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

 

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

 

For the quarterly period ended: June 30, 2015

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 x No ¨

 

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

 

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

 

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

 

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

 

Number of shares of common stock outstanding as of August 9, 2015: 15,918,940

 

  

TABLE OF CONTENtS

 

	Page
PART I – FINANCIAL INFORMATION	3
ITEM 1. FINANCIAL STATEMENTS	3
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	23
ITEM 4. CONTROLS AND PROCEDURES	23
PART II – OTHER INFORMATION	24
ITEM 1. LEGAL PROCEEDINGS	24
ITEM 1A. RISK FACTORS	24
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	24
ITEM 4. MINE SAFETY DISCLOSURES	24
ITEM 5. OTHER INFORMATION	24
ITEM 6. EXHIBITS	25

 

  

PART I– FINANCIAL INFORMATION

 

ITEM 1.    FINANCIAL STATEMENTS

  

GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

June 30, 2015 and 2014

 

(UNAUDITED)

 

Table of Contents

 

Condensed Consolidated Balance Sheets	4
Condensed Consolidated Statements of Operations and Comprehensive Income(loss)	5
Condensed Consolidated Statements of Cash Flows	6
Notes to Condensed Consolidated Financial Statements	7

 

 

GENERAL AGRICULTURE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		June 30, 2015				September 30, 2014
ASSETS
Current Assets:
Cash and cash equivalents		$	9,584,318			$	3,352,045
Accounts receivable			4,713,380				-
Inventory			3,781,529				4,951,273
Advance payments			554,518				2,189,956
Prepaid lease			4,541,216				3,773,379
Other current assets			19,132				11,572
Total Current Assets			23,194,093				14,278,225
Property and equipment, net			13,247,820				13,985,305
Other Assets
Intangibles, net			152,125				153,712
Prepaid leases, net of current portion			29,401,503				23,367,927
Total Other Assets			29,553,628				23,521,639
TOTAL ASSETS		$	65,995,541			$	51,785,169
LIABILITIES
Current Liabilities:
Short-term bank loans		$	4,583,600			$	4,547,200
Accounts payable and accrued expenses			240,814				276,443
Due to related parties			2,120,536				1,508,566
Customer deposits			1,784,330				-
Other current liabilities			104,990				61,849
Total Current Liabilities			8,834,270				6,394,058
Commitments and Contingencies
Stockholders' Equity
Common stock
$0.0001 par value, 200,000,000 shares authorized 15,918,940 shares issued and outstanding at June 30, 2015 and September 30, 2014, respectively			1,592				1,592
Additional paid-in capital			4,909,572				4,909,572
Statutory reserves			2,583,925				2,539,170
Retained earnings			46,851,255				35,545,085
Accumulated other comprehensive income			2,814,927				2,395,692
Total stockholders’ equity			57,161,271				45,391,111
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	65,995,541			$	51,785,169

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

  

GENERAL AGRICULTURE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

  

		For the Three Months Ended June 30,								For the Nine Months Ended June 30,
		2015				2014				2015				2014
Sales		$	2,123,558			$	1,187			$	22,588,007			$	19,490,078
Cost of sales			887,888				4,877				10,063,740				8,252,270
Gross profit/loss			1,235,670				(3,690	)			12,524,267				11,237,808
Operating expenses
Selling expenses			40,582				10,025				119,972				101,817
General and administrative expenses			172,213				468,135				904,662				1,095,461
Total operating expenses			212,795				478,160				1,024,634				1,197,278
Income (loss) from operations			1,022,875				(481,850	)			11,499,633				10,040,530
Other income (expenses):
Government subsidy			-				-				-				491,016
Interest income			7,102				2,681				12,734				7,662
Interest expense			(70,029	)			(84,641	)			(214,119	)			(229,741	)
Other income (expense), net			20,970				(47,623	)			52,677				(18,330	)
Total other income (expenses)			(41,957	)			(129,583	)			(148,708	)			250,607
Income (loss) before provision for income taxes			980,918				(611,433	)			11,350,925				10,291,137
Provision for income taxes			-				-				-				-
Net income (loss)			980,918				(611,433	)			11,350,925				10,291,137
Other comprehensive income (loss)
Foreign currency translation adjustment			90,504				85,751				419,235				(148,038	)
Total comprehensive income (loss)		$	1,071,422			$	(525,682	)		$	11,770,160			$	10,143,099
Earnings per share:
Basic and dulited		$	0.06			$	(0.04	)		$	0.71			$	0.65
Weighted average number of common stock outstanding
Basic and dulited			15,918,940				15,918,940				15,918,940				15,918,940

