Attached files
| file | filename |
|---|---|
| EX-32.1 - EXHIBIT 32.1 - AMAYA Global Holdings Corp. | v425649_ex32-1.htm |
| EX-31.1 - EXHIBIT 31.1 - AMAYA Global Holdings Corp. | v425649_ex31-1.htm |
| EX-31.2 - EXHIBIT 31.2 - AMAYA Global Holdings Corp. | v425649_ex31-2.htm |
| EX-32.2 - EXHIBIT 32.2 - AMAYA Global Holdings Corp. | v425649_ex32-2.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the Fiscal Year Ended September 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 Registrant as specified in its charter)
| Delaware | 35-2379917 |
| (State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) |
| organization) | |
| Room 801, Plaza B, Yonghe Building, | |
| No.28 AnDingMen East Street | |
| Dongcheng District | |
| Beijing, China | 100007 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number:
Phone: 86-10-64097316
Fax: 86-10-64097026
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 (§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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained herein, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer ¨ |
| Non-accelerated filer ¨ | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of March 31, 2015, the aggregate market value of the voting stock held by non-affiliates of the Registrant (3,754,849 shares of common stock held by non-affiliate shareholders) was $19,149,729.9.
On December 1, 2015, we had 15,918,940 shares of common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
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CAUTION REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this report may constitute forward-looking statements within the meaning of applicable securities laws. All statements that are not historical facts are forward-looking statements. Forward-looking statements include statements about matters such as: future prices and sales of, and demand for, our products; future industry market conditions; future changes in our business plans and objectives, production capacity and operations; future production, operating and overhead costs; future employment and contributions of personnel; tax and interest rates; capital expenditures and their impact on us; productivity, business process, rationalization, investment, acquisition, consulting, operational, tax, financial and capital projects and initiatives; contingencies; environmental compliance and changes in the regulatory environment; and future working capital, costs, revenues, business opportunities, debt levels, cash flows, margins, earnings and growth.
The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “plan,” “should,” “intend,” “may,” “will,” “would,” “potential” and similar expressions identify forward-looking statements, but are not the exclusive means of doing so. These statements are based on assumptions and assessments made by our management in light of their experience and their perception of historical and current trends, current conditions, possible future developments and other factors they believe to be appropriate. Forward-looking statements are not guarantees, representations or warranties and are subject to risks and uncertainties that could cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements. Some of those risks and uncertainties include the risk factors discussed in Item 1.A - “Risk Factors” and the following: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
All subsequent written and oral forward-looking statements by or attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. We undertake no obligation to publicly update or revise any forward-looking statement.
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References to “GELT” shall refer to General Agriculture Corporation. References to the “Company” “we,” “our,” “ours” and “us,” shall refer to General Agriculture Corporation, and include our operating subsidiaries in the PRC, Xingguo General Fruit Industry Development Co., Ltd. (“General Fruit”) and its wholly owned subsidiary Xingguo General Red Navel Orange Preservation Company Ltd. (“General Preservation”).
BUSINESS
Company Background
General Agriculture Corporation (“GELT”) 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, 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. To accomplish the Share Exchange Agreement, GELT issued to GRH an aggregate of 125,112,803 shares of the common stock of GELT, at par value of $0.0001 per share. GELT was delivered with zero assets and zero liabilities at time of closing. Immediately prior to the Share Exchange, GELT had 6,750,000 shares of Common Stock issued and outstanding. Simultaneously with the transaction, the two principal shareholders of GELT surrendered for cancellation an aggregate of 4,513,252 shares of Common Stock beneficially owned by them. The transaction was regarded as a reverse merger whereby GRH was considered to be the accounting acquirer. Although the Company is a legal parent company, the share exchange was treated as a recapitalization of GRH. Thus, GRH is the continuing entity for financial reporting purposes. The financial statements have been prepared as if GRH had always been the reporting company and then on the share exchange date, had reorganized its capital stock.
On September 30, 2011, GRH entered into a Share Transfer and Issuance Agreement (the “Agreement”) with Han Glory International Investment Limited (“Han Glory International”), a company incorporated on April 28, 2011 under the laws of British Virgin Islands and Hua Mei Investments Limited (“Hua Mei”), a company incorporated on April 26, 2011 under the laws of the British Virgin Islands. Under the Agreement, GRH issued 74,814,862 shares to Hua Mei, the sole stockholder of Han Glory International, in exchange for all shares and beneficial interest of Han Glory International. This transaction is treated as a reverse merger, and therefore, after the share exchange, Han Glory International became the wholly owned subsidiary of GRH.
On May 18, 2011, Han Glory International purchased all shares of Greater China International Investment Limited (“Greater China International”), a company incorporated on December 4, 2009 under the laws of Hong Kong, from Zhihao Zhang, the sole stockholder of Greater China International, for $1,290 (HK$10,000). As a result, Greater China International became the wholly owned subsidiary of Han Glory International.
On January 13, 2010, Greater China International formed Nanchang Hanxin Agriculture Technology Co., Ltd, a wholly foreign-owned enterprise (“WFOE”) in the city of Nanchang, Jiangxi Province, the 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.
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General Fruit was formed in Xingguo County, Jiangxi Province, under the corporate laws of 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.
Our current corporate structure is as follows:
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Our Current Business and Products
We are one of the leading producers of “Gannan” navel oranges in China, with operations that include the planting, growing, harvesting, post-harvest processing and temperature controlled preservation and storage of our navel oranges. Through our vertically integrated model, we exercise strict and direct control over the quality of our oranges, which we believe gives us a distinct competitive advantage.
We operate through a flexible procurement model by entering into contractual agreements with local farmers for the planting and harvesting work in our orchards on one hand, while also relying on third party farmers and cooperatives that do not use our land by purchasing some of their production on the other hand. We believe that this model provides us a stable and safe source of supply. Once the navel oranges are harvested or purchased, we commercially process and preserve them according to the standards of organic navel oranges, store and subsequently sell them throughout many regions in the PRC.
Led by a management team with extensive experience in the industry, we have put in place several investment programs that have allowed us to achieve our current strong position in the domestic market, with our scale and scope evidenced by the following:
| • | During fiscal year 2015, we sold over 28,750 metric tons of navel oranges, which generated sales revenue of $22.5 million and 55.4% net margin. |
| • | We established significant orchards with approximately 26,585 mu of land (4,380 acres, a “mu” is a Chinese acre equal to approximately 0.16 acres) in Ganzhou, Jiangxi Province, with the number of planted trees growing by over 90% from 536,586 orange trees at the end of fiscal year 2012 to 1,022,014 orange trees at the end of the fiscal year 2015. |
| • | We constructed one of the largest navel orange temperature-controlled facilities in the country which is 19,176 square meters (approximately 4.74 acres) with a 7,000 metric ton storage capacity. |
| • | Numerous honors and certifications awarded to our company and our “General Red” brand name for the quality of our oranges, including the “High Quality Navel Orange” awarded by China (Ganzhou) Navel Orange Festival committee, and “China Famous Fruit” awarded by China Fruit Distribution Association. |
Our goal is to become the largest integrated grower, packager and distributor of navel oranges in China. We plan to pursue continued growth and margin expansion through a strategy focused on the increase of our orchard and navel orange trees.
Industry and Market Overview
The navel orange cultivation and harvesting process can be divided into three categories: production, post-harvest processing and preservation.
Navel Orange Production
The navel orange industry has been growing rapidly in China due to governmental support and an increase in demand for navel oranges, with the domestic production growing from 270,000 metric tons in 2000 to 3,140,000 metric tons in 2013, with the compound annual growth rate of 21%. The Ministry of Agriculture and the Municipal Government of Ganzhou, Jiangxi Province, have provided incentives to encourage the production of navel oranges, including tax reduction, subsidies, free education, seedling promotion, and production standardization. As a result, the domestic production is forecasted to further grow at 8% annual rate within the next three years, according to Beijing Huaqing Zongheng Information and Statistics Center.
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Source: Beijing Huajing Zongheng Information and Statistics Center
We anticipate that the demand for navel oranges in China will continue to increase. According to the Ministry of Agriculture of China, the per capita consumption of fresh oranges is 12.7 kg in China, compared to 17.2 kg worldwide. Approximately 98% of navel oranges produced in China are sold in the domestic market, with only 2% exported to other countries. More than 95% of citrus fresh fruit is sold domestically in China, with less than 5% of such fruit exported. A large portion of raw materials for orange juice is imported from Brazil and the US. We believe that such data indicates there is a significant room for growth in this industry in China.
In addition, navel orange production requires stringent climate conditions; therefore, there are limited areas in the world where navel oranges can be produced. As a result, production is primarily concentrated in warmer climates, such as California, Spain, South Africa, Australia, and “Gannan — Southern Hunan — Northern Guangxi” in China. The Chinese government has identified the Gannan area as “the hometown of the navel orange in China”, and has been supportive of local producers. The Ministry of Agriculture named Gannan navel oranges as one of the nine competitive agricultural products in the country, and listed Gannan as one of the key developing areas.
As one of the leading enterprises in Gannan, we play a decisive role in the navel orange industry. Furthermore, even though “Gannan Navel Orange” is the common brand shared by all producers in Gannan area, we believe that “General Red” brand stands out among all of the other Gannan brands because of the measures we take to ensure the highest quality standards and our consistent branding strategy.
Post-harvest Processing
We believe the post-harvest processing of harvested fruits also has broad prospects in China. Post-harvest processing includes selecting, grading, cleaning, pre-cooling, waxing and packaging. Proper processing can minimize post-harvest loss, maintain the high nutritional content and freshness, slow down the metabolic process of fruit in its natural state, enhance the appearance of the fruit and extend the life of the fruit. Currently, 10% of fresh fruits are processed in the post-harvesting period in China, lower than the average level of 35% worldwide.
Preservation and Storage
The storage and preservation technology in China lags behind that of developed countries in the citrus exports sector due to grossly inadequate storage and preservation facilities. According to data published in the “Agricultural Product Cold-Chain Logistics Development Plan” formulated by China National Development and Reform Commission, the rate of cold chain distribution of fruits and vegetables is only 5%, and the rate of refrigerated transportation hardly reaches 15%, which is much lower than in developed countries. Cold chain distribution is a temperature controlled distribution supply chain, resulting in an uninterrupted series of storage and distribution activities by maintaining a given temperature. It is used to help extend and ensure the shelf life of products, including agricultural products. According to China National Development and Reform.
