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: June 30, 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 July 25, 2014: 15,918,940

 

 

TABLE OF CONTENTS

 

	Page
PART I – FINANCIAL INFORMATION	2
ITEM 1. FINANCIAL STATEMENTS	2
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	21
ITEM 4. CONTROLS AND PROCEDURES	21
PART II – OTHER INFORMATION	23
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

 

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

June 30, 2014 and 2013

 

(UNAUDITED)

 

Table of Contents

 

Condensed Consolidated Balance Sheets		3
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)		4
Condensed Consolidated Statements of Cash Flows		5
Notes to Condensed Consolidated Financial Statements

 

GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		June 30, 2014				September 30, 2013
ASSETS
Current Assets
Cash and cash equivalents		$	5,150,547			$	2,408,520
Accounts receivable			4,864,293				-
Inventory			3,249,323				4,074,166
Advance payments			30,988				24,438
Prepaid lease- current, net			3,393,413				2,372,480
Other current assets			398,358				15,625
Total Current Assets			17,086,922				8,895,229
Property and equipment, net			14,245,511				15,108,031
Other Assets
Intangibles, net			154,739				158,020
Prepaid leases – non current, net			23,068,492				18,000,267
Total Other Assets			23,223,231				18,158,287
TOTAL ASSETS		$	54,555,664			$	42,161,547
LIABILITIES
Current Liabilities
Short-term bank loans		$	5,525,000			$	5,542,000
Accounts payable and accrued expenses			353,690				208,325
Due to related parties			1,295,639				718,261
Customer deposits			1,517,651				-
Other current liabilities			73,488				45,865
Total Current Liabilities			8,765,468				6,514,451
STOCKHOLDERS' EQUITY
Common stock
$0.0001 par value, 200,000,000 shares authorized 15,918,940 shares issued and outstanding at June 30, 2014 and September 30, 2013			1,592				1,592
Additional paid-in capital			4,909,572				4,909,572
Statutory reserves			3,293,421				2,508,735
Retained earnings			35,184,457				25,678,005
Accumulated other comprehensive income			2,401,154				2,549,192
Total stockholders’ equity			45,790,196				35,647,096
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	54,555,664			$	42,161,547

 

See accompanying notes to the condensed consolidated financial statements
               

 

GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

		For the Three Months Ended June 30,								For the Nine Months Ended June 30,
		2014				2013				2014				2013
Sales		$	1,187				1,606,108			$	19,490,078				17,424,349
Cost of sales			4,877				419,187				8,252,270				7,576,417
Gross profit/loss			(3,690	)			1,186,921				11,237,808				9,847,932
Operating expenses
Selling expenses			10,025				95,194				101,817				881,482
General and administrative expenses			468,135				128,392				1,095,461				453,460
Total operating expenses			478,160				223,586				1,197,278				1,334,942
Income (loss) from operations			(481,850	)			963,335				10,040,530				8,512,990
Other income (expenses):
Government subsidy			-				19,127				491,016				275,391
Interest income			2,681				2,272				7,662				8,544
Interest expense			(84,641	)			(83,921	)			(229,741	)			(217,921	)
Other income(expense), net			(47,623	)			11,299				(18,330	)			34,142
Total other income(expenses)			(129,583	)			(51,223	)			250,607				100,156
Income (loss) before provision for income taxes			(611,433	)			912,112				10,291,137				8,613,146
Provision for income taxes			-				-				-				-
Net income (loss)			(611,433	)			912,112				10,291,137				8,613,146
Other comprehensive income (loss)
Foreign currency translation adjustment			85,751				501,924				(148,038	)			743,299
Total comprehensive income (loss)		$	(525,682	)		$	1,414,036			$	10,143,099			$	9,356,445
Earnings per share:
Basic and diluted		$	(0.04	)		$	0.06			$	0.65			$	0.54
Weighted average number of common stock outstanding
Basic and diluted			15,918,940				15,918,940				15,918,940				15,918,940

 

See accompanying notes to the condensed consolidated financial statements

 

 

GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Nine Months Ended June 30,
		2014				2013
Cash flows from operating activities:
Net Income		$	10,291,137			$	8,613,146
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Prepaid leases amortized in current period			2,337,718				1,643,982
Depreciation and amortization			832,836				828,619
Changes in current assets and current liabilities:
Accounts receivable			(4,879,858	)			(1,869,688	)
Inventory			814,946				996,596
Advance payments			(6,647	)			(49,275	)
Prepaid leases			(8,505,396	)			(9,247,469	)
Other current assets			(387,666	)			(16,372	)
Accounts payable and accrued expenses			145,742				53,418
Customer deposits			1,522,508				(1,406,768	)
Other current liabilities			27,854				21,173
Net cash provided by (used in) operating activities			2,193,174				(432,638	)
Cash flows from investing activities:
Acquisition of property and equipment			(43,038	)			(94,704	)
Net cash used in investing activities			(43,038	)			(94,704	)
Cash flows from financing activities:
Restricted cash			-				279,755
Proceeds from short-term bank loans			5,542,680				5,435,240
Repayment of short-term bank loans			(5,542,680	)			(4,204,318	)
Proceeds from related parties, net			577,762				98,935
Net cash provided by financing activities			577,762				1,609,612
Effect of exchange rate on cash and cash equivalents			14,129				24,267
Net increase in cash and cash equivalents			2,742,027				1,106,537
Cash and cash equivalents – beginning of period			2,408,520				351,045
Cash and cash equivalents – ending of period		$	5,150,547			$	1,457,582
Supplemental disclosure of cash flow information:
Cash paid for interest		$	229,741			$	217,921

 

See accompany notes to the condensed consolidated financial statements                

 

 

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 amended Form 10-K/A filed with the U.S. Securities Exchange Commission on June 4, 2014, 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 nine months ended June 30, 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 June 30, 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.

 

 

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:

 

		June 30,				September 30,
		2014				2013
Period end RMB:USD exchange rate			0.1625				0.1630
Average RMB:USD exchange rate			0.1630				0.1605
Period end HKD:USD exchange rate			0.1290				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. As of June 30, 2014 and September 30, 2013, no allowance was deemed necessary.

 

 

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 June 30, 2014 and September 30, 2013, no provisions were deemed necessary.

 

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 $5,021 and $1,977 for the three months ended June 30, 2014 and 2013 respectively, and $12,161 and $30,019 for the nine months ended June 30, 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 $0 and $73,256 for the three months ended June 30, 2014 and 2013 respectively, and $25,112 and $765,757 for the nine months ended June 30, 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.

 

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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 June 30, 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 June 30, 2014, no single customer accounted for more than 10% of the Company’s sales. For the three months ended June 30, 2013, four customers accounted for 47% of the Company’s total sales. For the nine months ended June 30, 2014, one customer accounted for 13% of the Company’s sales. For the nine months ended June 30, 2013, two customers accounted for approximately 20% of the Company’s total sales.

 

For the three months ended June 30, 2014, one vendor accounted for 90% of the Company’s total purchases. For the three months ended June 30, 2013, three vendors accounted for 63% of the Company’s purchases. For the nine months ended June 30, 2014, two vendors accounted for 71% and 16% of the Company’s total purchases, respectively. For the nine months ended June 30, 2013, four vendors accounted for approximately 67% of the Company’s purchase.

 

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 June 30, 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.

 

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606. This update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The guidance in this update supersedes the revenue recognition requirements in Topic 605 Additionally, this update supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (for example, assets within the scope of Topic 360, Property, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification., Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this update. This ASU is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2016 for public companies and 2017 for non-public companies. Management is evaluating the effect, if any, on the Company’s financial statements.

 

Note 3 – Inventory

 

Inventories by major categories are summarized as follows:

 

		June 30, 2014				September 30, 2013
Raw material		$	73,699			$	84,171
Work in process			3,175,624				3,989,995
		$	3,249,323			$	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.

 

Note 4 – Property and Equipment

 

Property and equipment consist of the following:

 

		June 30, 2014				September 30, 2013
Electronic equipment		$	118,657			$	117,670
Vehicles			324,567				325,566
Machinery and equipment			2,136,184				2,064,525
Buildings and improvements			7,731,826				7,755,617
Navel orange orchards			10,807,080				10,623,019
Subtotal			21,118,314				20,886,397
Less: Accumulated depreciation			6,924,460				6,084,046
			14,193,854				14,802,351
Add: Construction in progress			51,657				305,680
Total		$	14,245,511			$	15,108,031

 

Depreciation expense was $232,765 and $277,150 for the three months ended June 30, 2014 and 2013, respectively, and $830,029 and $825,868 for the nine months ended June 30, 2014, and 2013, respectively.

 

 

Note 5 – Intangible Assets

 

Intangible assets consist of the following:

 

		June 30, 2014				September 30, 2013
Land use rights		$	186,432			$	185,614
Less: Accumulated amortization			31,693				27,594
Total		$	154,739			$	158,020

 

Amortization expense was $932 and $925 for the three months ended June 30, 2014 and 2013, respectively, and $2,807 and $2,751 for nine months ended June 30, 2014 and 2013, respectively.

 

Note 6 – Prepaid Leases

 

Prepaid leases consist of the following:

 

		June 30, 2014				September 30, 2013
Current		$	3,393,413			$	2,372,480
Non-current			23,068,492				18,000,267
Total		$	26,461,905			$	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.

 

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.

 

 

Note 6 – Prepaid Leases (Continued)

 

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 $846,594 and $672,629, and $2,337,718 and $1,643,982 for the three and nine months ended June 30, 2014 and 2013, respectively.

 

Lease expense attributable to future periods is as follows:

 

Twelve months ending June 30:
2015		$	3,400,612
2016			3,400,612
2017			3,400,612
2018			3,400,612
2019			3,400,612
Thereafter			9,458,845
		$	26,461,905

Note 7 – CUSTOMER DEPOSITS

 

Based on the sales contract, certain sales distributors of the Company are required to make security deposits. As of June 30, 2014 and September 30, 2013, the Company had customer deposits of $1,517,651 and $0, respectively.

 

Note 8 – Short-Term Bank Loans

 

On November 30, 2012 and December 21, 2012, the Company obtained a loan of $5,525,000(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.

 

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 June 30, 2014 and September 30, 2013, the Company had outstanding debts from a related party, Hua Mei Investments Limited (“Hua Mei”), of $1,295,639 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 nine months ended June 30, 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 nine months ended June 30, 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 nine months ended June 30, 2014 and 2013, there was no income tax provision for the Company.

 

The US shell company has net operating losses amounting to approximately $706,000 and $70,000 during the nine months ended June 30, 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 NOL carryforwards. Management will review this valuation allowance annually and make adjustments as needed.

 

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

 

		Three and Nine Months Ended June 30,
		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 nine months ended June 30, 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			784,686
Balance – June 30, 2014		$	3,293,421

 

 

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. for the three and nine months ended June 30, 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. Factors that could contribute to such differences include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. 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”), 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 the 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”).

 

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. GELT was delivered with zero assets and zero liabilities at time of closing. 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. Accordingly, GRH became the wholly owned subsidiary of GELT.

 

On September 30, 2011, GRH entered into a Share Transfer and Issuance 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 (“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.

 

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 the State of Delaware a Certificate of Amendment to the Certificate of Incorporation (the “Charter Amendment”). Pursuant to the Charter Amendment, the Company’s Certificate of Incorporation was amended, effective as of July 12, 2013, to effect a reverse stock split of the Company’s shares of common stock. On July 12, 2013, the Company effected 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

 

Our 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 nine months ended June 30, 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.

 

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 (“$”). 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 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 $ or the purposes of preparing the consolidated financial statements were as follows:

 

		June 30,				September 30,
		2014				2013
Period end RMB: $ exchange rate			0.1625				0.1630
Average RMB: $ exchange rate			0.1630				0.1605
Period end HKD: $ exchange rate			0.1290				0.1290
Average HKD: $ exchange rate			0.1290				0.1289

 

 

Results of Operations for the three and nine months ended June 30, 2014 as compared to the three and nine months ended June 30, 2013

 

Sales

 

For the three months ended June 30, 2014, we had net sales of $1,187, as compared to those of $1,606,108 for the three months ended June 30, 2013, a decrease of approximately $1,604,921 or 99.9%. The decrease in net revenue is mainly because all navel oranges harvested in year 2013 were sold out before March 2014. However, navel oranges harvested in year 2012 were still sold in April 2013.

 

Sales Volume

Sale Price

Total Sales

(in KG)

Per KG

Revenue

Three months  ended

(in US$)

June 30, 2014

N/A

N/A

1,187

*

June 30, 2013

2,172,405

0.74

1,606,108

Variance

N/A

N/A

1,604,921

% Variance

N/A

N/A

99.9

%

 

 

*During the three months ended June 30, 2014, $1,817 of sales was generated from the sale of oranges not sold under our brand name because they did not meet the size or other requirements of our brand.

 

Our sales volume increased by approximately 15.3% for the nine months ended June 30, 2014, while the average unit sales price decreased by approximately 3.7%, as shown below:

 

		Sales Volume				Sale Price				Total Sales
		(in KG)				Per KG				Revenue
Nine months  ended						(in US$)
June 30, 2014			25,140,855				0.78				19,490,078
June 30, 2013			21,531,320				0.81				17,424,349
Variance			3,609,535				-0.03				2,065,729
% Variance			17	%			-3.7	%			11.9	%

   

Cost of sale

 

Cost of sales decreased by $414,310, or 99%, from $419,187 for the three months ended June 30, 2013 to $4,877 for the three months ended June 30, 2014. The decrease is attributed to a small amount of sales during the period of oranges not sold under our brand name because they did not meet the size or other requirements of our brand.

 

Cost of sales increased by $675,853, or 8.9%, from $7,576,417 for the nine months ended June 30, 2013 to $8,252,270 for the nine months ended June 30, 2014. The increasing rate of cost of sales is lower than the increasing rate in our sales. The reasons are (1) an increase in the product output of 3.0 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 fiscal year 2013. The cost of navel oranges cultivated from our orchard is lower than that outsourced; (3) a decrease in process fee (waxing and ripening fruit) since the Company postponed the pickup season during the fiscal year 2013.

 

Gross profit (deficit) and gross margin

 

Our gross deficit was $3,690 for the three months ended June 30, 2014 as compared to $1,186,921 for the three months ended June 30, 2013.

 

Our gross profit was $11,237,808 for the nine months ended June 30, 2014 as compared to $9,847,932 for the nine months ended June 30, 2013, representing a gross margin of 57.7% and 56.5%, respectively. The increase in our gross profit margin for the nine months ended June 30, 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; (2) lower amortization of the land use right due to low acquisition costs in current period.

 

 

Selling expenses

 

Selling expenses were $10,025 and $95,194 for the three months ended June 40, 2014 and 2013, respectively, a decrease of $85,169 or 89.5%; Selling expenses were $101,817 and $881,482 for the nine months ended June 30, 2014 and 2013, respectively, a decrease of $779,665, or 88.5%, mainly due to a reduction in shipping and handling, advertising and other expenses. 

 

Selling expenses for the three months ended June 30, 2014 and 2013 consisted of the following:

 

		Three Months Ended June 30,								Increase/decrease
		2014				2013				$				%
Shipping and handling			-				73,256				(73,256	)			-100	%
Compensations and related benefits			4,069				7,096				(3,027	)			-42.7	%
Advertising and promotion			5,020				1,751				3,269				186.7	%
Others			936				13,091				(12,155	)			-92.9	%
Total			10,025				95,194				(85,169	)			-89.5	%
Selling expenses as % of revenue			N/A				5.93	%			N/A				N/A

 

 

Shipping and handling expenses decreased by $73,256 or 100%, since the Company did not bear the shipping on domestic sales during fiscal year 2014.

 

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

 

Selling expenses for the nine months ended June 30, 2014 and 2013 consisted of the following:

 

		Nine Months Ended June 30,								Increase/decrease
		2014				2013				$				%
Shipping and handling			25,112				765,757				(740,645	)			-96.7	%
Compensations and related benefits			26,143				25,661				482				1.9	%
Advertising and promotion			12,160				28,325				(16,165	)			-57.1	%
Others			38,402				61,739				(23,337	)			-37.8	%
Total			101,817				881,482				(779,665	)			-88.4	%
Selling expenses as % of revenue			0.52	%			5.06	%			(4.54	)			-89.7	%

 

Shipping and handling expenses decreased by $740, 645 or 96.7%, since the Company did not bear the shipping on domestic sales during fiscal year 2014.

 

Advertising and promotion expense decreased by $16,165 or 57.1%, as a result of the down-sizing of our marketing campaign in the nine months ended June 30, 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 $468,135 for the three months ended June 30, 2014, as compared to $128,392 for the same period in 2013, an increase of $339,743 or 264.6%. General and administrative expenses consisted of the following:

 

 

		Three Months Ended June 30,								Increase/decrease
		2014				2013				$				%
Compensation and related benefits			73,694				52,588				21,106				40.1	%
Depreciation			25,628				24,377				1,251				5.1	%
Professional services			348,745				14,355				334,390				2329.4	%
Office expenses			3,648				4,703				(1,055	)			-22.4	%
Other			16,420				32,369				(15,949	)			-49.2	%
Total			468,135				128,392				339,743				264.6	%
G&A expense as of revenues			N/A				8.0	%			N/A				N/A

 

Professional service fees increased by 334,390 due to more audit and legal fees incurred during the three months ended June 30, 2014.

 

General and administrative expenses amounted to $1,095,461 for the nine months ended June 30, 2014, as compared to $453,460 for the same period in 2013, an increase of $642,001 or 141.6%. General and administrative expenses consisted of the following:

 

		Nine Months Ended June 30,								Increase/decrease
		2014				2013				$				%
Compensation and related benefits			242,157				154,643				87,514				56.6	%
Depreciation			73,393				112,674				(39,281	)			-34.9	%
Professional service			651,188				29,727				621,461				2090.6	%
Office expenses			10,599				16,903				(6,304	)			-37.3	%
Tax			10,900				-				10,901				100	%
Other			107,224				139,513				(32,289	)			-23.1	%
Total			1,095,461				453,460				642,001				141.6	%
G&A expense as of revenues			5.62	%			26.02	%			-20.4	%			78.4	%

 

Compensation and related benefits increased by $87,514 or 56.6%, mainly because we elected independent directors and hired a chief financial officer during 2013.

 

Professional service fees increased by $621,461 due to more audit and legal fees incurred during the nine months ended June 30, 2014.

 

Income (loss) from operations

 

For the three and nine months ended June 30, 2014, loss from operations was $481,850 and income from operations was $10,040,530, as compared to income of $963,335 and income of $8,512,990 for the three and nine months ended June 30, 2013, a decrease of $1,445,185 and an increase of $1,527,540 or 150.2% and 17.9%, mainly due to the reasons we discussed above.

 

Other income (expenses)

 

For the three months ended June 30, 2014, other expenses amounted to $129,583 as compared to $51,223 for the same period in 2013. The increase is mainly attributed to: (i) a decrease of $19,127 in government subsidies income; and (ii) an amount of loan guarantee fee incurred in this period.

 

For the nine months ended June 30, 2014, other income amounted to $250,607 as compared to $100,156 for the same period in 2013. The increase is mainly attributed to: (i) government subsidies income increased to $491,016 from 275,391; (ii) interest expense increased by $11,820; and (iii) $48,906 of loan guarantee fee incurred in the period.

 

Income tax expense

 

For the three and nine months ended June 30, 2014 and 2013, income tax amounted to $0. We began enjoying an income tax exemption for year 2013 and 2012 for processing agricultural commodities. General Fruit has been approved for tax exemption since its formation.

 

 

Net income (loss)

 

As a result of the factors described above, our net loss for the three months ended June 30, 2014 was $611,453 and net income for the nine months ended June 30, 2014 was $10,291,137. For the three and nine months ended June 30, 2013, we had net income of $912,112 and $8,613,146, 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 gain of $85,751 and foreign currency translation loss of $148,038 for the three and nine months ended June 30, 2014 as compared to foreign currency translation gain of $501,924 and $743,299 for the same period in 2013. This non-cash gain had the effect of increasing our reported comprehensive income.

 

Comprehensive income

 

For the three and nine months ended June 30, 2014, comprehensive loss of $525,682 and comprehensive income of $10,143,099 were derived from the sum of our net loss of $611,453 and net income of $10,291,137 plus foreign currency translation gain of 85,751 and foreign currency translation loss of $148,038, respectively.

 

For the three and nine months ended June 30, 2013, comprehensive income of $1,414,036 and $9,356,445 were derived from the sum of our net income of $912,112 and $8,613,146 plus foreign currency translation gain of $501,924 and $743,299, respectively.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We have historically funded our operation primarily through paid-in capital, sales of goods, loans 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 of operations for at least the next twelve months.

 

As of June 30, 2014, our balance of cash and cash equivalents was $5,150,547. As of September 30, 2013, our balance of cash and cash equivalents was $2,408,520, an increase of $2,742,027 or 113.8%, mainly due to net cash provided by operating activities.

 

The following summarizes the key components of the Company’s cash flows for the nine months ended June 30, 2014 and 2013:

 

		Nine Months Ended June 30,								Increase/decrease
		2014				2013				$				%
Net cash provided by (used in) operating activities			2,193,174				(432,638	)			2,625,812				606.9	%
Net cash used in investing activities			(43,038	)			(94,704	)			51,666				54.6	%
Net cash provided by financing activities			577,762				1,609,612				(1,031,850	)			-64.1	%
Effect of foreign currency translation			14,129				24,267				(10,138	)			-41.8	%
Net increase in cash and cash equivalents			2,742,027				1,106,537				1,635,490				147.8	%

 

In summary, our cash flows were:

 

Net cash provided by operating activities increased in the nine months ended June 30, 2014 by $2,625,812 to $2,193,174, from net cash used in operating activities of $432,638 for the nine months ended June 30, 2013. These changes were mainly brought about by an increase in net income of $1,677,991 offset by an increase in accounts receivable of $3,010,170, and an increase in customer deposits of $2,929,276offset by an increase in prepaid leases of $1,379,485.

 

Net cash used in investing activity increased by $51,666, from $94,704 to $43,038, in the nine months ended June 30, 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 $1,031,850 to $577,762 in the nine months ended June 30, 2014 compared to $1,609,612 provided by financing activities for the comparable period ended in 2013. This was due to increases in the net proceeds from related parties in 2014, the decrease in restricted cash in 2014 and the increase in repayment of bank loans in 2014.

 

Working capital increased by $5,940,676 to $8,321,454 as of June 30, 2014 from working capital of $2,380,778 as of September 30, 2013.  In order to stay cost competitive in the long-run, we leased 145,000 orange trees during the nine months ended June 30, 2014. Based on the lease rate of approximately $58.83(RMB360) per tree in 2014, the total cost was $8,482,500 (RMB52,200,000).

 

 

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 paid monthly. The loan was secured by the Company’s real property and equipment, and guaranteed by the CEO.  The loan was also guaranteed by Ganzhou Guoruitai Guarantee Co., Ltd., an unrelated party, with maximum exposure limit of $1,963,200 (RMB12,000,000). On November 20 and December 4, 2013, the CEO and Jiangjunhong Industrial Group Co., Ltd., a Chinese Corporation owned by Xingping Hou, jointly entered into cross-guarantee agreements with Ganzhou Guoruitai Guarantee Co, Ltd. Pursuant to the cross-guarantee agreements, the Company paid $49,080 (RMB300,000) to the guarantor as 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 failed to make their debt payment, Jiangjunhong Industrial Group Co., Ltd. and the CEO 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 the working capital.

 

As of June 30, 2014 and September 30, 2013, the Company had outstanding debts from a related party, Hua Mei Investments Limited (“Hua Mei”), of $1,295,639 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 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.

 

 

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: August 8, 2014	By:	/s/ Xingping Hou
	Name:	Xingping Hou
	Title:	Chief Executive Officer
		(Principal Executive Officer)
Date: August 8, 2014	By:	/s/ Amy Xue
	Name:	Amy Xue
	Title:	Chief Financial Officer
		(Principal Financial and Accounting Officer)

 

 

EXHIBIT INDEX

 

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