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

  

GENERAL AGRICULTURE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Nine Months Ended June 30,
		2015				2014
Cash flows from operating activities:
Net Income		$	11,350,925			$	10,291,137
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of prepaid leases			3,112,856				2,337,718
Depreciation and amortization			906,143				832,836
Changes in current assets and current liabilities:
Accounts receivable			(4,696,104	)			(4,879,858	)
Inventory			1,204,947				814,946
Advance payments			1,646,910				(6,647	)
Prepaid leases			(9,672,872	)			(8,505,396	)
Other current assets			(11,746	)			(387,666	)
Accounts payable and accrued expenses			(35,232	)			145,742
Customer deposits			1,777,790				1,522,508
Other current liabilities			40,858				27,854
Net cash provided by operating activities			5,624,475				2,193,174
Cash flows from investing activities:
Acquisition of property and equipment			(57,013	)			(43,038	)
Net cash used in investing activities			(57,013	)			(43,038	)
Cash flows from financing activities:
Proceeds from short-term bank loans			-				5,542,680
Repayment of short-term bank loans			-				(5,542,680	)
Proceeds from related parties, net			610,983				577,762
Net cash provided by financing activities			610,983				577,762
Effect of exchange rate changes on cash and cash equivalents			53,828				14,129
Net increase in cash and cash equivalents			6,232,273				2,742,027
Cash and cash equivalents – beginning of period			3,352,045				2,408,520
Cash and cash equivalents – ending of period		$	9,584,318			$	5,150,547
Supplemental disclosure of cash flow information:
Cash paid for interest		$	214,119			$	229,741

 

See accompany notes to the unaudited condensed consolidated financial statements

 

  

GENERAL AGRICULTURE CORPORATION

Notes to Condensed 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 Company, through its wholly owned operating subsidiary, Xingguo General Fruit Industry Development Co., Ltd. (“General Fruit”) and General Fruit’s wholly-owned subsidiary, Xingguo General Red Navel Orange Preservation Company, Ltd. (“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”).

 

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, 2014, included in the Company’s annual report on Form 10-K filed with the U.S. Securities Exchange Commission on December 11, 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, 2014. Operating results for the three and nine months ended June 30, 2015 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.

 

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.

 

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 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.

 

  

GENERAL AGRICULTURE CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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,
		2015				2014
Period end RMB:USD exchange rate			0.1637				0.1624
Average RMB:USD exchange rate			0.1631				0.1627
Period end HKD:USD exchange rate			0.1290				0.1288
Average HKD:USD exchange rate			0.1290				0.1290

 

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 obsolesce 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, 2015 and September 30, 2014, no allowance was deemed necessary.

 

Inventory

 

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, 2015 and September 30, 2014, 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.

 

  

GENERAL AGRICULTURE CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Advertising Expense

 

The Company expenses all advertising expenses as incurred. Advertising expenses included in selling expenses were $29,377 and $5,021 for the three months ended June 30, 2015 and 2014 respectively, and $66,511 and $12,161 for the nine months ended June 30, 2015 and 2014, respectively.

 

Shipping and Handling

 

All shipping and handling costs are expensed as incurred and included in selling expenses. Total shipping and handling expenses were $2,857 and $0 for the three months ended June 30, 2015 and 2014, respectively, and $21,773 and $25,112 for the nine months ended June 30, 2015 and 2014, 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.

 

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, 2015 and September 30, 2014, 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, 2015, two customers accounted for 37% of the Company’s sales. For the three months ended June 30, 2014, no single customer accounted for more than 10% of the Company’s sales. For the nine months ended June 30, 2015, two customers accounted for 26% of the Company’s sales. For the nine months ended June 30, 2014, one customer accounted for 13% of the Company’s sales.

 

 

GENERAL AGRICULTURE CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

  

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

For the three months ended June 30, 2015 and 2014, the Company did not outsource any navel oranges.

 

For the nine months ended June 30, 2015 and 2014, the outsourced navel oranges accounted for 23% and 25% of the Company’s total purchase, respectively. The Company purchased 100% outsourced navel oranges from one vendor.

 

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, 2015 and September 30, 2014, there are no potentially dilutive securities outstanding.

 

Recent Accounting Pronouncements

 

In April 2015, the FASB issued ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments in this ASU provide guidance that will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement, including whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license consistent with the acquisition of other software licenses; otherwise, the customer should account for the arrangement as a service contract. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Entities can elect to adopt the amendments either prospectively to all arrangements entered into after the effective date or retrospectively to all prior periods. The Company does not expect the adoption of the amendment in this ASU to have a significant impact on the Company's consolidated financial statements.

 

In July 2015, the FASB issued ASU No. 2015-011, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in this ASU do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method, but rather does apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments in this ASU should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company does not expect the adoption of the amendment in this ASU to have a significant impact on the Company's consolidated financial statements.

 

 

GENERAL AGRICULTURE CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 3 – Inventory

 

Inventory by major categories are summarized as follows:

 

		June 30, 2015				September 30, 2014
Raw material		$	56,359			$	68,780
Work in process			3,725,170				4,882,493
		$	3,781,529			$	4,951,273

 

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

 

Note 4 – ADVANCE PAYMENTS

 

Advance payments represent payments made to suppliers for goods and materials that have not been received. Advance payments are also reviewed periodically by the Company to determine whether their carrying value has become impaired. Historically, the Company has not experienced any losses as a result of these advances. As of June 30, 2015 and September 30, 2014, the Company had $554,518 and $2,189,956 of advance payments that related to payments for purchasing navel oranges from other parties as well as packaging materials and utilities.

 

Note 5 – Property and Equipment

 

Property and equipment consist of the following:

 

		June 30, 2015				September 30, 2014
Electronic equipment		$	147,012			$	142,956
Vehicles			296,608				303,345
Machinery and equipment			2,151,393				2,134,306
Buildings and improvements			7,849,533				7,787,198
Navel orange orchards			10,886,886				10,800,430
Subtotal			21,331,432				21,168,235
Less: Accumulated depreciation			8,083,612				7,182,930
Total		$	13,247,820			$	13,985,305

 

Depreciation expense was $288,675 and $232,765 for the three months ended June 30, 2015 and 2014, respectively, $903,336 and $830,029 for the nine months ended June 30, 2015 and 2014, respectively

 

Note 6 – Intangible Assets

 

Intangible assets consist of the following:

 

		June 30, 2015				September 30, 2014
Land use rights		$	187,808			$	186,317
Less: Accumulated amortization			35,683				32,605
Total		$	152,125			$	153,712

 

Amortization expense was $940 and $932 for the three months ended June 30, 2015 and 2014, respectively, $2,807 and $2,807 for the nine months ended June 30, 2015 and 2014, respectively.

 

 

GENERAL AGRICULTURE CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 7 – Prepaid Leases

 

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.

 

On September 3, 2014, General Fruit entered into another 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, 2015. The lease terms are effective from January 1, 2015 through December 31, 2024. The aggregate lease amount is approximately RMB23,750,000 ($3,857,000). As of December 31, 2014, the Company paid off the entire lease amount using cash generated from operations.

 

On December 18, 2014, General Fruit entered into a lease contract with an individual orchard owner, pursuant to which General Fruit was authorized to operate the orchards for 10 years starting January 1, 2015. The lease terms are effective from January 1, 2015 through December 31, 2024. The aggregate lease amount is approximately RMB 24,200,000 ($3,942,180) and pursuant to the contract terms, as of December 31, 2014, the Company paid off the entire lease amount using cash generated from operations.

 

In February 2015, General Fruit entered into lease contracts with three individual orchard owners. Pursuant to the contract, General Fruit was authorized to operate the orchard for 10 years starting January 1, 2015. The lease terms are effective from January 1, 2015 through December 31, 2024. The aggregate lease amount is approximately RMB20,860,000 ($3,408,524). As of March 31, 2015, 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 $1,134,788 and $846,594 for the three months ended June 30, 2015 and 2014, and $3,112,856 and $2,337,718 for the nine months ended June 30, 2015 and 2014 respectively.

 

 

GENERAL AGRICULTURE CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 7 – Prepaid Leases (Continued)

 

Lease expense attributable to future periods is as follows:

 

Twelve months ending June 30:
2016		$	4,524,572
2017			4,524,572
2018			4,524,572
2019			4,524,572
2020			4,524,572
Thereafter			11,319,859
		$	33,942,719

 

Note 8 – Short-Term Bank Loans

 

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), respectively. Pursuant to the Loan Agreements, the principal 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.  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.  Both bank loans were repaid in September 2014.

 

On September 29, 2014, the Company entered into another short-term bank loan agreement with Agricultural Development Bank of China, which allows the Company to borrow up to $5,521,600 (RMB34,000,000). Pursuant to the loan agreement, the principal will be repaid on July 28, 2015 and interest of 6.6%. 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 Jinshengyuan Guarantee Co., Ltd., an unrelated party, with a maximum exposure limit of $4,547,200 (RMB28,000,000). On September 30, 2014, Xingping Hou, CEO of the Company and General Fruit and General Preservation, jointly entered into a cross-guarantee agreement with Ganzhou Guoruitai Guarantee Co, Ltd. Pursuant to the cross-guarantee agreements, the Company paid $90,945 (RMB560,000) to the guarantor as a guarantee fee for the above bank loan.  On the maturity date of the loan, should the Company fail to make their debt payment, General Fruit, General Preservation and Xingping Hou will be obligated to perform under the cross guarantees by making the required payments, including late fees and penalties. As of June 30, 2015, the Company has drawn down $4,583,600 (RMB 28,000,000) of the loan to use for working capital purposes. The loan was fully repaid on July 28, 2015.

 

Note 9 – CUSTOMER DEPOSITS

 

Based on the sales contract, certain sales distributors of the Company are required to make security deposits. As of June 30, 2015 and September 30, 2014, the Company had customer deposits of $1,784,330 and $0, respectively.

 

 

GENERAL AGRICULTURE CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 10 – Due to Related Party

 

As of June 30, 2015 and September 30, 2014, the Company owed Hua Mei Investments Limited (“Hua Mei”), a related party (controlled by Mr. Hou Xingping, CEO of the Company), $2,120,536 and $1,508,566, respectively. These debts are non-interest bearing and payable on demand. The proceeds of these debts were utilized as working capital.

 

Note 11 – Income Taxes

 

General Agriculture Corporation and its U.S. subsidiary, 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, 2015 and 2014 as the US entities incurred losses.

 

General Agriculture Corporation’s offshore subsidiary, Han Glory International, is not subject to tax on income or capital gains under the laws of the British Virgin Islands. Another offshore subsidiary, Greater China International, did not earn any income that was derived in Hong Kong for the three and nine months ended June 30, 2015 and 2014, 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 2015 and 2014. As a result, for the three and nine months ended June 30, 2015 and 2014, there was no income tax provision for the Company.

 

The US shell company has net operating losses amounting to approximately $2,073,033 and $1,497,945 as of June 30, 2015 and September 30, 2014. These carryforwards will expire, if not utilized by June 2035 and September 2034, respectively. Management believes that it is more likely than not that the benefit from the NOL carryforwards will not be realized. In recognition of this uncertainty, we have provided a valuation allowance against the deferred tax asset relating to these NOL carryforwards. Management will review this valuation allowance periodically and make adjustments as needed.

 

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

 

		Nine Months Ended June 30,
		2015				2014
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			-				-

 

 

GENERAL AGRICULTURE CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 12 – Statutory Reserve

 

For the nine months ended June 30, 2015, statutory reserve activity was as follows:

 

Balance – September 30, 2014		$	2,539,170
Addition to statutory reserve			44,755
Balance – June 30, 2015		$	2,583,925

 

  

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, 2015 and 2014 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. All share and per share amount have been retroactively adjusted to reflect this reverse split.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). 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 believe 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, 2015 and 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 November 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.

 

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.

 

Impairment of Long-Lived Assets

 

Long-lived assets, including property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

 

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

 

Intangible Assets

 

Intangible assets are amortized using the straight-line method over their estimated period of benefit. Evaluation of the recoverability of intangible assets is made to take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. No impairments of intangible assets have been identified during any of the periods presented. Land use rights with a finite useful life are amortized on a straight-line basis over its estimated useful life of 50 years.

 

Foreign Currency Translation and Transactions

 

The accompanying unaudited consolidated financial statements are presented in U.S. Dollars (“$”). 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 U.S. GAAP.

 

Cash flows from the Company’s operations included in the statements of cash flows is calculated based upon the functional currency using the average translation rate. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with arithmetical changes in the corresponding balances on the consolidated balance sheets. No presentation is made that the RMB amounts could have been, or could be, converted into $at the rates used in translation.

 

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 $ for the purposes of preparing the consolidated financial statements were as follows:

 

  

		June 30, 2015				September 30, 2014
Period end RMB:USD exchange rate			0.1637				0.1624
Average Period RMB:USD exchange rate			0.1631				0.1627
Period end HKD:USD exchange rate			0.1290				0.1288
Average Period HKD:USD exchange rate			0.1290				0.1290

 

Results of Operations for the Three and Nine Months Ended June 30, 2015 Compared to the Three and Nine Months Ended June 30, 2014

 

Revenues

 

For the three months ended June 30, 2015, we had sales of $2,123,558, as compared to those of $1,187 for the three months ended June 30, 2014, a decrease of approximately $2,122,371 or 178801%. 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 2014 were still sold in April 2015.

 

For the nine months ended June 30, 2015, we had sales of $22,588,007, as compared to those of $19,490,078 for the nine months ended June 30, 2014, an increase of approximately $3,097,929 or 15.9%. The increase is mainly because of the increase in the production of navel oranges and the increase in customer demand compared to the same period of last year.

 

Our sales volume and average unit sales price during three months ended June 30, 2015 and 2014 as shown below: 

 

Three Months ended

Sales Volume (in KG)

Sale Price Per KG (in US$)

Total Sales Revenue (in US$)

June 30, 2015

2,283,275

0.93

2,123,558

June 30, 2014

N/A

N/A

1,187

Variance

N/A

N/A

N/A

% Variance

N/A

N/A

N/A

 

Our sales volume increased by approximately 14.4% for the nine months ended June 30, 2015, while the average unit sales price increased by approximately 0.7%, as shown below: 

 

Nine Months ended		Sales Volume (in KG)				Sale Price Per KG (in US$)				Total Sales Revenue (in US$)
June 30, 2015			28,749,675				0.79				22,558,007
June 30, 2014			25,140,855				0.78				19,490,078
Variance			3,608,820				0.01				3,097,929
% Variance			14.4	%			1.3	%			15.9	%

 

Cost of sales

 

Cost of sales increased by $883,011, from $4,877 for the three months ended June 30, 2014 to $887,888 for the three months ended June 30, 2015. Cost of sales increased by $1,811,470, or 22%, from $8,252,270 for the nine months ended June 30, 2014 to $10,063,740 for the nine months ended June 30, 2015. The increase in cost of sales for three and nine months ended June 30, 2015 was mainly because the price of navel oranges that we outsourced increased in cost compared to the same period of last year.

 

Gross profit and gross margin

 

Our gross profit was $1,235,670 for the three months ended June 30, 2015 as compared to gross deficit of $3,690 for the three months ended June 30, 2014.

 

Our gross profit was $12,524,267 for the nine months ended June 30, 2015 as compared to $11,237,808 for the nine months ended June 30, 2014, representing a gross margin of 55.4% and 57.7%, respectively. The changes in our gross profit margin for the three and nine months ended June 30, 2015 was mainly attributable to the different 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 $40,582 and $10,025 for the three months ended June 30, 2015 and 2014, respectively, an increase of $30,557. Selling expenses were $119,972 and $101,817 for the nine months ended June 30, 2015 and 2014, respectively, an increase of $18,155, or 17.8%, mainly due to increase in advertising and promotion.

 

Selling expenses for the three months ended June 30, 2015 and 2014 consisted of the following:

 

		Three Months Ended June 30,								Increase/decrease
		2015				2014				$				%
Shipping and handling		$	2,857			$	-				2,857				N/A
Compensation and related benefits			6,245				4,069				2,176				53.5	%
Advertising and promotion			29,377				5,020				24,357				485.2	%
Others			2,103				936				1,167				124.7	%
Total		$	40,582			$	10,025				30,557				304.8	%
Selling expenses as % of revenue			1.9	%			N/A				N/A				N/A

 

Selling expenses for the nine months ended June 30, 2015 and 2014 consisted of the following:

 

		Nine Months Ended June 30,								Increase/decrease
		2015				2014				$				%
Shipping and handling		$	21,773			$	25,112				(3,339	)			-13.3	%
Compensation and related benefits			18,645				26,143				(7,498	)			-28.7	%
Advertising and promotion			66,511				12,160				54,351				447	%
Others			13,043				38,402				(25,359	)			-66.0	%
Total		$	119,972			$	101,817				18,155				17.8	%
Selling expenses as % of revenue			0.53	%			0.52	%			0.01	%			1.9	%

 

General and administrative expenses

 

General and administrative expenses amounted to $172,213 for the three months ended June 30, 2015, as compared to $468,135 for the same period in 2014, a decrease $295,922 or 63.2%. General and administrative expenses consisted of the following:

 

		Three Months Ended June 30,								Increase/decrease
		2015				2014				$				%
Compensation and related benefits		$	70,753			$	73,694				(2,941	)			-4.0	%
Depreciation			28,079				25,628				2,451				9.6	%
Professional service			64,502				344,742				(280,240	)			-81.3	%
Office expenses			5,118				3,648				1,470				40.3	%
Meals and entertainment			590				20,423				(19,833	)			-97.1	%
Other			3,171				-				3,171				-
Total		$	172,213			$	468,135				(295,922	)			-63.2	%
G&A expense as a percentage of revenue			8.1	%			N/A				N/A				N/A

 

General and administrative expenses amounted to $904,662 for the nine months ended June 30 2015, as compared to $1,095,461 for the same period in 2014, a decrease $190,799 or 17.4%. General and administrative expenses consisted of the following:

 

		Nine Months Ended June 30,								Increase/decrease
		2015				2014				$				%
Compensation and related benefits		$	228,464			$	242,157				(13,693	)			-5.7	%
Depreciation			75,006				73,393				1,613				2.2	%
Professional service			498,124				651,188				(153,064	)			-23.5	%
Office expenses			14,665				10,599				4,066				38.4	%
Meal and entertainment			16,330				40,758				(24,428	)			-59.9	%
Other			72,073				77,366				(5,293	)			-6.8	%
Total		$	904,662			$	1,095,461				(190,799	)			-17.4	%
G&A expense as a percentage of revenue			4.0	%			5.6	%			-1.6	%			-28.6	%

 

  

Professional service fees was $65,042 and $498,124 during three and nine months ended June 30, 2015, as compared to $344,742 and $651,188 for the same period in 2014, a decrease of $280,240 and $153,064 or 81.3% and 23.5%, mainly due to expenses related to costs of the Company listing requirements paid during three and six months ended June 30, 2014.

 

Income (loss) from operations

 

For the three and nine months ended June 30, 2015, income from operations were $1,22,875 and $11,499,633, as compared to loss from operations of $481,850 and income from operations of $10,040,530 for the same period in 2014, an increase of $1,504,725 and $1,459,103 or 312.3% and 14.5%, mainly due to the reasons presented above.

 

Other income (expenses)

 

For the three and nine months ended June 30, 2015 and 2014, other expenses amounted to $41,957 and $148,708 as compared to other expense of 129,583 for the three months ended June 30, 2014 and other income of 250,607 for the nine months ended June 30, 2014.

 

The primary element of other income (expenses) during three and nine months ended June 30, 2015 and 2014 was interest expenses relating to loans from bank. For the three and nine months ended June 30, 2015, interest expenses were $70,029 and $214,119 as compared to $84,641 and $229,741 for the same period in 2014 The decrease in interest expenses was mainly due to the decrease in loan principal. The Company received government subsidy of $491,016 during nine months ended June 30, 2014.

 

Income tax expense

 

For the three and nine months ended June 30, 2015 and 2014, income tax was $0. 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. No provision for US federal income taxes were made for the three and nine months ended June 30, 2015 and 2014 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, 2015 and 2014, 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 inception. General Preservation was also approved for such exemption from income tax for the years 2015 and 2014. As a result, for the three and nine months ended June 30, 2015 and 2014, there was no income tax provision for the Company.

 

Net income

 

As a result of the factors described above, our net income for the three and nine months ended June 30, 2015 were $980,918 and $11,350,925 respectively. For the three and nine months ended June 30, 2014 our net loss was $611,433 and net income was $10,291,137, respectively.

 

Foreign currency translation gain

 

The functional currency of our subsidiaries operating in the PRC is the Chinese Yuan or Renminbi (“RMB”). The financial statements of our subsidiaries are translated to U.S. dollars using period end rates of exchange for assets and liabilities, and average rates of exchange (for the period) for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. As a result of these translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $90,504 for the three months ended June 30, 2015 as compared to $85,751 for the same period in 2014, and foreign currency translation gain of $419,235 for the nine months ended June 30, 2015 as compared to a loss of $148,038 for the same period in 2014,. This non-cash gain had the effect of increasing our reported comprehensive income.

 

  

Comprehensive income

 

For the three and nine months ended June 30, 2015, comprehensive income of $1,071,422 and $11,770,160 were derived from the sum of our net income of $980,918 and $11,350,925 plus foreign currency translation gain of $90,504 and $419,235, respectively.

 

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 $611,433 plus foreign currency translation gain of $85,751, the sum of our net income of $10,291,137 plus foreign currency translation loss of $148,038, respectively.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We have historically funded our operations primarily through paid-in capital, sales of goods, loans from our stockholders and short term loans from financial institutions in China. The Company currently generates its cash flow primarily through operations, which it believes will be sufficient to sustain current level operations for at least the next twelve months.

 

As of June 30, 2015 and September 30, 2014, our balance of cash and cash equivalents was $9,584,318 and $3,352,045, respectively, an increase of $6,232,273 or 185.9%, mainly due to net cash provided by operating activities.

 

The following summarizes the key components of the Company’s cash flows for the nine ended June 30, 2015 and 2014:

 

		Nine Months Ended June 30,								Increase/decrease
		2015				2014				$				%
Net cash provided by  operating activities		$	5,624,475			$	2,193,174				3,431,301				156,.5	%
Net cash used in investing activities			(57,013	)			(43,038	)			(13,975	)			32.5	%
Net cash provided by financing activities			610,983				577,762				33,221				5.7	%
Effect of foreign currency translation			53,828				14,129				39,699				281.0	%
Net increase in cash and cash equivalents		$	6,232,273			$	2,742,027				3,490,246				127.3	%

 

In summary, our cash flows were:

 

Net cash provided by operating activities increased by $3,431,301 to $5,624,475 in the nine months ended June 30, 2015, from net cash provided by operating activities of $2,193,174 for the same period in 2014. These changes were mainly caused by the following factors: a change in net income of $1,059,788, a change in cash provided by advance payments of $1,653,557, a change in cash used in prepaid leases of $1,167,476.

 

Net cash used in investing activity increased by $13,975, which is mainly due to cash expenditures on property and equipment.

 

Net cash provided by financing activities increased by $33,221 to $610,983 in the nine months ended June 30, 2015 compared to $577,762 of the same period in 2014. This was due to related party loans the Company borrowed in nine months ended June 30, 2015.

 

Working capital increased by $6,475,656 to $14,359,823 as of June 30, 2015 from $7,884,167 as of September 30, 2014. In order to stay competitive in the long-run, we leased 112,650 orange trees in the nine months ended June 30, 2015. Based on the lease rate of approximately $65.2 (RMB400) per tree in 2014, the total lease amounts were $7.35 million (RMB 45.1 million) that were paid during the nine months ended June 30, 2015.

 

As we are a good credit customer listed by the lending bank, we do not foresee any difficulty to renew our short-term bank loans at their maturity dates.

 

On September 29, 2014, the Company entered into a short-term bank loan agreement with Agricultural Development Bank of China, which allows the Company to borrow up to $5,521,600 (RMB34,000,000). Pursuant to the Loan Agreements, the principle will be repaid on July 28, 2015. The interest is being calculated using an annual fixed interest rate of 6.6%. The loan is secured by the funds deposited by Ganzhou Jinshengyuan Guarantee Co., Ltd., an unrelated party, and guaranteed by Xingping Hou, CEO of the Company and Ganzhou Jinshengyuan Guarantee Co., Ltd., with a maximum exposure limit of $4,547,200 (RMB28,000,000). On September 29, 2014, Xingping Hou, CEO of the Company and General Fruit and General Preservation, jointly entered into a cross-guarantee agreement with Ganzhou Jinshengyuan Guarantee Co, Ltd. Pursuant to the cross-guarantee agreements, the Company paid $90,945 (RMB560,000) to the guarantor as a guarantee fee for the above bank loan; and on the same day, General Preservation and Ganzhou Jinshengyuan Guarantee Co., Ltd. entered into another cross-guarantee agreement, pursuant to which, General Preservation shall mortgage its real properties and equipment to such third party guarantee. 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, General Fruit, General Preservation and Xingping Hou will be obligated to perform under the cross guarantees by primarily making the required payments, including late fees and penalties. As of September 30, 2014, the Company has drawn down $4,547,200 (RMB 28,000,000) of the loan to use for working capital purposes. The loan was fully repaid on July 28, 2015.

 

  

As of June 30, 2015 and September 30, 2014, the Company had outstanding debts from a related party, Hua Mei Investments Limited (“Hua Mei”), of $2,120,536 and $1,508,566, 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

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure material information required to be disclosed in our reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, we recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of June 30, 2015 in ensuring that information required to be disclosed by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the Exchange Act rules and forms due to the material weaknesses described below. As a result, we performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management believes the consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

 

Material Weaknesses

 

Management evaluated the effectiveness of our internal control over financial reporting as of September 30, 2014. In making the assessment, management used the framework in “1992 Internal Control–Integrated Framework” promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the “COSO” criteria. Based on that assessment, our principal executive officer and principal financial and accounting officer concluded that our internal control over financial reporting was not effective as of September 30, 2014 because a material weakness existed in our internal control over financial reporting. Specifically, the material weakness related to a lack of sufficient personnel with the appropriate level of knowledge, experience and training in the application of U.S. GAAP standards in the preparation of the financial statement.

 

  

Remediation of Material Weaknesses

 

In July 2013, the Company hired a Chief Financial Officer and elected an audit committee. Our Chief Financial Officer has years of experience in audit and financial statement preparation under US GAAP and is Certified Public Accountant in the United States. Our audit committee consists of individuals with knowledge, skill and experience in accounting and financial matters. The audit committee chairman has extensive experience in financial audit and internal control audits of Chinese public companies and is a Chinese Certified Public Accountant and an International Certified Internal Auditor.

 

The Company has started holding regular seminars, briefings and training sessions to help employees stay current on recent developments of internal control procedure and new SEC rules and regulations and accounting pronouncements.

 

Management is establishing a formal process for closing the Company’s books and preparing and reviewing its financial statements, which includes all the appropriate closing and consolidating entries, as well as the preparation of the appropriate disclosures. In furtherance of this process, on a monthly basis the Company’s controller and manager of the accounting department will execute financial statements, review the adjusted entries and the closing entries and add accounting memos, if necessary.

 

Conclusion

 

The Company believes that these measures are addressing the internal control weaknesses over financial reporting as the Company continues the process of remediation of the material weaknesses. However, until these remediation measures have been tested, we cannot assure or report that the remediation was successful. We are committed to continually improving our internal control processes. Under the direction of the Audit Committee, management will continue to review and make changes it deems necessary to the overall design of the Company’s internal control over financial reporting, including implementing further improvements in policies and procedures and taking additional measures to address any control deficiencies. As we continue to evaluate and work to improve our internal controls over financial reporting, we may determine that additional measures are necessary to address control deficiencies. Moreover, we may decide to modify certain of the remediation measures we implement as we continue to evaluate and work to improve our internal controls over financial reporting.

 

Changes in Internal Control over Financial Reporting

 

Except as discussed in this Item 4 there were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION  

 

ITEM 1.       LEGAL PROCEEDINGS

 

None.

  

ITEM 1A.    RISK FACTORS

 

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

 

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

 

None.

 

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 12, 2015	By:	/s/ Xingping Hou
	Name:	Xingping Hou
	Title:	Chief Executive Officer
		(Principal Executive Officer)
Date: August 12, 2015	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