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Commission, the loss rate in distribution of oranges in China is 20 – 30%, compared with less than 5% in developed countries. The National Development and Reform Commission of China developed a “cold chain logistics development plan” in 2010, to improve the cold chain distribution rate to 20% and refrigerated transportation rate to 30%, and reduce loss rate in distribution to 15%.
Operations
Our vertically-integrated operations cover every step of the navel orange cultivation, harvest, post-harvest processing, storage and preservation.
We believe that the scale of our operations represents a key success factor and we have made continuous efforts to increase the size of our orchards and land planting area, as presented by the table below. In addition, we have been able to grow the number of planted navel orange trees in our orchards by over 90% between 2012 and 2015, from 536,586 trees to 1,022,014 trees.
| Land Planting Area(1) | ||||||
| in mu (acres) | Sept-2013 | Sept-2014 | Sept-2015 | |||
| Own Orchards | 10,028 mu (1,652 acres) | 10,028 mu (1,652 acres) | 10,028 mu (1,652 acres) | |||
| Leased Orchards | 10,085 mu (1,661 acres) | 14,398 mu (2,371 acres) | 16,557 mu (2,728 acres) | |||
| Total | 20,113 mu (3,313 acres) | 20,113 mu (4,023 acres) | 26,585 mu (4,380 acres) |
(1) There is no private ownership of land in China. Land is usually owned by the state and the government grants land use rights for specified terms. We have obtained several Land Use Right Certificates. In addition, we have entered into certain lease agreements with various parties and pay rent for the use of their land.
Moreover, we have put in place a production and procurement model that we believe provides us a constant and stable source of supply on one hand, while providing us with flexible cost control mechanisms on the other. This procurement model is illustrated below:
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In certain company-owned orchards, we have direct employees working in the orchards, and there is no involvement of unrelated third parties in production. In other orchards that we own, we hire local farmers to take care of orchards at a fixed fee per tree, which has been in the range of approximately $8.0 to $9.0 per tree per year since 2011. We provide local farmers with raw materials, such as seedlings and fertilizer, as well as production tools, electricity and irrigation facilities necessary for planting and harvesting the oranges. Our in-house fruit forest management and protection team provides technical support and guidance to the farmers to optimize cultivation, irrigation, fertilization, water and soil conservation, administration of organic pesticides for weed and pest control, and protection against frost and rain. We instruct farmers on how to implement these quality control measures.
For the leased orchards, we adopt a different model. Prior to the growing season, the farmers enter into short-term sales contracts with us, which provide that we will purchase a specified quantity of oranges from the farmers, based on weight, at a specified purchase price. We divide the production yield with farmers, so that 60% of all product is for us, and 40% is for the farmers. These contracts further provide that we are only obligated to purchase those oranges that meet our quality specifications. We believe that this is an attractive model for farmers, as it allows them to bypass the logistics and added costs of going through wholesale or retail markets to sell their oranges. This model is also beneficial to us because we have an ongoing supply of oranges, which we know are grown according to our specifications enabling us to consistently maintain our high level of quality. In addition to production in our owned and leased orchards, we buy navel oranges from outside parties. However, the production volume from our owned and leased orchards has increased from 35% of total sales in fiscal year 2009, to 72% in fiscal year 2012, 78% in fiscal year 2013, 84% in fiscal year 2014, and 84% in fiscal year 2015.
Once the navel oranges are harvested or purchased, we commercially process, preserve, store them in our temperature controlled facility and subsequently sell them throughout the PRC.
Our post-harvest processing equipment, which includes our selection and packaging lines, was purchased from MAF RODA Group of Spain (“MAF RODA”). As part of the purchasing contract, MAF RODA provides us with technical training on how to operate the equipment, which includes educating our employees about the automatic control technology used in the equipment. In addition, we have two modern sorting lines at our Ganzhou facility, with a sorting capacity of 40 tons/hour. These two sorting lines clean, disinfect and apply wax coating to the oranges, and then select, classify, and send the navel oranges to pre-storage.
Currently, most of the navel orange storage facilities in the Southern Jiangxi region are cold storage, with only a few being temperature-controlled facilities. As a result, the fact that we have constructed one of the largest navel orange temperature-controlled preservation facilities in the region which is 19,176.31 square meters (approximately 4.74 acres) with a maximum storage capacity of 7,000 metric tons, gives us a distinct advantage regarding the quality of our products.
The temperature-controlled storage and preservation technology used in our facility comes from Beijing Furui Ventilation Protection Company (“Beijing Furui”), which was previously a subsidiary of China Agricultural University and Chinese Academy, of Agricultural Sciences. Beijing Furui was the construction contractor in the design and construction of our temperature-controlled preservation facility, and provided the main equipment used in the facility. In addition, our preservation facility is an air-controlled facility in which we control not only the temperature but also the composition of the air. A nitrogen rich air environment slows down the oxidation process and prolongs the life of the fruits.
Our Competitive Strengths
Our current strong market position and potential future growth can be attributed to the following key factors and competitive strengths:
| • | Our vertically integrated operations, which allow us to exercise a better control of the quality of our products and generate higher margins; |
| • | The strategic location of our planting areas, which affords us numerous advantages, including desirable climate conditions and soil for c_ultivating organic oranges, as well as proximity to China’s extensive transportation network; |
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| • | Our product quality and brand name, for which we have received more than 20 honors related to our navel oranges and our preservation facility; |
| • | Our controlled atmosphere storage and preservation technology, which allows us to maintain a storage period of up to 6 – 8 months, improve orange appearance and color, and retain a fresh flavor, and which we believe enables us to sell navel oranges at a higher price during the off-season when other producers may not have sufficient supply; and |
| • | Our management and expert team, which has developed extensive expertise through formal education on farming techniques, in-house training and several years of experience in the navel orange industry. |
Competitors
Even though we are one of the largest integrated navel orange companies with both growing areas and post-harvest processing and preservation facilities in China, the whole industry is still very fragmented and we believe the industry will consolidate and present good opportunities for growth through acquisitions. Our competitors are pure navel orange growers, pure post-harvest processors, or both. The largest competitor in navel orange growing is Jiangxi Wangpin Agricultural Science and Technology Development Co. Ltd. with 5,600 mu (992 acres) of navel orange groves. The largest competitors in post-harvest processing and preservation are Anyuan Shengda Fruit Industrial Co. Ltd with 20,000 metric ton of preservation capacity, and Xinfeng Yuhe Agricultural Development Co. Ltd. with 30,000 metric tons of preservation capacity.
The following table lists our competitors in China and their profiles, based upon information accessible to us:
| Planting Base (mu) | Storage | |||||||||||||||||||||
| Area of Organic | Sorting Line | Facility | Leading | |||||||||||||||||||
| Total Area | Planting Base for | Capacity | Capacity | Enterprise | ||||||||||||||||||
| Company Name | (mu) | (acres) | Navel Orange | (ton/hour) | (tons) | Qualification 1 | ||||||||||||||||
| Anyuan County Anshengda Fruit Industry Co., Ltd. | 5,000 | 823 | None | 50 | 20000 | Provincial Level | ||||||||||||||||
| Jiangxi Yangshi Fruit Co., Ltd. | None | None | None | 120 | 20,000 | Provincial Level | ||||||||||||||||
| Jiangxi Wangpin Agricultural Science and Technology Development Co., Ltd. | 5,600 | 922 | None | 30 | None | Provincial Level | ||||||||||||||||
| Jiangxi Shengwei Fruit Industry Co., Ltd. | None | None | None | 20 | 8000 | None | ||||||||||||||||
| Jiangxi Shengdi Fruit Industry Development Co., Ltd. | 3,000 | 494 | None | None | None | None | ||||||||||||||||
| Xinfeng County Yuhe Agricultural Development Co., Ltd. | None | None | None | 65 | 30,000 | Provincial Level | ||||||||||||||||
| Xunwu County Yuanxing Fruit Industry Co., Ltd. | 3,000 | 494 | None | 40 | 5,000 | Provincial Level | ||||||||||||||||
| Huichang County Lvfeng Fruit Industry Co., Ltd. | None | None | None | 20 | 9,000 | Provincial Level | ||||||||||||||||
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(1) The Leading Enterprise Qualification is designated by the government based on the company’s operational scale, economic benefits, and influence in the region. It represents a company’s prestigious status in the industry and in the region. There are three levels of Leading Enterprise Qualifications, National, Provincial and Municipal, designated by central government, provincial government and municipal government respectively.
The scale and the scope of our operations represent our main competitive advantages. As one of the largest growers of navel oranges in Gannan and a fully integrated company, we are able to exercise better control over the source and quality of our navel oranges.
Growth Strategy
As one of the leading vertically integrated producers of navel oranges in Gannan, we believe that we are in a unique position to take full advantage of the vast opportunities in our domestic market. We plan to leverage our strengths in order to achieve continued growth and increased margin by:
Increasing Navel Orange Orchards in Gannan: within the next two years, we will continue to build, acquire and lease navel orange orchards in the Gannan region, because of the geographic advantages of Gannan presented earlier. Our strategy will focus primarily on increasing the size of our orchards by entering into lease agreements with other land owners. During the year ending September 30, 2015 and 2014, we leased 112,650 and 207,502 additional orange trees in Gannan, respectively.
Promoting “General Red” Brand Name: as part of our continuous efforts in the next few years, we plan to promote and enhance the “General Red” brand by placing General Red trademark signs and advertisements in member stores and in the target markets, employing consistent product management system and high standards for product quality, conducting customer feedback surveys, and bringing added convenience to end-customers.
Suppliers
In addition to the production of oranges in our own and leased orchards, we source oranges from outside parties. We are supplied with what is referred to as “raw navel oranges,” which are oranges prior to post-harvest processing. In a typical supply contract that we enter into with an outside party, we require the supplier to supply a certain amount of navel oranges at a predefined price pursuant to our quality standards during the harvest season. The suppliers are responsible for the cost of transportation to our facility. Upon execution of purchase contracts with local farmer collectives, as a measure to secure title in the navel oranges to be purchased, the Company usually makes an advance payment equivalent to approximately 10% to 20% of the total contract price when executing purchase contracts with local farmer collectives. Upon receipt of navel oranges, these advance payments will be applied against related invoices.
The ratio of outside supplies of navel oranges has declined from approximately 55% in fiscal year 2011 to 28% in fiscal year 2012, 23% in fiscal year 2013, 16% in fiscal year 2014 and 16% in fiscal year 2015, due to the increase in navel orange trees that we own and lease.
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When we initially develop the orange groves, our fruit seedlings are sourced from seedling cultivation centers, which are typically the result of the joint efforts among the agriculture research institutes, and government agency in agriculture technology promotion.
We purchase the fertilizers, other production materials and tools from the public market. We have not had any problems in sourcing the supplies.
Significant Customers
Our products are currently sold through distributors in over 11 provinces of China including Jiangxi, Beijing, Shanghai, Zhejiang, Guangxi, Shandong, Guangdong, Anhui, Helongjiang, Inner Mongolia and Jiangsu. We currently do not sell directly to consumers or retail markets.
Set forth below is a list of our top five customers during the year ended September 30, 2015:
Customer | Percentage of total sales | |||
| Sichun Huaxinghongcheng Investment Co., Ltd | 14 | % | ||
| Beijing Laoliao Fruit Trade Co., Ltd. | 12 | % | ||
| Shenzhen Jialun Xingnong Fruit Trade Co., Ltd. | 8 | % | ||
| Beijing Green Area Fruit Co., Ltd. | 8 | % | ||
| Feng Xin | 7 | % | ||
Our sales contract usually provides that our distributors will buy from us a minimum amount of navel oranges during a predefined period of the year at market price. Each distributor is assigned to a geographic region for the sale of our branded navel oranges to end consumers. Within its assigned region, a distributor must execute our company’s sales strategy, and protect our company’s brand name. We split the long-distance transportation cost with distributors equally. Since October 2013, the distributors bear all transportation cost. Distributors deposit a small amount with us as a security deposit, and settle the payment to us on a monthly basis.
PRC Government Regulation
Environmental Matters
We are subject to a variety of governmental regulations related to environmental protection. The environmental regulations applicable to us primarily include the PRC Environmental Protection Law, the Environment Impact Evaluation Law, the PRC Water Pollution Prevention and Control Law, the Implementation Rules of the PRC Water Pollution Prevention and Control Law, the PRC Air Pollution Prevention and Control Law, the Implementation Rules of the PRC Air Pollution Prevention and Control Law, the PRC Solid Waste Pollution Prevention and Control Law.
According to PRC Environmental Protection Law, measures must be taken to protect the ecological environment while natural resources are being developed or utilized.
According to the Environment Impact Evaluation Law, to commence production which may potentially lead to environmental pollution during the course of production, an environmental impact evaluation report or form should be prepared to provide a complete and detailed evaluation of the potential pollution as well as the impact on the environment. Such environmental impact appraisal report or form should be submitted to the environment protection authorities for approval.
In order to comply with these requirements, we may need to spend certain amounts of money and other resources from time to time to (i) construct or acquire new equipment, (ii) conduct Environment Evaluation for the expansion of our business if required by governmental authority, (iii) use pesticide properly and keep ecological environment of the land, (iv) modify, upgrade, or replace existing and proposed equipment and (v) clean up or decommission our facilities or other locations to which our wastes have been sent.
We believe that we have completed environment evaluation report for our orange storage warehouses and selection and packaging line which was approved by local bureau of environmental protection, and are compliant with PRC environmental guidelines and regulations in all material respects.
We are not aware of any significant costs or effects of our compliance with environmental laws.
Agriculture Laws
On July 2, 1993, the Standing Committee of National People's Congress of the PRC promulgated the Agriculture Law, which sets forth certain principles and various measures designed to ensure the steady development of the agricultural industry. For example, the production or operation of agricultural products that affect the health of people or animals, such as seeds, must meet registration and approval requirements of the PRC laws and regulations. The Agriculture Law regulates the planting, processing, selling, preservation and transportation of agricultural products. Agricultural Law stipulates that farmers and organizations for production and operation of agriculture products shall keep good maintenance of their lands, make a rational use of chemical fertilizers and pesticides, increase their application of organic fertilizers so as to improve soil fertility and prevent the land from pollution, destruction and soil fertility declination. The Company believes it is in material compliance with the Agricultural Law.
According to Law of the People's Republic of China on Quality and Safety of Agricultural Products passed by Standing Committee of National People’s Congress on April 29, 2006, effective on November 1, 2006, the administrative departments for agriculture under the governments at or above the county level shall be responsible for supervision and control of the quality and safety of agricultural products; and the relevant departments of the people's governments at or above the county level shall, in compliance with the division of their duties, be responsible for the work related to the quality and safety of agricultural products. Agricultural production enterprises and specialized cooperative economic organizations of farmers shall test the quality and safety of their products themselves or entrust the testing to a testing agency. The Company has engaged a testing agency to test soil, cultivating water and air for certain planting areas to ensure the quality and safety of its products.
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According to Law of the People's Republic of China on Quality and Safety of Agricultural Products, when agricultural products is marketed by agricultural production enterprises, specialized cooperative economic organizations of farmers, and by units or individuals engaged in the purchase of agricultural products, then such agriculture products will be required to be packed or labeled in case the packing and labeling is necessary according to related regulations and shall be marketable only after they are packaged or labeled. The Company believes that it has packed and labeled its orange products as in compliance with the relevant laws and regulations.
New Plant Varieties Regulation
The Regulation for the Protection of New Plant Varieties of was promulgated by the State Council on March 20, 1997 and became effective on October 1, 1997. The administrative departments of the State Council in charge of agriculture and forestry are, according to their respective functions, jointly responsible for the acceptance and examination of applications for the rights to new varieties of plants and the grant of such rights. A person that has completed the production, sale or dissemination of a new variety of plant which has been granted a variety right will have an exclusive right in its protected variety. Unless otherwise provided in the regulations, no other person may use such variety for commercial purposes without a license from the owner of the rights to the variety. The Company does not currently have the exclusive rights of a protected variety to any brand of navel orange. As its business develops, the Company may file for protection of its own orange variety in the future.
Forest Laws
The PRC Forestry Law passed by the Standing Committee of the National People’s Congress on April 29, 1998 and effective as of July 1, 1998, as well as its implement rules promulgated by State Council on January 29, 2000 (“Forest Law”), is enacted to protect, cultivate and reasonably use of forest resources. It governs the afforestation, cultivation, felling, utilization, management and administration of forests within the PRC territory. PRC Forestry Law divided the forests into the following five categories: (1) Protection forests: forests, trees and bushes mainly aimed at protection, inclusive of water source storage forests, forests for water and soil conservation, wind protection and sand bind forests, forests for farmland and grassland protection, river bank protective belts and road protection belts; (2) Timber stands: forests and trees mainly at timber production, inclusive of bamboo groves mainly aimed at bamboo production; (3) Economic forests: trees mainly aimed at the production of fruits; edible oils, soft drinks and ingredients; industrial raw materials; and medicinal materials; (4) Firewood forests: trees mainly aimed at the production of fuels; (5) Forests for special uses: forests and trees mainly aimed at national defense, environmental protection and scientific experiments, inclusive of national defense forests, experimental forests, parent stands, environmental protection forests, scenic beauty forests, trees for sites of historical interests and the forests of natural protection areas. Forest Law prohibits land reclamation at the expense of deforestation, rock quarrying, sand quarrying, soil extracting and other activities at the expense of deforestation. The Company believes it is in material compliance with the Forestry Law.
PRC Quarantine Law on the Import and Export of Plants and relevant rules and regulations
The PRC Quarantine Inspection Law on the Import and Export of Plants passed by the Standing Committee of the National People’s Congress on October 30, 1991, and effective as of April 1, 1992, is aimed at preventing diseases, insect pests and harmful organisms from spreading into or out of the country, protecting the production of agriculture, forestry, animal husbandry and fishery as well as human health, and promoting the development of foreign economic relations and trade. The implement rule of PRC Quarantine Inspection Law on the Import and Export of Plants was promulgated by State Council on December 2, 1996 and effective as of January 1, 1997. Administration Rule of Quarantine Inspection of Exporting Fruits was promulgated by General Administration of Quality Supervision, Inspection and Quarantine of PRC (“AQSIQ”) on December 25, 2006 and effective on February 1, 2007.
Pursuant to PRC Quarantine Inspection Law on the Import and Export of Plants and its implementing regulations, (i) the Ministry of Agriculture shall be responsible for the import and export quarantine of animal and plant; and (ii) enterprises importing plant seeds, seedlings or other propagating materials must submit an application in advance and go through the formalities of quarantine inspection. In addition, according to Administration Rule of Quarantine Inspection of Exporting Fruits, the fruits may export after the pass of quarantine inspection.
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We believe that we have taken reasonable measures to ensure material compliance with PRC Quarantine Law and its related implementing regulations. We have obtained registration certificates issued by Jiangxi Entry-Exit Inspection and Quarantine Bureau for the export by our orchard and packaging factory of navel oranges in accordance with the Administration Rule of Quarantine Inspection of Exporting Fruits promulgated by AQSIQ. The Administration Rule of Quarantine Inspection of Exporting Fruits also provides that the Bureau for Inspection and Quarantine execute the inspection and quarantine for exporting fruits and the goods shall be permitted for export if the exporting fruits pass such inspection and quarantine and obtain related certificates issued accordingly. Our exported oranges have passed the inspection and quarantine.
Foreign Currency Exchange
Pursuant to the Foreign Currency Administration Rules promulgated on January 29, 1996 and amended on August 1, 2008, as well as various regulations issued by State Administration of Foreign Exchange (“SAFE”) and other relevant PRC government authorities, the RMB is freely convertible into a foreign currency for current account items, including trade-related receipts and payments, interest and dividends, but not for capital account items, such as direct equity investments, loans and repatriation of investment, unless prior approval from SAFE or a local branch has been obtained. Transactions that occur within the PRC must be settled in RMB. Unless otherwise approved, PRC companies must repatriate foreign currency payments received from abroad and domestic enterprises must convert all of their foreign currency receipts into RMB. Foreign-invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks subject to a cap set by SAFE or its local branch.
Intellectual Property
The PRC Trademark Law, adopted on August 23, 1982 and revised on October 27, 2001, protects the proprietary rights of registered trademarks. The State Administration for Industry and Commerce’s Trademark Office handles trademark registrations and grants an initial term of rights of ten years to registered trademarks. Upon the initial term’s expiration, a second term of ten years may be granted under a renewal. Trademark license agreements must be filed with the Trademark Office or a regional office. In addition, if a registered trademark is recognized as a well-known trademark in a specific case, the proprietary right of the trademark holder may be extended beyond the registered sphere of products and services to which the trademark relates.
We own and utilize the domain of www.gelt-cn.com and the trademarks listed below. We continuously look to increase the number of our trademarks where necessary to protect valuable intellectual property. We regard our trademarks and other intellectual property as valuable assets and believe that they have significant value in the marketing of our products. We vigorously protect our trademarks against infringement, including through the use of cease and desist letters, administrative proceedings and lawsuits.
We rely on trademark, and trade secret protection, non-disclosure agreements and licensing arrangements to establish, protect and enforce intellectual property rights in our logos, trade names and in the marketing of our products. In particular, we believe that our future success will largely depend on our ability to maintain and protect the “General Red” trademark. Despite our efforts to safeguard and maintain our intellectual property rights, we cannot be certain that we will be successful in this regard. Furthermore, we cannot be certain that our trademarks, products and promotional materials or other intellectual property rights do not or will not violate the intellectual property rights of others, that our intellectual property would be upheld if challenged or that we would, in such an event, not be prevented from using our trademarks or other intellectual property rights. Such claims, if proven, could materially and adversely affect our business, financial condition and results of operations. In addition, although any such claims may ultimately prove to be without merit, the necessary management attention to, and legal costs associated with, litigation or other resolution of future claims concerning trademarks and other intellectual property rights could materially and adversely affect our business, financial condition and results of operations.
The laws of certain foreign countries do not protect intellectual property rights to the same extent or in the same manner as do the laws of the PRC. Although we continue to implement protective measures and intend to defend our intellectual property rights vigorously, these efforts may not be successful or the costs associated with protecting our rights in certain jurisdictions may be prohibitive. From time to time we may discover products in the marketplace that are counterfeit reproductions of our products or that otherwise infringe upon intellectual property rights held by us. Actions taken by us to establish and protect our trademarks and other intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violating trademarks and intellectual property rights. If we are unsuccessful in challenging a third party’s products on the basis of infringement of our intellectual property rights, continued sales of such products by that or any other third party could adversely impact the “General Red” brand, result in the shift of consumer preferences away from our products and generally have a material adverse effect on our business, financial condition and results of operations.
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Trademarks
Through General Fruit and General Preservation, we are licensed to use the following trademarks registered with the Trademark Office, State Administration for Industry and Commerce in the PRC:
We plan to file for an extension with the appropriate trademark offices before expiration of the trademarks listed above.
Employees
Currently, we have 81 employees and temporary staff. Set forth below is a breakdown of our employees by category:
Category | Number of employees | |||
| Administrative and finance | 26 | |||
| Sales and marketing | 3 | |||
| Technician | 5 | |||
| Workers* | 47 | |||
| * | The number of workers we hired for seasonal work was 43. |
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General Fruit and General Preservation, our operating companies in PRC, have signed employment contracts with all employees, either full-time or part-time. Pursuant to the labor regulations in PRC, we are required to pay social insurance for full-time employees, but not for part-time employees.
Corporation Information
Our principal executive offices are located at Room 801, Plaza B, Yonghe Building, No.28 AnDingMen East Street, Dongcheng District, Beijing, China. Postal Code: 100007
Our telephone number is + 86-10-64097316.
Any investment in our common stock involves a high degree of risk. You should consider carefully the specific risk factors described below in addition to the other information contained in this Report, including our consolidated financial statements and related notes included elsewhere in the report, before making a decision to invest in our common stock. If any of these risks actually occurs, our business, financial condition, results of operations or prospects could be materially and adversely affected. This could cause the trading price of our common stock to decline and a loss of all or part of your investment.
Risks Related to Our Business
If our products are unable to compete effectively with current and future products targeting similar markets as our potential products, our commercial opportunities will be reduced or eliminated.
We have established orchards on approximately 26,585 mu of land (4,380 acres). We also established one of the largest temperature facilities in the PRC with a 7,000 metric ton storage capacity in which we preserve and package our navel oranges. During fiscal year 2015, we sold over 28,750 metric tons of navel oranges. Even though we are one of the largest integrated navel orange companies with both growing areas and post-harvest processing, our competitors are pure navel orange growers, pure post-harvest processors, or both. The largest competitor in navel orange growing is Jiangxi Wangpin Agricultural Science and Technology Development Co. Ltd. with approximately 5,600 mu (992 acres) of navel orange groves. The largest competitors in post-harvest processing and preservation are Anyuan Shengda Fruit Industrial Co. Ltd with approximately 20,000 metric tons of preservation capacity, and Xinfeng Yuhe Agricultural Development Co. Ltd. with approximately 30,000 metric tons of preservation capacity.
Our ability to provide products at a competitive price is critical to our continued operations. Some of our competitors have greater financial resources, more established market positions and better opportunities for contracts and have lower costs of capital, labor and material than us. If our competition is such that we cannot compete and generate a sufficient return on our investment and operations, we may be forced to curtail our operations, resulting in a loss to investors.
We have agreements with a limited number of farmers to grow and supply us with oranges. Any disruption in supply breach of our agreements or failure to deliver products could adversely impact our distribution capabilities or increase our costs, which could harm our reputation or materially and adversely affect our business, results of operations and financial condition.
We purchase certain of our products from farmers with whom we have seasonal contracts. The failure of our farmers to supply oranges that satisfy our quality, quantity and cost requirements, the decision by farmers not to re-enter into contracts with us or a breach of the contracts, could have an adverse effect on our ability to maintain our distribution network. If we fail to maintain our relationships with these farmers or fail to develop new relationships with other farmers, our business, results of operations and financial condition would be materially adversely impacted.
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We derive all of our sales from the PRC.
Substantially all of our sales are generated from the PRC. In 2012, 2014 and 2015 approximately 1% or less of our revenues were generated from export of our oranges outside of the PRC. In 2013 no sales were generated from export outside of the PRC. Although we have explored the exportation of oranges outside of the PRC, at this time we anticipate that sales of our oranges in the PRC will continue to represent all or substantially all of our total sales in the near future. Any significant decline in the condition of the PRC economy could adversely affect consumer demand of our products, among other things, which in turn would have a material adverse effect on our business and financial condition.
If our land use rights are revoked, we would have no operational capabilities or ability to conduct our business.
Under PRC law, land is owned by state or rural collective economic organizations. The state issues tenants the rights to use property. Rights to use property can be revoked and tenants can be forced to vacate at any time when redevelopment of the land is in the public interest. The public interest rationale is interpreted broadly and the process of land appropriation may be less than transparent. Because production of oranges is dependent on having land to grow oranges on, we rely on these land use rights as the cornerstone of our operations, and the loss of such rights by us or the farmers from whom we purchase oranges would have a detrimental effect on our business.
Weather and other environmental factors may affect our harvesting season, and a reduction in the quality or quantity of our orange supplies may have a detrimental effect on our revenues.
Our business may be adversely affected by weather and environmental factors beyond our control, such as adverse weather conditions during the growing season. We have no control over such forces of nature. A significant reduction in the quantity or quality of oranges harvested resulting from adverse weather conditions, disease to the crops or other factors could result in increased per unit processing costs and decreased production, with adverse financial consequences to us.
We may require additional capital to fund the expansion of our business, and our inability to obtain such capital could harm our business.
To support our expanding business, we must have sufficient capital to continue to make significant investments in our existing products and advertising. We cannot assure you that cash generated by our operations will be sufficient to allow us to fund such expansion. If cash flows from operations are not sufficient, we may need additional equity or debt financing to provide the funds required to expand our business. If such financing is not available on satisfactory terms or at all, we may be unable to expand our business or to develop new business at the rate desired and our operating results may suffer. Debt financing increases expenses, may contain covenants that restrict the operation of our business, and must be repaid regardless of operating results. Equity financing, or debt financing that is convertible into equity, could result in additional dilution to our existing stockholders.
Our inability to obtain adequate capital resources, whether in the form of equity or debt, to fund our business and growth strategies may require us to delay, scale back or eliminate some or all of our operations or the expansion of our business, which may have a material adverse effect on our business, operating results, financial condition or prospects.
If we make any acquisitions, they may disrupt or have a negative impact on our business.
Although we have no present plans for any specific acquisitions, in the event that we make acquisitions, we could have difficulty integrating the acquired companies’ personnel and operations with our own. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the effect expansion may have on our core business. Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:
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| · | the difficulty of integrating acquired products, services or operations; |
| · | the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies; |
| · | the difficulty of incorporating acquired rights or products into our existing business; |
| · | difficulties in disposing of the excess or idle facilities of an acquired company or business and expenses in maintaining such facilities; |
| · | difficulties in maintaining uniform standards, controls, procedures and policies; |
| · | the potential impairment of relationships with employees and distributors as a result of any integration of new management personnel; |
| · | the potential inability or failure to achieve additional sales and enhance our distributor base through cross-marketing of the products to new and existing distributors; |
| · | the effect of any government regulations which relate to the business acquired; and |
| · | potential unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool, reposition or modify the marketing and sales of acquired products or the defense of any litigation, whether or not successful, resulting from actions of the acquired company prior to our acquisition. |
Our business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection with these acquisitions, many of which cannot be presently identified, these risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations.
Our growth could strain our personnel and infrastructure resources, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.
Our success will depend in part upon management’s ability to manage growth. To do so, we must continue to hire, train and manage new employees as needed. If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business may be harmed. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. The additional headcount and capital investments we are adding will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan.
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Risks Related to Our Industry
Our financial and operating performance may be adversely affected by epidemics, adverse weather conditions, natural disasters and other catastrophes.
Orange tree disease, insect infestation, severe weather conditions, such as floods, droughts, windstorms and hurricanes, and other adverse environmental conditions and natural disasters, may adversely affect our supply of our product, reduce our sales volumes, increase our unit production costs or prevent or impair our ability to ship products as planned. Because a significant portion of our costs are fixed and contracted in advance of each operating year, volume declines due to production interruptions or other factors could result in increases in unit production costs, which could result in substantial losses and weaken our financial condition. Severe weather conditions may occur with higher frequency or may be less predictable in the future due to the effects of climate change. An occurrence of such an event might result in material disruptions to our operations, to the operations of our distributors or suppliers, resulting in a decline in the agriculture industry and our financial and operating performance. There can be no assurance that our facilities or products will not be affected by any such occurrence in the future, which occurrence may lead to adverse conditions to our operations and financial results. The centralization of our fruit trees in the Jiangxi Province exacerbates this concern.
For example, in early 2003, several economies in Asia, including China, were affected by the outbreak of severe acute respiratory syndrome, or SARS. During May and June of 2003, many businesses in the PRC were closed by the PRC government to prevent transmission of SARS. Our business could be materially and adversely affected by the effects of H1N1 flu (swine flu), avian flu, severe acute respiratory syndrome or other epidemics or outbreaks. In April 2009, an outbreak of H1N1 flu first occurred in Mexico and quickly spread to other countries, including the U.S. and China. In the last decade, China has suffered health epidemics related to the outbreak of avian influenza and severe acute respiratory syndrome. Any prolonged occurrence or recurrence of H1N1 flu (swine flu), avian flu, SARS or other adverse public health developments in the PRC may have a material adverse effect on our business and operations. These health epidemics could result in severe travel restrictions and closures that would restrict our ability to ship our products. Potential outbreaks could also lead to temporary closure of our manufacturing facilities, our suppliers’ facilities and/or our distributors’ facilities, leading to reduced production, delayed or cancelled orders, and decrease in demand for our products. Any future health epidemic or outbreaks that could disrupt our operations and/or restrict our shipping abilities may have a material adverse effect on our business and results of operations. Furthermore, the 2008 Sichuan earthquake also had a negative impact on many businesses in the region. Losses caused by epidemics, adverse weather conditions, natural disasters and other catastrophes, including SARS, avian flu, swine flu, earthquakes or typhoons, could adversely affect our financial and operating performance.
Concerns over food safety and public health may affect our operations by increasing our costs and negatively impacting demand for our products.
We could be adversely affected by diminishing confidence in the safety and quality of certain food products or ingredients, even if our practices and procedures are not implicated. As a result we may also elect or be required to incur additional costs aimed at increasing consumer confidence in the safety of our products. For example, a crisis in the PRC over melamine-contaminated milk in 2008 adversely impacted PRC food exports of milk and dairy products, with several countries banning the import of all PRC milk and milk products even though the contamination was localized to certain companies. Our success depends on our ability to maintain the quality of our products. Product quality issues, real or imagined, or allegations of product contamination, even if false or unfounded, could tarnish our image and may cause consumers to choose other products. However, most of our sales are generated from the PRC and not from exports. Although we have explored the exportation of oranges outside of the PRC, at this time we anticipate that sales of our oranges in the PRC will continue to represent all or substantially all of our total sales in the near future.
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Risks Related to Our Company
Adverse Chinese and international economic and market conditions may adversely affect our product sales and business.
Current U.S. and international economic and market conditions are uncertain. Our revenues and operating results may be affected by uncertain or changing economic and market conditions, including the challenges faced in the credit markets and financial services industry. If domestic and global economic and market conditions remain uncertain or persist or deteriorate further, we may experience material impacts on our business, financial condition and results of operations. Adverse economic conditions impacting our distributors, including, among others, increased taxation, higher unemployment, lower distributor confidence in the economy, higher distributor debt levels, lower availability of distributor credit, higher interest rates and hardships relating to declines in the stock markets, could cause purchases of oranges and orange products to decline, resulting in a decrease in purchase of our products, which could adversely affect our financial condition and results of operation. Adverse economic market conditions could also negatively impact our business by negatively affecting the parties with whom we do business, including among others, distributors and our suppliers.
We do not currently hedge our risk exposure to market fluctuations in the price and demand of oranges.
We sell our oranges at market prices. Our only product is oranges, and the market price of oranges directly affects the profitability of our operations. Additionally, demand for our products depends primarily on consumer-related factors such as demographics, local preferences and food consumption trends, macroeconomic factors such as the condition of the economy and the level of consumer confidence, as well as seasonal factors such as weather and festivities, and the market price of oranges. We do not currently hedge our risk exposure to market fluctuations in the price of our oranges. However, due to our superior preservation capabilities, we are able to extend our fruits’ life cycle to June of the year following harvesting, which enables us to sell navel oranges at a higher price during the off-season when other producers may not have sufficient supply. If the market price for oranges declines, our revenue will decrease and our failure or inability to follow or adapt to changes in market demand or market price in a timely manner, if at all, may have a material adverse effect on our results of operations and financial condition.
Our earnings and, therefore our profitability, may be affected by price volatility.
Our earnings may be affected by the price of our oranges. There are many factors influencing the price including expectations for inflation; global and regional demand and production; political and economic conditions; and production costs. These factors are beyond our control and are impossible for us to predict. As a result we are not able to predict with certainty what price we will receive for our products. Additionally, the growth cycle of such products in many instances dictates when such products must be marketed to achieve the maximum profitability. Excessive supplies tend to cause severe price competition and lower prices throughout the industry affected. Conversely, shortages may drive the prices higher. Shortages often result from adverse growing conditions which can reduce the availability of the agricultural products affected. Since multiple variables can affect supply and demand, we cannot accurately predict or control from year to year what prices, either favorable or unfavorable, it will receive from the market.
In addition, general public perceptions regarding the quality, safety or health risks associated with particular food products could reduce demand and prices for some of our products. To the extent that consumer preferences evolve away from products that we produce for health or other reasons, and we are unable to modify our products or to develop products that satisfy new consumer preferences, there will be a decreased demand for our products. Our preservation capabilities allow us to preserve our oranges for approximately six months which enables us to sell at a higher price during the off season when other producers may not have sufficient supply. However, even if market prices are unfavorable at the end of the life of our oranges, as extended by our preservation capabilities, our oranges must be brought to market promptly.
A decrease in the selling price received for our products due to the factors described above could have a material adverse effect on our business, results of operations and financial condition.
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We are subject to the risk of product contamination and product liability claims which may cause us to incur litigation expenses and to devote significant management time to defending such claims and, if determined adversely to us, could require us to pay significant damage awards.
The sales of our products may involve the risk of injury to consumers. Such injuries may result from tampering by unauthorized personnel, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, or residues introduced during the growing, packing, storage, handling or transportation phases. While we are subject to governmental inspection and regulations and believe our facilities comply in all material respects with all applicable laws and regulations, including internal product safety policies, we cannot be sure that consumption of our products will not cause a health-related illness in the future or that we will not be subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential distributors and our brand image. We do not maintain product liability insurance.
Unlike the United States and many other countries, product liability claims and lawsuits in the PRC are rare. We cannot guaranty that product liability exposures and litigation will not become more commonplace in the PRC. In addition to the genetic traits and the quality of our products, the performance marketability of our oranges depends on climate, geographical areas, cultivation method, farmers’ degree of knowledge and other factors. At the same time, the viability of some farmland in the PRC has deteriorated due to toxic and hazardous materials from farmers’ overuse of herbicides. These factors are beyond our control and can result in sub-optimal production yields. However, farmers generally attribute sub-optimal production yields to poor seed quality. We may be required from time to time to recall products. Product recalls could adversely affect our profitability and our brand image.
While we have not experienced any credible product liability litigation to date, there is no guarantee that we will not experience such litigation in the future. In the event we do experience product liability claims or a product recall, our financial condition and business operations could be materially adversely affected.
One or more of our distributors could engage in activities that are harmful to our brand and to our business.
Our products are sold solely through distributors, and those distributors are responsible for ensuring that our oranges are kept at the right temperature to be fresh and meet shelf life terms. If our products are sold under another brand, the purchasers will not be aware of our brand name, and we will be unable to cross-market other seed varieties or other products as effectively to these purchasers. Furthermore, if any of our distributors sell inferior products under our brand name or do not store our oranges at the right temperature, our brand and reputation could be harmed, which could make marketing of our branded seeds more difficult.
We may fail to maintain the permits we currently hold. This could subject us to fines and other penalties, which could materially adversely affect our results of operations.
We are required to hold numerous permits and licenses to conduct business in the PRC. The approvals, permits or licenses required by governmental agencies may change without substantial advance notice, and we could fail to obtain or maintain the approvals, permits or licenses required to expand our business. If we do not possess a permit or license required, we fail to obtain or to maintain such permits or licenses, or if renewals are granted with onerous conditions, we could be subject to fines and other penalties and be limited in the number or the quality of the products that we could offer. As a result, our business, results of operations and financial condition could be materially and adversely affected.
We may experience major accidents in the course of our operations, which may cause significant property damage and personal injury.
We may experience major accidents in the course of our operations, which may cause significant property damage and personal injuries. Significant industry-related accidents and natural disasters may cause interruptions to various parts of our operations, or could result in property or environmental damage, increase in operating expenses or loss of revenue. We do not currently maintain insurance policies to cover the occurrence of such accidents. Losses or payments incurred may have a material adverse effect on our operating performance because such losses are not insured.
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Risks Related to Doing Business in the PRC
We are subject to risks relating to the nature of China’s agriculture and food industry.
The agricultural and food industry in the PRC has issues that the agricultural industry does not have within the United States. In the PRC, insurance coverage is a relatively new concept compared to that of the United States and for certain aspects of a business operation, insurance coverage is restricted or expensive. Workers compensation for employees in the PRC may be unavailable or, if available, insufficient to adequately cover such employees. The environmental laws and regulations in the PRC set various standards regulating certain aspects of health and environmental quality, including, in some cases, the obligation to rehabilitate current and former facilities and locations where operations are or were conducted. Violation of those standards could result in a temporary or permanent restriction by the PRC of our operations. We cannot assure you that we will be able to adequately address any of these or other limitations.
If the PRC government were to change its presently favorable policy toward the agriculture industry, we would no longer enjoy our present tax-related privileges, which would materially and adversely impact our sales performance, margins, and net profit and our costs structure.
As producers active in the agriculture industry, our subsidiaries are presently exempt from income tax and enjoy various incentive grants and subsidies given by the PRC government. If the PRC government were to change its presently favorable policy toward the agriculture industry, we would no longer enjoy our present tax-related privileges, which would materially and adversely impact our sales performance, margins, and net profit and our costs structure. We have experienced, and may continue to experience, quick changes of policies by the PRC government. If we do not effectively and efficiently manage and respond to such changes of policy changes, we could suffer adversely from the consequences of any such policy changes.
Currency fluctuations and restrictions on currency exchange may adversely affect our business, including limiting our ability to convert PRC Renminbi, or RMB, into foreign currencies and, if the RMB were to decline in value, reduce our revenue in U.S. Dollar terms.
The exchange rate of the RMB is currently managed by the PRC government. On July 21, 2005, the People’s Bank of China, or the People’s Bank, with the authorization of the State Council of the PRC, announced that the RMB exchange rate would no longer be pegged to the U.S. Dollar and would float based on market supply and demand with reference to a basket of currencies. According to public reports, the governor of the People’s Bank has stated that the basket is composed mainly of the U.S. Dollar, the European Union Euro, the Japanese Yen and the South Korean Won. Also considered, but playing smaller roles, are the currencies of Singapore, the United Kingdom, Malaysia, Russia, Australia, Canada and Thailand. The weight of each currency within the basket has not been announced.
The initial adjustment of the RMB exchange rate was an approximate 2% revaluation from an exchange rate of 8.28 RMB per U.S. Dollar to 8.11 RMB per U.S. Dollar. Since July 2005, the People’s Bank has made several changes to the regulation of the exchange rate of the RMB. The People’s Bank announced that the daily trading price of the U.S. Dollar against the RMB in the inter-bank foreign exchange market would be allowed to float within a band of 2% around the central parity. In May 2007, the People’s Bank announced that the daily trading price of the U.S. Dollar against the RMB would be allowed to float within a band of 0.5% around the central parity. In June 2010, the People’s Bank announced its intention to allow the RMB to move more freely against the basket of currencies which would increase the possibility of sharp fluctuations in the value of the RMB and the unpredictability associated with the RMB exchange rate. Despite this change in its exchange rate regime, the PRC government continues to manage the valuation of the RMB. The People’s Bank has announced two changes to the exchange rate regime: once in April 2012 when the band was extended to 1% around the central parity and again in March 2014 when the band was extended to 2% around the central parity.
The value of our common stock will be indirectly affected by the foreign exchange rate between the U.S. Dollar and the RMB. Appreciation or depreciation in the value of the RMB relative to the U.S. Dollar would affect our financial results reported in U.S. Dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. Dollars, as well as earnings from, and the value of, any U.S. Dollar-denominated investments we make in the future.
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The income statements of our operations are translated into U.S. Dollars at the average exchange rates in each applicable period. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. Dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. Dollars will lead to a translation gain or loss, which is recorded as a component of other comprehensive income.
Very limited hedging transactions are available in the PRC to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
The PRC economic cycle may negatively impact our operating results.
We believe that the rapid growth of the PRC economy before 2008 generally led to higher levels of inflation. We believe that the PRC economy has more recently experienced a decrease in its growth rate. We believe that a number of factors have contributed to this deceleration, including appreciation of the RMB, which has adversely affected China’s exports. In addition, we believe the deceleration has been exacerbated by the recent global crisis in the financial services and credit markets, which has resulted in significant volatility and dislocation in the global capital markets. It is uncertain how long the global crisis in the financial services and credit markets will continue and the significance of the adverse impact it may have on the global economy in general or the PRC economy in particular. Slowing economic growth in the PRC could result in weakening growth and demand for our products which could reduce our revenues and income. In the event of a recovery in the PRC, renewed high growth levels may again lead to inflation. The government’s attempts to control inflation may adversely affect the business climate and growth of private enterprise. In addition, our profitability may be adversely affected if prices for our products rise at a rate that is insufficient to compensate for the rise in inflation.
Under the PRC Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China, and such classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders.
Under the PRC Enterprise Income Tax Law, or the EIT Law, which became effective on January 1, 2008, an enterprise established outside the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. In 2009, the State Administration of Taxation, or the SAT, issued the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprise on the Basis of De Facto Management Bodies, or SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Further to SAT Circular 82, on July 27, 2011, the SAT issued the Administrative Measures for Enterprise Income Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Trial), or SAT Bulletin 45, to provide more guidance on the implementation of SAT Circular 82; the bulletin became effective on September 1, 2011. SAT Bulletin 45 clarified certain issues in the areas of resident status determination, post-determination administration and competent tax authorities’ procedures.
According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be considered as a PRC tax resident enterprise by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following conditions are met: (a) the senior management and core management departments in charge of its daily operations function have their presence mainly in the PRC; (b) its financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (d) more than half of the enterprise’s directors or senior management with voting rights habitually reside in the PRC. SAT Bulletin 45 specifies that when provided with a copy of Chinese tax resident determination certificate from a resident Chinese controlled offshore incorporated enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to the Chinese controlled offshore incorporated enterprise.
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Although SAT Circular 82 and SAT Bulletin 45 only apply to offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise groups and not those controlled by PRC individuals or foreigners, the determination criteria set forth therein may reflect the SAT’s general position on how the term “de facto management body” could be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners.
If the PRC tax authorities determine that we or any of our non-PRC subsidiaries is a PRC resident enterprise for PRC enterprise income tax purposes, then we or any such non-PRC subsidiary could be subject to PRC tax at a rate of 25% on its world-wide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations.
If the PRC tax authorities determine that our company is a PRC resident enterprise for PRC enterprise income tax purposes, gains realized on the sale or other disposition of shares may be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. Any such tax may reduce the returns on your investment in the shares.
Uncertainties with respect to the PRC legal system could adversely affect us and we may have limited legal recourse under PRC law if disputes arise under our contracts with third parties.
Since 1979, we believe PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in the PRC. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in the PRC. In particular, because these laws and regulations are relatively new, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, sometimes we may not be aware of our violation of these policies and rules until sometime after violation.
The PRC government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the PRC government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek an injunction under PRC law, in either of these cases, are severely limited, and without a means of recourse by virtue of the PRC legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.
Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of the PRC, which could reduce the demand for our products and materially and adversely affect our competitive position.
Our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in the PRC. The PRC economy differs from the economies of most developed countries in many respects, including:
| · | the amount of government involvement; |
| · | the level of development; |
| · | the growth rate; |
| · | the control of foreign exchange; and |
| · | the allocation of resources. |
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While the PRC economy has grown significantly in the past 20 years, we believe the growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. We believe some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in the PRC is still owned by the PRC government. The PRC government also exercises significant control over PRC economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
Contract drafting, interpretation and enforcement in the PRC involve significant uncertainty.
We have entered into numerous contracts governed by PRC law, many of which are material to our business. As compared with contracts in the United States, contracts governed by PRC law tend to contain less detail and to not be as comprehensive in defining contracting parties’ rights and obligations. As a result, contracts in the PRC are more vulnerable to disputes and legal challenges. In addition, contract interpretation and enforcement in the PRC is not as developed as in the United States, and the result of any contract dispute is subject to significant uncertainties. Therefore, we cannot assure you that we will not be subject to disputes under our material contracts, and if such disputes arise, we cannot assure you that we will prevail.
The application of PRC regulations relating to the overseas listing of PRC domestic companies is uncertain, and we may be subject to penalties for failing to request approval of the PRC authorities prior to listing our shares in the U.S.
On August 8, 2006, six PRC government agencies, namely, the Ministry of Commerce (“MOFCOM”), the State Administration for Industry and Commerce (“SAIC”), the China Securities Regulatory Commission (“CSRC”), the State Administration of Foreign Exchange (“SAFE”), the State-Owned Assets Supervision and Administration Commission (“SASAC”), and the State Administration for Taxation (“SAT”), jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “New M&A Rules “), which became effective on September 8, 2006. The New M&A Rules purport, among other things, to require offshore “special purpose vehicles” that are (1) formed for the purpose of overseas listing of the equity interests of PRC companies via acquisition and (2) are controlled directly or indirectly by PRC companies and/or PRC individuals, to obtain the approval of the CSRC prior to the listing and trading of their securities on overseas stock exchanges. On September 21, 2006, pursuant to the New M&A Rules and other PRC Laws, the CSRC published on its official website relevant guidance with respect to the listing and trading of PRC domestic enterprises’ securities on overseas stock exchanges (the “Related Clarifications”), including a list of application materials regarding the listing on overseas stock exchanges by special purpose vehicles. We were and are not required to obtain the approval of CSRC under the New M&A Rules in connection with this transaction because we were and are not considered a special purpose vehicle formed or controlled by PRC companies or PRC individuals.
However, there are substantial uncertainties regarding the interpretation, application and enforcement of these rules, and CSRC has yet to promulgate any written provisions or formally to declare or state whether the overseas listing of a PRC-related company structured similar to ours is subject to the approval of CSRC. Any violation of these rules could result in fines and other penalties on our operations in the PRC, restrictions or limitations on remitting dividends outside of China, and other forms of sanctions that may cause a material and adverse effect to our business, operations and financial conditions.
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The New M&A Rules also established additional procedures and requirements that are expected to make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise that owns well-known trademarks or China’s traditional brands. We may grow our business in part by acquiring other businesses. Complying with the requirements of the New M&A Rules in completing this type of transaction could be time-consuming, and any required approval processes, including CSRC approval, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
Failure to comply with PRC regulations regarding the registration requirements for employee stock ownership plans or share option plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.
On February 15, 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, or the Stock Option Rules, which replaced the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly-Listed Companies issued by SAFE on March 28, 2007. Under the Stock Option Rules and other relevant rules and regulations, PRC residents who participate in stock incentive plan in an overseas publicly-listed company are required to register with SAFE or its local branches and complete certain other procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of its participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted institution or other material changes. We and our PRC employees who have been granted stock options may be subject to these regulations in the future. Failure of our PRC stock option holders to complete their SAFE registrations may subject these PRC residents to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute dividends to us, or otherwise materially adversely affect our business.
PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiary’s ability to increase their registered capital or distribute profits to us or otherwise expose us to liability and penalties under PRC law.
The SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. SAFE Circular 37 is issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75. If our shareholders who are PRC residents or entities do not complete their registration with the local SAFE branches, our PRC subsidiary may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiary. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions. However, we cannot compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may restrict or prevent us from using the proceeds of an offering of our stock, to make loans to our PRC subsidiaries or to make additional capital contributions to our PRC subsidiaries, which may materially and adversely affect our liquidity and our ability to fund and expand our business.
We are an offshore holding company conducting our operations in the PRC through our PRC subsidiaries. We may make loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries.
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Any loans by us to our PRC subsidiaries, which are treated as foreign-invested enterprises under PRC law, are subject to PRC regulations and foreign exchange loan registrations. For example, loans by us to our wholly owned PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of SAFE. If we decide to finance our wholly owned PRC subsidiaries by means of capital contributions, these capital contributions must be approved by the Ministry of Commerce or its local counterpart.
On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular 142 provides that the RMB capital converted from the foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from the foreign currency registered capital of a foreign-invested company. The use of such RMB capital may not be altered without SAFE approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of SAFE Circular 142 could result in severe monetary or other penalties. SAFE further promulgated the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses, or Circular 45, on November 9, 2011, which expressly prohibits foreign-invested enterprises from using registered capital settled in RMB converted from foreign currencies to grant loans through entrustment arrangements with a bank, repay inter-company loans or repay bank loans that have been transferred to a third party. Circular 142 and Circular 45 may significantly limit our ability to transfer the net proceeds from this offering to our PRC subsidiary and to convert such proceeds into RMB, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC. On March 30, 2015, SAFE issued the Circular on Reform of the Administrative Rules of the Payment and Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises, or SAFE Circular 19, which became effective on June 1, 2015 and supersede Circular 142 when it becomes effective. SAFE Circular 19 has made certain adjustments to some regulatory requirements on the settlement of foreign exchange capital of foreign-invested enterprises, and some foreign exchange restrictions under SAFE Circular 142 are expected to be lifted. However, considering that SAFE Circular 19 is lately promulgated, it is unclear how it will be implemented and there exist high uncertainties with respect to its interpretation and implementation by authorities.
In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, including SAFE Circular 142 and SAFE Circular 19, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiaries or with respect to future capital contributions by us to our PRC subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we received from this Offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Capital outflow policies in the PRC may hamper our ability to remit income to the United States.
The PRC has adopted currency and capital transfer regulations. These regulations may require that we comply with complex regulations for the movement of capital and as a result we may not be able to remit income earned and proceeds received in connection with our operations or from the sale of our operating subsidiary to the U.S. or to our shareholders.
Our operations and assets in the PRC are subject to significant political and economic uncertainties.
Government policies are subject to rapid change and the government of the PRC may adopt policies which have the effect of hindering private economic activity and greater economic decentralization. There is no assurance that the government of the PRC will not significantly alter its policies from time to time without notice in a manner which reduces or eliminates any benefits from its present policies of economic reform. In addition, a substantial portion of productive assets in the PRC remains government-owned. For instance, all lands are state or rural collective economic organizations owned and leased to business entities or individuals through governmental grants of the land use rights. The grant process is typically based on government policies at the time of the grant, which could be lengthy and complex. This process may adversely affect our business. The government of the PRC also exercises significant control over the PRC’s economic growth through the allocation of resources, controlling payment of foreign currency and providing preferential treatment to particular industries or companies. Uncertainties may arise as a result of changing governmental policies and measures. In addition, changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency, the nationalization or other expropriation of private enterprises, as well as adverse changes in the political, economic or social conditions in the PRC, could have a material adverse effect on our business, results of operations and financial condition.
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If our land use rights are revoked, we would have no operational capabilities or ability to conduct our business.
Under PRC law, land is owned by state or rural collective economic organizations. The state issues tenants the rights to use property. We have paid a land grant fee for land use rights indicated in Land Use Right Certificate (Xingguoyong 2005 No. 2B2905-051) and have been granted land use rights on such land. We also have land operating rights in orchards allocated by the local government. The local governmental authorities may provide allocated land use rights to us for free use or at a discounted levy rate given our contribution to the development of the local economy. However, pursuant to theCatalogue on Allocated Land issued by the Ministry of Land Resources of the PRC (the “Catalogue”), the land use rights for allocated land may only be granted to those specific projects which are in compliance with the Catalogue, subject to the approval of the competent governmental authorities. We, as a privately owned agricultural producer, may not be qualified to be granted such land use rights for allocated land according to the Catalogue. Consequently, our use of such land may be subject to challenge in the future, and the legal consequences could include the confiscation of such land by the governmental authorities or a demand that we pay a market price for purchasing the land use rights for such land and converting the allocated land use right to a granted land use right. If we hold allocated land use rights, rather than granted land use right, we may need additional governmental approval for disposal of such land use right.
Rights to use land can be revoked and tenants can be forced to vacate at any time when redevelopment of the land is in the public interest. The public interest rationale is interpreted broadly and the process of land appropriation may be less than transparent.
Because production of oranges is dependent on having land to grow oranges on, we rely on these land use rights as the cornerstone of our operations, and the loss of such rights by us or the farmers from whom we purchase oranges would have a detrimental effect on our business.
Because PRC law governs almost all of our material agreements, we may not be able to enforce our legal rights within the PRC or elsewhere, which could result in a significant loss of business, business opportunities, or capital.
PRC law governs almost all of our material agreements. We cannot assure you that we will be able to enforce any of our material agreements or that remedies will be available outside of the PRC. The system of laws and the enforcement of existing laws in the PRC may not be as certain in implementation and interpretation as in the United States. Our inability to enforce or obtain a remedy under any of our current or future agreements could result in a significant loss of business, business opportunities or capital. It will be extremely difficult to acquire jurisdiction and enforce liabilities against our officers, directors and assets based in the PRC.
All of our assets are located in the PRC and all of our directors and officers other than our chief financial officer reside outside of the United States. As a result, it may not be possible for United States investors to enforce their legal rights, to effect service of process upon our directors or officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers under federal securities laws. Moreover, we have been advised that the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement of criminal penalties of the federal securities laws.
Because our cash and cash equivalents are held in banks which do not provide capital guarantee insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business.
Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. A significant portion of our assets are in the form of cash deposited with banks in the PRC, and in the event of bank failure, we may not have access to, or may lose entirely, our funds on deposit. Depending upon the amount of cash we maintain in a bank that fails, our inability to have access to such cash deposits could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.
We must comply with the Foreign Corrupt Practices Act.
We are required to comply with the United States Foreign Corrupt Practices Act, which prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some of our competitors, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in mainland China. If our competitors engage in these practices, they may receive preferential treatment, giving our competitors an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put us at a disadvantage. Although we inform our personnel that such practices are illegal, we cannot assure you that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties.
Labor laws in the PRC may adversely affect our results of operations.
On June 29, 2007, the PRC government promulgated a new labor law, namely, the Labor Contract Law of the PRC, or the New Labor Contract Law, which became effective on January 1, 2008 and amended in December 2012. The New Labor Contract Law imposes greater liabilities on employers and significantly affects the cost of an employer’s decision to reduce its workforce. Further, it requires that certain terminations be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce, the New Labor Contract Law could adversely affect our ability to effect such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and adversely affecting our financial condition and results of operations.
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Dividends we receive from General Preservation, General Fruit and/or Hanxin Agriculture may be subject to PRC withholding tax.
The New EIT Law provides that an income tax rate of 20% may be applicable to dividends payable to non-PRC investors that are “non-resident enterprises” and that do not have an establishment or place of business in the PRC, or which have such establishment or place of business in the PRC but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within the PRC. The income tax for non-resident enterprises shall be subject to withholding at the income source, with the payer acting as the obligatory withholder under the New EIT Law, and therefore such income taxes are generally called withholding tax in practice. The State Council of the PRC has reduced the withholding tax rate from 20% to 10% through the Implementation Rules of the New EIT Law. It is currently unclear in what circumstances a source will be considered as located within the PRC. We are an offshore holding company. Thus, if we are considered as a “non-resident enterprise” under the New EIT Law and the dividends paid to us by our subsidiary in the PRC are considered income sourced within the PRC, such dividends may be subject to a 10% withholding tax.
The new tax law provides only a framework of the enterprise tax provisions, leaving many details on the definitions of numerous terms as well as the interpretation and specific applications of various provisions unclear and unspecified. Any increase in our combined company’s tax rate in the future could have a material adverse effect on our financial conditions and results of operations.
Under PRC laws, General Preservation and General Fruit are obligated to withhold and pay individual income tax on behalf of our employees who are subject to PRC individual income tax. If the PRC Subsidiary fails to withhold and/or pay such individual income tax in accordance with PRC laws, it may be subject to certain sanctions and other penalties and may become subject to liability under PRC laws.
In addition, the State Administration of Taxation has issued several circulars concerning employee stock options. Under these circulars, our employees working in the PRC (which could include both PRC employees and expatriate employees subject to PRC individual income tax) who exercise stock options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee stock options with relevant tax authorities and withhold and pay individual income taxes for those employees who exercise their stock options. While tax authorities may advise us that our policy is compliant, they may change their policy, and we could be subject to sanctions.
Your ability to bring an action against us or against our directors and officer, or to enforce a judgment against us or them, will be limited because we conduct all of our operations in the PRC and because all of our directors and the majority of our officers reside outside of the United States.
We are a Delaware holding company and all of our assets are located outside of the United States. All of our current operations are conducted in the PRC. In addition, all of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts’ judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, none of whom are residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Our counsel as to PRC law has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. Courts in the PRC may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between the PRC and the country where the judgment is made or on reciprocity between jurisdictions. The PRC does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty, security or the public interest. Therefore, it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.
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Risks Related to Ownership of Our Common Stock
You may find it difficult to sell our shares because there is no significant public market for our common stock and there is no assurance a public market will develop.
There has been a limited public market for our common stock on the OTCBB. An active, liquid trading market for our common stock may not develop or be sustained. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace and independent decisions of willing buyers and sellers of our common stock, over which we have no control. Without an active, liquid trading market for our common stock, shareholders may not be able to sell their shares at the volume, prices and times desired. An inactive market may also impair our ability to raise capital by selling our common stock.
In addition, if we fail to meet the criteria set forth in the SEC regulations, by law, various requirements would be imposed on broker-dealers who sell our securities to persons other than established distributors and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our common stock, which may further affect the liquidity of our common stock.
Our directors and officers control a majority of our common stock and their interests may not align with the interests of our other shareholders.
Our executive officers and directors control our company and beneficially own a majority of our issued and outstanding common stock. This significant concentration of share ownership may adversely affect the trading price of our common stock because investors often perceive a disadvantage in owning shares in a company with one or several controlling shareholders. Furthermore, our directors and officers, as a group, have the ability to significantly influence or control the outcome of all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. This concentration of ownership may have the effect of delaying or preventing a change in control of our company which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our common stock. In addition, without the consent of our directors and officers, we could be prevented from entering into transactions that could be beneficial to us and they may cause us to take actions that are opposed by other shareholders as their interests may differ from those of other shareholders.
We are an emerging growth company and cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an "emerging growth company" as defined in the Jumpstart Our Business Startups Act (the "JOBS Act"), and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, our stock price may be lower than it otherwise would be, there may be a less active trading market for our common stock and our stock price may be more volatile.
We will remain an emerging growth company until the earliest of (i) the last day of our fiscal year during which we have total annual gross revenues of at least $1.0 billion; (ii) the last day of our fiscal year ending after the fifth anniversary of the completion of our initial public offering; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a "large accelerated filer" under the Exchange Act.
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The Company may issue additional common stock or other equity securities in the future that could dilute the ownership interest of existing shareholders.
The Company is currently authorized to issue up to 200,000,000 shares of common stock of one class, of which 15,918,940 shares were issued and outstanding as of December 1, 2015. The Company’s board of directors may decide from time to time to issue additional shares, or securities convertible into, exchangeable for or representing rights to acquire our common stock. The sale of these securities may significantly dilute our shareholders’ ownership interest as a shareholder and the market price of our common stock. New investors in other equity securities issued by the Company in the future may also have rights, preferences and privileges senior to our current shareholders that may adversely impact its current shareholders.
The price of the Company’s common stock may fluctuate significantly, which could negatively affect the Company and holders of its common stock.
The market price of the Company’s common stock may fluctuate significantly from time to time as a result of many factors, including:
| · | investors’ perceptions of the Company’s and its prospects; |
| · | investors’ perceptions of the Company’s and/or the industry’s risk and return characteristics relative to other investment alternatives; |
| · | investors’ perceptions of the prospects of the commodities markets; |
| · | differences between actual financial and operating results and those expected by investors and analysts; |
| · | our inability to commence production, obtain permits or otherwise fail to reach Company objectives; |
| · | actual or anticipated fluctuations in quarterly financial and operating results; |
| · | volatility in the equity securities market; and |
| · | sales, or anticipated sales, of large blocks of the Company’s common stock . |
We do not expect to pay any cash dividends for the foreseeable future.
We currently expect to retain all available funds and future earnings, if any, for use in the operation and growth of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our Board of Directors, subject to compliance with applicable law, our organizational documents and any contractual provisions, including under agreements for indebtedness we may incur, that restrict or limit our ability to pay dividends, and will depend upon, among other factors, our results of operations, financial condition, earnings, capital requirements and other factors that our Board of Directors deems relevant. Accordingly, realization of a gain on your investment in our stock will depend on the appreciation of the price of our common stock, which may never occur.
You may have difficulty re-selling their common stock as the liquidity of the market for our shares may be adversely affected by the impact of the “Penny Stock” Rules.
It may be more difficult for holders to sell our common stock. A “penny stock” is generally defined by regulations of the SEC as an equity security with a market price of less than $5.00 per share. However, an equity security with a market price under $5.00 will not be considered a penny stock if it fits within any of the following exceptions:
| i. | the equity security is listed on a national securities exchange; |
| ii. | the issuer of the equity security has been in continuous operation for less than three years, and either has (a) net tangible assets of at least $5,000,000, or (b) average annual revenue of at least $6,000,000; or |
| iii. | the issuer of the equity security has been in continuous operation for more than three years, and has net tangible assets of at least $2,000,000. |
Although we believe our common stock is not a penny stock based upon the exception (ii) above, we cannot provide any assurance that in the future our common stock will not be classified as penny stock.
If an investor buys or sells a penny stock, SEC regulations require that the investor receive, prior to the transaction, a disclosure explaining the penny stock market and associated risks. Furthermore, trading in our common stock is currently subject to Rule 15g-9 of the Exchange Act, which relates to non-exchange listed securities. Under this rule, broker/dealers who recommend our securities to persons other than established distributors and accredited investors must make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to a transaction prior to sale.
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The low price of our common stock has a negative effect on the amount and percentage of transaction costs paid by individual shareholders. The low price of our common stock also limits our ability to raise additional capital by issuing additional shares. There are several reasons for these effects. First, the internal policies of certain institutional investors prohibit the purchase of low-priced stocks. Second, many brokerage houses do not permit low-priced stocks to be used as collateral for margin accounts or to be purchased on margin. Third, some brokerage house policies and practices tend to discourage individual brokers from dealing in low-priced stocks. Finally, broker’s commissions on low-priced stocks usually represent a higher percentage of the stock price than commissions on higher priced stocks. As a result, our shareholders may pay transaction costs that are a higher percentage of their total share value than they would if our share price were substantially higher.
As an issuer of “penny stock” the protection provided by the federal securities laws relating to a forward-looking statement does not apply to us and as a result we could be subject to legal action.
Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, if we are a penny stock, we will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading. Such an action could hurt our financial condition.
The issuance of any of our equity securities pursuant any equity compensation plan we may adopt may dilute the value of existing shareholders and may affect the market price of our stock.
In the future, we may issue to our officers, directors, employees and/or other persons equity based compensation under any equity compensation plan we may adopt to provide motivation and compensation to our officers, employees and key independent consultants. The award of any such incentives could result in an immediate and potentially substantial dilution to our existing shareholders and could result in a decline in the value of our stock price. The exercise of these options and the sale of the underlying common stock and the sale of shares issued pursuant to grants may have an adverse effect upon the price of our common stock.
Our common stock may be thinly traded, so you may be unable to sell at or near ask prices or at all.
We cannot predict the extent to which an active public market for our common stock will develop or be sustained. Our common stock is currently traded on the OTCBB where the shares have historically been thinly traded, meaning that the number of persons interested in purchasing our common stock at or near bid prices at any given time may be relatively small or non-existent.
This situation may be attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community who generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we have become more seasoned and viable. As a consequence, there may be periods of several days, weeks or months when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot assure you that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained or not diminish.
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We may become involved in securities class action litigation that could divert management’s attention and harm our business.
The capital markets in general, and the shares of early stage companies in particular, have experienced extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to the operating performance of the companies involved. If these fluctuations occur in the future, the market price of our shares could fall regardless of our operating performance. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. If the market price or volume of our shares suffers extreme fluctuations, then we may become involved in this type of litigation, which would be expensive and divert management’s attention and resources from managing our business.
As a public company, we may also from time to time make forward-looking statements about future operating results and provide some financial guidance to the public markets. The management has limited experience as a management team in a public company and as a result projections may not be made timely or set at expected performance levels and could materially affect the price of our shares. Any failure to meet published forward-looking statements that adversely affect the stock price could result in losses to investors, shareholder lawsuits or other litigation, sanctions or restrictions issued by the SEC.
Securities analysts may elect not to report on our common stock or may issue negative reports that adversely affect the stock price.
At this time, no securities analysts provide research coverage of our common stock, and securities analysts may not elect not to provide such coverage in the future. It may remain difficult for our company, with its small market capitalization, to attract independent financial analysts that will cover our common stock. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect the stock’s actual and potential market price. The trading market for our common stock may be affected in part by the research and reports that industry or financial analysts publish about our business. If one or more analysts elect to cover our company and then downgrade the stock, the stock price would likely decline rapidly. If one or more of these analysts cease coverage of our company, we could lose visibility in the market, which, in turn, could cause our stock price to decline. This could have a negative effect on the market price of our common stock.
If we become directly subject to the recent scrutiny involving PRC companies, we may have to expend significant resources to investigate and defend the matter, which could harm our business operations, stock price and reputation.
Recently, many U.S. public companies that have substantially all of their operations in the PRC have been the subject of intense scrutiny by investors, financial commentators and regulatory agencies. Much of the scrutiny has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial reporting and, in many cases, allegations of fraud. As a result of the scrutiny, the publicly traded stock of many U.S. listed China-based companies that have been the subject of such scrutiny has sharply decreased in value. Many of these companies are now subject to shareholder lawsuits and/or Securities and Exchange Commission (the “SEC”) enforcement actions and are conducting internal and/or external investigations into the allegations. If we become the subject of any such scrutiny, whether any allegations are true or not, we may have to expend significant resources to investigate such allegations and/or defend our company. Such investigations or allegations will be costly and time-consuming and distract our management from our business plan and could result in our reputation being harmed and our stock price could decline as a result of such allegations, regardless of the truthfulness of the allegations.
Risks Relating to U.S. Taxes
We might incur income tax liabilities even if we receive no distributions
We are a holding company that holds, directly or indirectly, 100% of the stock of non-U.S. corporations. Such non-U.S. corporations will be considered to be controlled foreign corporations (“CFCs”). A portion of the CFCs’ income, whether or not distributed, could be treated as imputed income to us. Because we do not anticipate receiving distributions from the CFCs, we will have to rely on other sources of cash to satisfy potential income tax liabilities that could arise from any imputed income.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
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There is no private ownership of land in China. Land is usually owned by the state and the government grants land use rights for specified terms. General Preservation has obtained the following Land Use Right Certificates and Property Right Certificates which show our entitlement to the land and buildings used by the Company. In addition, General Fruit has entered into certain orchard and office leases.
| No. | Company | Certificate Number | Area (sq m) | Purpose | Property Location | Expiration Date | ||||||
| 1 | General Preservation | Property Right Certificate (Xingfangquanzheng Gaoxing Zi No. LJGF2049) |
1,688 | Dormitory | Mengshan Village, Gaoxing Town, Xingguo County | November 1, 2055 | ||||||
| 2 | General Preservation | Property Right Certificate (Xingfangquanzheng Gaoxing Zi No. LJGF2050) |
11,131 | Workshop | Mengshan Village, Gaoxing Town, Xingguo County | November 1, 2055 | ||||||
| 3 | General Preservation | Property Right Certificate (Xingfangquanzheng Gaoxing Zi No. LJGF2051) |
418 | Electricity Supply Room | Mengshan Village, Gaoxing Town, Xingguo County | November 1, 2055 | ||||||
| 4 | General Preservation | Property Right Certificate (Xingfangquanzheng Gaoxing Zi No. LJGF2052) |
2,241 | Office Building | Mengshan Village, Gaoxing Town, Xingguo County | November 1, 2055 | ||||||
| 5 | General Preservation | State-owned Land Use Right Certificate (Xingguoyong 2005 No. 2B2905-051) |
39,171 | Industry | Mengshan Village, Gaoxing Town, Xingguo County | November 1, 2055 | ||||||
| 6 | General Fruit | Lease from various people (6) | 2,343 mu | Orchards | Ningdu county | December 31, 2020 | ||||||
| General Fruit | Lease from various people (7) | 2,258.4 | Orchards | Ningdu county | December 31, 2022 | |||||||
| General Fruit | Lease from 1 person | 500 | Orchards | Yudu county | December 31, 2022 | |||||||
| General Fruit | Lease from various people(3) | 841.3 mu | Orchards | Ningdu county | December 31, 2024 | |||||||
| 7 | General Fruit | Lease from various people (20) | 4,765 mu | Orchards | Xingguo county | December 31, 2020 | ||||||
| General Fruit | Lease from 1 person | 1,318 | Orchards | Xingguo county | December 31, 2024 | |||||||
| 8 | General Fruit | Lease from one Company | 4,532 mu | Orchards | Xingguo county | December 31, 2023 | ||||||
| 9 | General Fruit | