	)			(86,715	)
Cash flows from financing activities:
Restricted cash			-				278,548
Proceeds from short-term bank loans			5,555,940				5,411,780
Repayment of short-term bank loans			(5,555,940	)			(4,186,171	)
Proceeds from related parties, net			316,251				91,245
Net cash provided by financing activities			316,251				1,595,402
Effect of exchange rates on cash and cash equivalents			(26,239	)			5,841
Net increase (decrease) in cash and cash equivalents			(802,879	)			1,108,191
Cash and cash equivalents – beginning of period			2,408,520				351,045
Cash and cash equivalents – ending of period		$	1,605,641			$	1,459,236
Supplemental disclosure of cash flow information:
Cash paid for interest		$	145,100			$	134,000

 

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

 

 

GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

 

General Agriculture Corporation (“Gelt” or the “Company”), formerly Geltology Inc., was established under the laws of the State of Delaware on March 24, 2010. On July 12, 2013, Gelt filed with the Secretary of State of Delaware a Certificate of Amendment to change its name to General Agriculture Corporation. The accompanying unaudited consolidated financial statements include the financial statements of General Agriculture Corporation 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 12, 2013, the Company affected the 1 for 8 reverse split of the Company’s issued and outstanding common stock, decreasing the number of outstanding shares from 127,349,551 to 15,918,940. These statements have been retroactively adjusted to reflect this reverse split.

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and 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.

 

These interim unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended September 30, 2013, included in the Company’s annual report on Form 10-K filed with the U.S. Securities Exchange Commission on December 27, 2013, as not all disclosures required by US GAAP for annual financial statements are presented. The interim consolidated financial statements follow the same accounting policies and methods of computations as the audited consolidated financial statements for the year ended September 30, 2013. Operating results for the three and six months ended March 31, 2014 may not be necessarily indicative of the results that may be expected for the full year.

 

The consolidated financial statements include the accounts of General Agriculture Corporation and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

In preparing the accompanying unaudited consolidated financial statements, we evaluated the period from March 31, 2014 through the date the financial statements were issued for material subsequent events requiring recognition or disclosure. No such events were identified for this period.

 

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 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.

 

 

GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Foreign Currency Translation and Transactions

 

The accompanying unaudited consolidated financial statements are presented in U.S. dollars (“USD”). Greater China International’s functional currency is Hong Kong Dollar (“HKD”) and Nanchang Hanxin Agriculture Technology Co., Ltd, General Fruit and General Preservation’s functional currency is Chinese Yuan Renminbi (“RMB”). All assets and liabilities were translated at the current exchange rate, at respective balance sheets dates, stockholders’ equity is translated at the historical rates and income statement items are translated at the average exchange rate for the reporting periods. The resulting translation adjustments are reported as other comprehensive income and accumulated other comprehensive income in stockholders’ equity in accordance with the Codification ASC 220, Comprehensive Income.

 

Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. There were no material transaction gains or losses in the periods presented.

 

The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the consolidated financial statements were as follows:

 

		March 31,				September 30,
		2014				2013
Period end RMB:USD exchange rate			0.1623				0.1630
Average RMB:USD exchange rate			0.1634				0.1605
Period end HKD:USD exchange rate			0.1289				0.1290
Average HKD:USD exchange rate			0.1290				0.1289

 

Use of Estimates

 

The preparation of unaudited consolidated financial statements in conformity with US GAAP 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 financial statements and the reported amounts of revenues and expenses during the reporting periods presented. Actual results could differ from these estimates. Significant items subject to such estimates and assumptions include the recoverability of the carrying amounts of recorded assets and liabilities, estimated useful life of property and equipment, inventory obsolescence and the allowance for doubtful accounts.

 

Accounts Receivable

 

Accounts receivable are recorded net of allowance for doubtful accounts. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. Periodically, management assesses customer credit history and relationships as well as performs accounts receivable aging analysis. Based on the results, management determines whether certain balances are deemed uncollectible at the end of each period. Using its past collection experience, the Company reserves 0.3% of accounts receivable balances outstanding between six months and twelve months, 3% of accounts receivable outstanding for more than one year but less than two years, and 100% of accounts receivable balances outstanding for more than two years. As of March 31, 2014 and September 30, 2013, no allowance was deemed necessary as all receivables were aged less than six months.

 

 

GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Inventories

 

Inventory is stated at the lower of cost or market. Cost is determined using the weighted-average cost method. Provisions are made for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable values, if any. Management continually evaluates the recoverability based on assumptions about customer demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves or write-downs may be required that could negatively impact our gross margin and operating results. As of March 31, 2014 and September 30, 2013, no provisions were deemed necessary as no obsolete and slow-moving inventories were observed.

 

Revenue Recognition

 

The Company derives its revenue primarily from sale of navel oranges. Revenue is recognized in accordance with the provisions of ASC Topic 605, which provides that revenue is recognized when products are shipped, title and risk of loss is passed to the customers and collection is reasonably assured. Payments received before the above criteria are satisfied are recorded as advances from customers.

 

Advertising Expense

 

The Company expenses all advertising expenses as incurred. Advertising expenses included in selling expenses were $5,280 and $10,892 for the three months ended March 31, 2014 and 2013 respectively, and $7,140 and $28,042 for the six months ended March 31, 2014 and 2013 respectively.

 

Shipping and Handling

 

All shipping and handling costs are expensed as incurred and included in selling expenses. Total shipping and handling expenses were $4,325 and $362,957 for the three months ended March 31, 2014 and 2013 respectively, and $25,171 and $726,902 for the six months ended March 31, 2014 and 2013, respectively.

 

Value-added-tax

 

The Company is subject to a value added tax (“VAT”) of 13% for selling navel oranges that were bought from other farmers and 17% for processing navel oranges from General Fruits. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT paid on purchases made with the relevant supporting invoices (input VAT). Under the commercial practice of the PRC, the Company pays VAT based on tax invoices issued. The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event that the PRC tax authorities dispute the date on which revenue is recognized for tax purposes, the PRC tax office has the right to assess a penalty based on the amount of the taxes which are determined to be late or deficient, and will be expensed in the period if and when a determination is made by the tax authorities that a penalty is due. The Company reports revenues net of PRC’s value added tax for all the periods presented in the consolidated statements of operations.

 

 

GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Operating leases

 

Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over the shorter of the lease term or estimated useful life.

 

 Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk are cash and accounts receivable arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.

 

As of March 31, 2014 and September 30, 2013, the Company’s cash was with banks in the PRC and Hong Kong, where there is currently no rule or regulation mandated on obligatory insurance of bank accounts.

 

For the three months ended March 31, 2014 and 2013, no single customer accounted for more than 10% of the Company’s sales. For the six months ended March 31, 2014, a customer accounted for 13% of the Company’s sales. For the six months ended March 31, 2013, two customers accounted for approximately 20% of the Company’s total sales.

 

For the three months ended March 31, 2014, two vendors accounted for 50% and 10% of the Company’s total purchase, respectively. For the three months ended March 31, 2014, three vendors accounted for 93% of the Company’s purchase. For the six months ended March 31, 2014, two vendors accounted for 71% and 16% of the Company’s total purchases, respectively. For the six months ended March 31, 2013, four vendors accounted for approximately 63% of the Company’s purchase.

 

Fair Value

 

The Company has categorized its assets and liabilities at fair value based upon the fair value hierarchy specified by FASB ASC 820.

 

The levels of fair value hierarchy are as follows:

 

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.

 

Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

 

Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity.

 

 

GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.  As of March 31, 2014 and September 30, 2013, the carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, accounts payable, and other payables, approximate their fair values because of the short maturity of these instruments and market rates of interest available to the Company.

 

Earnings Per share

 

The Company reports earnings per share in accordance with the provisions of ASC 260.10, "Earnings Per Share”. ASC 260.10 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 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 using the treasury method. As of March 31, 2014 and September 30, 2013, there are no potentially dilutive securities outstanding.

 

Recent Accounting Pronouncements

 

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. The new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The adoption of ASU 2014-08 is not expected to have a material impact on the Company’s consolidated financial statements.

 

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

 

NOTE 3 – Inventory

 

Inventories by major categories are summarized as follows:

 

		March 31, 2014				September 30, 2013
Raw material		$	78,746			$	84,171
Work in process			-				3,989,995
Finished goods			1,650,507				-
		$	1,728,983			$	4,074,166

 

Work in process consists of the capitalization of depreciation, amortization of prepaid lease of navel orange orchards, rental, salary, fertilizer, utility, and 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 starts in October.

 

 

GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 4 – Property and Equipment

 

Property and equipment consist of the following:

 

		March 31, 2014				September 30, 2013
Electronic equipment		$	117,896			$	117,670
Vehicles			324,168				325,566
Machinery and equipment			2,133,035				2,064,525
Buildings and improvements			7,722,310				7,755,617
Navel orange orchards			10,793,779				10,623,019
Subtotal			21,091,188				20,886,397
Less: Accumulated depreciation			6,631,426				6,084,046
			14,459,762				14,802,351
Add: Construction in progress			-				305,680
Total		$	14,459,762			$	15,108,031

 

Depreciation expense was $280,291 and $274,663 for the three months ended March 31, 2014 and 2013, respectively, and $597,264 and $548,718 for the six months ended March 31, 2014, and 2013, respectively.

 

Note 5 – Intangible Assets

 

Intangible assets consist of the following:

 

		March 31, 2014				September 30, 2013
Land use rights		$	187,694			$	185,614
Less: Accumulated amortization			2,215				27,594
Total		$	155,479			$	158,020

 

Amortization expense was $939 and $914 for the three months ended March 31, 2014 and 2013, respectively, and $1,875 and $1,826 for six months ended March 31, 2014 and 2013, respectively.

 

Note 6 – Prepaid Leases

 

Prepaid leases consist of the following:

 

		March 31, 2014				September 30, 2013
Current		$	3,389,432			$	2,372,480
Non-current			23,886,499				18,000,267
Total		$	27,275,931			$	20,372,747

 

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 98,553,600 ($16,123,369) and pursuant to the contract terms, as of September 30, 2012, the Company paid off the entire lease amount using cash generated from operations.

 

 

GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 6 – Prepaid Leases (Continued)

 

On December 30, 2012, January 1, 2013 and June 1, 2013, General Fruit entered into lease contracts with another 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 57,847,300 ($9,463,818) and pursuant to the contract terms, as of June 30, 2013, the Company paid off the entire lease amount using cash generated from operations.

 

On December 31, 2013, General Fruit entered into a lease contract with an orchard company, pursuant to which General Fruit was authorized to operate the orchard for 10 years starting January 1, 2014. The lease terms are effective from January 1, 2014 through December 31, 2023. The aggregate lease amount is approximately RMB 24,840,000 ($4,063,824) and pursuant to the contract terms, as of December 31, 2013, the Company paid off the entire lease amount using cash generated from operations.

 

On March 26, 2014, General Fruit entered into a lease contract with Jinglin Agriculture Development Ltd. in Xingguo County. Pursuant to the contract, General Fruit was authorized to operate the orchard for 10 years starting January 1, 2014. The lease terms are effective from January 1, 2014 through December 31, 2023. The aggregate lease amount is approximately RMB27,360,000($4,440,528). As of March 31, 2014, the Company paid off the entire lease amount using cash generated from operations.

 

These leases are accounted for as operating leases in accordance with ASC 840-20 and the aggregate lease amounts will be expensed each year on a straight-line basis over the lease terms. Lease expenses were approximately $1,491,124 and $971,353 for the six months ended March 31, 2014 and 2013, respectively.

 

Lease expense attributable to future periods is as follows:

 

Twelve months ended March 31:
2015		$	3,408,747
2016			3,408,747
2017			3,408,747
2018			3,408,747
2019			3,408,747
Thereafter			10,232,196
		$	27,275,931

 

NOTE 7 – CUSTOMER DEPOSITS

 

Based on the sales contract, certain sales distributors of the Company are required to make security deposits. As of December 31, 2013 and September 30, 2013, the Company had customer deposits of $1,515,783 and $0, respectively.

 

Note 8 – Short-Term Bank Loans

 

On November 30, 2012 and December 21, 2012, the Company obtained a loan of $5,542,000(RMB34,000,000) from Agricultural Development Bank of China, the principal of which would 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 real property, inventory and equipment and guaranteed by Xingping Hou, CEO of the Company and Youhua Yu, wife of Xingping Hou. The principal was paid off in October and November 2013.

 

 

GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 8 – Short-Term Bank Loans (Continued)

 

On November 28 and December 4, 2013, the Company entered into two short-term bank loan agreements with Agricultural Development Bank of China for $2,617,600(RMB16,000,000) and $2,944,800 (RMB18,000,000). Pursuant to the Loan Agreements, the principle will be repaid on September 27, 2014 and October 3, 2014. The interest is being calculated using an annual fixed interest rate of 6.00% and is being paid monthly. The loan is secured by the Company’s real property, navel orange orchards and equipment, and guaranteed by Xingping Hou, CEO of the Company.  The loan is also guaranteed by Ganzhou Guoruitai Guarantee Co., Ltd., an unrelated party, with a maximum exposure limit of $1,963,200 (RMB12,000,000). On November 20 and December 4, 2013, Xingping Hou, CEO of the Company and Jiangjunhong Industrial Group Co., Ltd., a Chinese Corporation owned by Xingping Hou, jointly entered into a cross-guarantee agreement with Ganzhou Guoruitai Guarantee Co, Ltd. Pursuant to the cross-guarantee agreements, the Company paid $49,080 (RMB300,000) to the guarantor as a guarantee fee for the above bank loans.  The term of these guarantees are for two years. On the date of the loan expiration, should the Company fail to make their debt payment, Jiangjunhong Industrial Group Co., Ltd. and Xingping Hou will be obligated to perform under the cross guarantees by primarily making the required payments, including late fees and penalties. In addition, on December 3, 2013, the Company paid Ganzhou Guoruitai Guarantee Co, Ltd $392,640 (RMB2,400,000) as a security deposit for the guarantee.  These bank loans are for working capital purposes.

 

Note 9 – Due to Related Party

 

As of March 31, 2014 and September 30, 2013, the Company had outstanding debts from a related party, Hua Mei Investments Limited (“Hua Mei”), of $1,033,980 and $718,261, respectively. These debts are non-interest bearing and payable on demand. The proceeds of these debts were utilized as working capital.

 

Note 10 – Income Taxes

 

General Agriculture Corporation and General Red Holding Inc. (collectively referred to as the “US entities”) are each subject to US tax and file US federal income tax returns. The US entities are Delaware corporations and conduct all of their businesses through their Chinese subsidiaries. No provision for US federal income taxes were made for the three and six months ended March 31, 2014 and 2013 as the US entities incurred losses.

 

Han Glory International is not subject to tax on income or capital gains under the laws of the British Virgin Islands. Greater China International did not earn any income that was derived in Hong Kong for the three and six months ended March 31, 2014 and 2013, and therefore was not subject to Hong Kong Profit tax.

 

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 a tax exemption since its formation. General Preservation was also approved for such exemption from income tax for the years 2014 and 2013 As a result, for the three and six months ended March 31, 2014 and 2013, there was no income tax provision for the Company.

 

The US shell company has net operating losses amounting to approximately $352,000 and $70,000 during the six months ended March 31, 2014 and 2013, respectively. Net operating losses are carried forward, and if not utilized, will expire in 20 years after its generation. Management believes that it is more likely than not that the benefit from the NOL carryforwards will not be realized. In recognition of this risk, we have provided an offsetting valuation allowance of the deferred tax asset, relating to these

 

 

GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES (FORMERLY GELTOLOGY INC.)

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 10 – Income Taxes (Continued)

 

NOL carryforwards. Management will review this valuation allowance periodically and make adjustments as warranted.

 

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate as of the:

 

		Three and Six Months Ended March 31,
		2014				2013
U.S. Statutory rate			34	%			34	%
Foreign income not recognized in the U.S.			-34	%			-34	%
PRC statutory income tax rate			25	%			25	%
Tax exemption			-25	%			-25	%
Effective income tax rate			-				-

 

Note 11 – Statutory Reserve

 

For the six months ended March 31, 2014, statutory reserve activity was as follows:

 

Balance – September 30, 2012		$	1,653,723
Addition to statutory reserve			855,012
Balance – September 30, 2013			2,508,735
Addition to statutory reserve			786,563
Balance – March 31, 2014		$	3,295,298

 

 

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 General Agriculture Corp.(formerly Geltology Inc.) for the three and six months ended March 31, 2014 and 2013 should be read in conjunction with the unaudited consolidated financial statements and the notes to those statements that are included elsewhere in this 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. These risks and uncertainties include, among others: general economic and business conditions in the United States and other countries in which the Company’s customers and suppliers are located; industry conditions and trends; competition and other factors which may affect prices which the Company may charge for its products and its profit margins; the availability and cost of supplies purchased by the Company; the relative value of the United States dollar to currencies in the countries in which the Company’s customers, suppliers and competitors are located; changes in, or the failure to comply with, government regulation; the Company’s ability to implement its business strategies and development plans; and the availability, terms and deployment of debt and equity capital if needed for expansion. 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 and Transactions” below for information concerning the exchanges rates at which Renminbi and Hong Kong Dollar were translated into U.S. Dollars at various pertinent dates and for pertinent periods.

 

COMPANY OVERVIEW

 

General Agriculture Corporation (“GELT” or the “Company”), formerly Geltology Inc., was incorporated under the laws of the State of Delaware on March 24, 2010. On July 12, 2013, GELT filed with the Secretary of State of Delaware a Certificate of Amendment to change its name to General Agriculture Corporation. GELT, through its direct operating subsidiaries General Fruit and General Preservation, 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, the WFOE purchased all the 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, the 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 the 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.

 

On June 28, 2013, at the Annual Meeting of stockholders the stockholders of the Company approved an amendment to the Company’s Certificate of Incorporation. On June 28, 2013, the Company filed with the Secretary of State of Delaware a Certificate of Amendment to the Charter (the “Charter Amendment”). Pursuant to the Charter Amendment, the Company’s Charter was amended, effective as of July 12, 2013, to affect a reverse stock split of the Company’s shares of common stock. On July 12, 2013, the Company affected the 1 for 8 reverse split of the Company’s issued and outstanding common stock, decreasing the number of outstanding shares from 127,349,551 to 15,918,940. These statements in this report have been retroactively adjusted to reflect this reverse split.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Unaudited 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 unaudited consolidated financial statements for the three and six months ended March 31, 2014, 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.

 

 

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.

 

Accounts receivable

 

Accounts receivable are recorded net of allowance for doubtful accounts. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. Periodically, management assesses customer credit history and relationships as well as performs accounts receivable aging analysis. Based on the results, management determines whether certain balances are deemed uncollectible at the end of each period. Using its past collection experience, the Company reserves 0.3% of accounts receivable balances outstanding between six months and twelve months, 3% of accounts receivable outstanding for more than one year but less than two years, and 100% of accounts receivable balances outstanding for more than two years.

 

Inventories

 

Inventory is stated at the lower of cost or market. Cost is determined using the weighted-average cost method. Provisions are made for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable values, if any. Management continually evaluates the recoverability based on assumptions about customer demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves or write-downs may be required that could negatively impact our gross margin and operating results.

 

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 and Transactions

 

The accompanying unaudited consolidated financial statements are presented in U.S. dollars (“USD”). Great China International’s functional currency is Hong Kong Dollar (“HKD”) and Nanchang Hanxin Agriculture Technology Co., Ltd, General Fruit and General Preservation’s functional currency is Chinese Yuan Renminbi (“RMB”). All assets and liabilities were translated at the current exchange rate, at respective balance sheet dates, stockholders’ equity is translated at the historical rates and income statement items are translated at the average exchange rate for the reporting periods. The resulting translation adjustments are reported as other comprehensive income and accumulated other comprehensive income in stockholders’ equity in Accordance with the Codification ASC 220, Comprehensive Income.

 

 

Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. There were no material transaction gains or losses in the periods presented.

 

The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the consolidated financial statements were as follows:

 

		March 31,				September 30,
		2014				2013
Period end RMB:USD exchange rate			0.1623				0.1630
Average RMB:USD exchange rate			0.1634				0.1605
Period end HKD:USD exchange rate			0.1289				0.1290
Average HKD:USD exchange rate			0.1290				0.1289

 

Results of Operations for the three and six months Ended March 31, 2014 Compared to the three and six months Ended March 31, 2013

 

Sales

 

For the three months ended March 31, 2014, we had sales of $12,408,641, as compared to those of $8,377,564 for the three months ended March 31, 2013, an increase of approximately $4,031,077 or 48.1%. For the six months ended March 31, 2014, we had sales of $19,535,516, as compared to those of $15,818,241 for the six months ended March 31, 2013, an increase of approximately $3,717,275 of 23.5%. The navel orange from Gannan gradually built its reputation in the market due to its taste and high quality. As a result, the demand for the orange is growing. The Chinese Lunar Year also attributed to the significant increase in our sales volume.

 

Our sales volume increased by approximately 48.1% for the three months ended March 31, 2014, while the average unit sales price decreased by approximately 1.2%, as shown below:

  

						Sale Price
		Sales Volume				Per KG
Three months  ended		(in KG)				(in US$)				Total Sales
March 31, 2014			15,372,250				0.81				12,408,641
March 31, 2013			10,216,541				0.82				8,377,564
Variance			5,155,709				0.01				4,031,077
% Variance			50.5	%			1.2	%			48.1	%

 

Our sales volume increased by approximately 25.3% for the six months ended March 31, 2014, while the average unit sales price decreased by approximately 1.3%, as shown below:

 

						Sale Price
		Sales Volume				Per KG
Six months  ended		(in KG)				(in US$)				Total Sales
March 31, 2014			25,140,855				0.78				19,535,516
March 31, 2013			20,023,090				0.79				15,818,241
Variance			5,117,765				0.01				3,717,275
% Variance			25.6	%			1.3	%			23.5	%

 

 

Cost of sale.

 

Cost of sales increased by $1,237,238, or 32.9%, from $3,756,622 for the three months ended March 31, 2013 to $4,993,860 for the three months ended March 31, 2014. Cost of sales increased by $1,109,894, or 15.5%, from $7,157,230 for the six months ended March 31, 2013 to $8,267,124 for the six months ended March 31, 2014. The rate of cost of sales increase is lower than the rate in our sales increase. The reasons are (1) an increase in the product output of 2.5 kg orange per tree due to better maintenance and cultivation in the past two years; (2) an extra tax levied on navel oranges sold overseas, which increased the cost of sale in the fiscal year ended September 30, 2013. The cost of navel oranges cultivated from our orchard is lower than that outsourced; and (3) a decrease in process fee(waxing and ripening fruit) since the Company postponed the pickup season during the fiscal year ended September 30, 2014.

 

Gross profit and gross margin

 

Our gross profit was $7,414,781 for the three months ended March 31, 2014 as compared to $4,620,942 for the three months ended March 31, 2013, representing a gross margin of 59.8% and 55.2%, respectively. Our gross profit was $11,268,392 for the six months ended March 31, 2014 as compared to $8,661,011 for the six months ended March 31, 2013, representing a gross margin of 57.7% and 54.8%, respectively. The increase in our gross profit margin for the three and six months ended March 31, 2014 was mainly attributable to the reasons discussed above. The higher gross margin was primarily due to (1) the synergy between the complete chains of the production process from planting, preserving to packaging; and (2) lower amortization of the land use right due to low acquisition cost.

 

Selling expenses

 

Selling expenses were $32,638 and $389,885 for the three months ended March 31, 2014 and 2013, respectively, a decrease of $357,247 or 91.6%. Selling expenses were $91,772 and $786,288 for the six months ended March 31, 2014 and 2013, respectively, a decrease of $694,516, or 88.3%, mainly due to a reduction in shipping and handling, advertising and other expenses. 

 

Selling expenses for the three months ended March 31, 2014 and 2013 consisted of the following:

 

		Three Months Ended March 31,								Increase/decrease
		2014				2013				$				%
Shipping and handling			4,325				362,957				(358,632	)			-98.8	%
Compensations and related benefits			11,082				16,036				(4,954	)			-30.9	%
Advertising and promotion			5,280				10,892				(5,612	)			-51.5	%
Other			11,951				-				11,950				-
Total			32,638				389,885				(357,247	)			-91.6	%
Selling expenses as % of revenue			0.26	%			0.05	%			(0.04	)%			-94.3	%

 

Shipping and handling expense decreased by $358,632 or 98.8%, since the Company does not bear the shipping cost in domestic sales during the fiscal year ended September 30, 2014.

 

Compensation and related benefits decreased by $4,954, or 30.9%, in the three months ended March 31, 2014 compared to the three months ended March 31, 2013, due to the implementation of automated planting starting in October 2012.

 

Advertising and promotion expense decreased by $5,612 or 51.5%, as a result of the down-sizing of our marketing campaign during the three months ended March 31, 2014.

 

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

 

 

Selling expenses for the six months ended March 31, 2014 and 2013 consisted of the following:

 

		Six Months Ended March  31,								Increase/decrease
		2014				2013				$				%
Shipping and handling			25,171				726,902				(701,731	)			-96.5	%
Compensations and related benefits			22,074				26,983				(4,909	)			-18.2	%
Advertising and promotion			7,140				28,042				(20,902	)			-74.5	%
Others			37,387				4,361				37,387				757.3	%
Total			91,772				786,288				(694,516	)			-88.3	%
Selling expenses as % of revenue			0.74	%			4.65	%			(3.91	)%			-84.1	%

 

Shipping and handling expenses decreased by $701,731 or 96.5%, since the Company does not bear the shipping cost in domestic sales during the fiscal year ended September 30, 2014.

 

Compensation and related benefits decreased by $4,909, or 18.2%, in the six months ended March 31, 2014 compared to the six months ended March 31, 2013, due to the implementation of automated planting starting in October 2012.

 

Advertising and promotion expense decreased by $20,902 or 74.5%, as a result of the down-sizing of our marketing campaign during the six months ended March 31, 2014.

 

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

 

General and administrative expenses

 

General and administrative expenses amounted to $166,147 for the three months ended March 31, 2014, as compared to $113,065 for the same period in 2013, an increase of $53,082 or 46.9%. General and administrative expenses consisted of the following:

 

		Three Months Ended March 31,								Increase/decrease
		2014				2013				$				%
Compensation and related benefits			77,428				70,112				7,316				10.4	%
Depreciation			23,491				23,604				(113	)			-0.5	%
Professional service			64,161				-				64,161				-
Office expenses			1,067				12,268				(11,201	)			-91.3	%
Tax			-				1,748				(1,748	)			-
Other			-				5,333				(5,333	)			-
Total			166,147				113,065				53,082				46.95	%
G&A expense as of revenues			1.34	%			1.35	%			-0.01	%			-0.79	%

 

Professional service fees increased by 64,161 due to increased audit and legal fees incurred during three months ended March 31, 2014.

 

General and administrative expenses amounted to $627,326 for the six months ended March 31, 2014, as compared to $325,068 for the same period in 2013, an increase of $302,258 or 93.0%. General and administrative expenses consisted of the following:

 

		Six Months Ended March 31,								Increase/decrease
		2014				2013				$				%
Compensation and related benefits			168,463				147,233				21,230				14.4	%
Depreciation			47,765				67,893				(20,128	)			-29.6	%
Professional service			302,443				15,141				287,302				1897.5	%
Office expenses			6,951				41,516				(34,565	)			-83.3	%
Tax			10,927				21,344				(10,417	)			-48.8	%
Other			87,777				31,941				55,836				174.8	%
Total			627,326				325,068				302,258				93.0	%
G&A expense as of revenues			3.21	%			2.06	%			1.16	%			56.26	%

 

 

Compensation and related benefits increased by $21,230 or 14.4%, mainly because we elected independent directors and hired a chief financial officer during 2013.

 

Professional service fees increased by $287,302 due to increased audit and legal fees incurred during six months ended March 31, 2014.

 

Income from operations

 

For the three and six months ended March 31, 2014, income from operations was $7,215,996 and $10,549,294, as compared to $4,117,992 and $7,549,655 for the three and six months ended March 31, 2013, an increase of $3,098,004 and $2,999,639 or 75.2% and 39.7%, mainly due to an increase in sales and a decrease in operating expenses.

 

Other income (expenses)

 

For the three months ended March 31, 2014, other income amounted to 373,533 as compared to other income of $79,762 for the same period in 2013. For the three months ended March 31, 2014 and 2013, other income (expense) mainly included: (i) interest expense, which increased by $2,196 or 2.7%, and (ii) certain government subsidies which for the three months ended March 31, 2014 and 2013, we received approximately $492,191 and $144,943, respectively.

 

For the six months ended March 31, 2014, other income amounted to $322,779 as compared to other income of $151,379 for the same period in 2013. For the six months ended March 31, 2014 and 2013, other income (expense) mainly included: (i) interest expense, which increased by $11,100 or 8.3%, and (ii) certain government subsidies which for the six months ended March 31, 2014 and 2013, we received approximately $492,191 and $256,264, respectively.

 

Income tax expense

 

For the three and six months ended March 31, 2014 and 2013, income tax amounted to $0. We have an income tax exemption for the years 2014 and 2013 for processing agricultural commodities. General Fruit has been approved for a tax exemption since its formation.

 

Net income

 

As a result of the factors described above, our net income for the three and six months ended March 31, 2014 was $7,589,529 and $10,872,073 respectively. For the three and six months ended March 31, 2013, we had net income of $4,197,754 and $7,701,034, 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 foreign currency translation loss of $376,232 and $233,789 for the three and six months ended March 31, 2014, respectively as compared to foreign currency translation gain of $180,884 and $241,375 for the three and six months ended March 31, 2013, respectively. This non-cash gain or loss had the effect of increasing or decreasing our reported comprehensive income.

 

Comprehensive income

 

For the three and six months ended March 31, 2014, comprehensive income of $7,213,297 and $10,638,284 were derived from the sum of our net income of $7,589,529 and $10,872,073 plus foreign currency translation loss of $376,232 and $233,789, respectively.

 

For the three and six months ended March 31, 2013, comprehensive income of $4,378,638 and $7,942,409 were derived from the sum of our net income of $4,197,154 and $7,701,034 plus foreign currency translation gain of $180,884 and $241,375, respectively.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We have historically funded our operation primarily through paid-in capital, sales of goods, loan from stockholders and short term loans from financial institutions in China.  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.

 

 

As of March 31, 2014, our cash and cash equivalents was $1,605,641. As of September 30, 2013, our cash and cash equivalents was $2,408,520, a decrease of $802,879 or 33.3%, mainly due to net cash used in operating activities.

 

The following summarizes the key components of the Company’s cash flows:

 

		Six Months Ended March 31,								Increase/decrease
		2014				2013				$				%
Net cash used in operating activities			(1,083,005	)			(406,337	)			(676,668	)			166.5	%
Net cash used in investing activities			(9,886	)			(86,715	)			76,829				-88.6	%
Net cash provided by financing activities			316,251				1,595,402				(1,279,151	)			-80.2	%
Effect of foreign currency translation			(26,239	)			5,841				(32,080	)			-549.2	%
Net increase(decrease) in cash and cash equivalents			(802,879	)			1,108,191				(1,911,070	)			-172.5	%

 

In summary, our cash flows were:

 

Net cash used in operating activities increased during the six months ended March 31, 2014 by $676,688 to $1,083,005, from net cash used in operating activities of $406,377 for the six months ended March 31, 2013. These changes were mainly brought about by the following changes: a change in net income of $3,171,039, a change in cash used in accounts receivable of $5,196,434, a change in cash provided by customer deposits of $1,398,814, and a change in cash tied in inventory of $807,920.

 

Net cash used in investing activity decreased by $76,829, from $86,715 to $9,886, in the six months ended March 31, 2014 compared to the same period ended in 2013, which is mainly due to less cash expenditures on property and equipment.

 

Net cash provided by financing activities decreased by $1,279,151 to $316,251 in the six months ended March 31, 2014 as compared to $1,595,402 provided by financing activities at the same period ended in 2013. This was due to the repayment of short-term bank loans.

 

Working capital increased by $5,402,862 to $7,783,640 as of March 31, 2014 from working capital of $2,380,778 as of March 31, 2013.  In order to stay cost competitive in the long-run, we leased 145,000 orange trees in six months ended March 31, 2014. Based on the lease rate of approximately $58.83(RMB360) per tree in 2014, the total spending was $8,530,002 (RMB24,840,000).

 

As we are listed by our 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 $5,555,940 (RMB34, 000, 000) from Agricultural Development Bank of China, which was paid off during October and November 2013.

 

On November 28 and December 4, 2013, the Company entered into two short-term bank loan agreements with Agricultural Development Bank of China for $2,617,600(RMB16,000,000) and $2,944,800 (RMB18,000,000). Pursuant to the Loan Agreements, the principle will be repaid on September 27, 2014 and October 3, 2014. The interest was calculated using an annual fixed interest rate of 6.00% and will be paid monthly. The loan was secured by the Company’s real property, navel orange orchards and equipment, and guaranteed by Xingping Hou, CEO of the Company.  The loan was also guaranteed by Ganzhou Guoruitai Guarantee Co., Ltd., an unrelated party, with a maximum exposure limit of $1,963,200 (RMB12,000,000). On November 20 and December 4, 2013, Xingping Hou, CEO of the Company and Jiangjunhong Industrial Group Co., Ltd., a Chinese Corporation owned by Xingping Hou, jointly entered into a cross-guarantee agreement with Ganzhou Guoruitai Guarantee Co, Ltd. Pursuant to the cross-guarantee agreements, the Company paid $49,080 (RMB300,000) to the guarantor as a guarantee fee for the above bank loans.  The term of these guarantees are for two years. On the date of loan expiration, should the Company fail to make their debt payment, Jiangjunhong Industrial Group Co., Ltd. and Xingping Hou will be obligated to perform under the cross guarantees by primarily making the required payments, including late fees and penalties. In addition, on December 3, 2013, the Company paid Ganzhou Guoruitai Guarantee Co, Ltd $392,640 (RMB2,400,000) as a security deposit for the guarantee.  The purpose of such bank loans are for working capital.

 

As of March 31, 2014 and September 30, 2013, the Company had outstanding debts from a related party, Hua Mei Investments Limited (“Hua Mei”), of $1,033,980 and $718,261, respectively. These debts are non-interest bearing and payable on demand. The proceeds of these debts were utilized as working capital.

 

 

Although we will continue to invest in our business, with expected positive operating cash flow fueled by our profits, we believe our operating cash is sufficient to sustain our current level of 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.

 

 

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.

 

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
Exhibit
No.		Description
31.1		Certification of the Chief Executive Officer (Principal Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of the Chief Financial Officer (Principal Financial and Accounting Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101 Interactive data files

 

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.

	GENERAL AGRICULTURE CORPORATION
Date: May 15, 2014	By:	/s/ Xingping Hou
	Name:	Xingping Hou
	Title:	Chief Executive Officer
		(Principal Executive Officer)
Date: May 15, 2014	By:	/s/ Amy Xue
	Name:	Amy Xue
	Title:	Chief Financial Officer
		(Principal Financial and Accounting Officer)

 

 

 

EXHIBIT INDEX

 

Exhibit No.	Description
31.1	Certification of the Chief Executive Officer (Principal Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer (Principal Financial and Accounting Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	Interactive data files   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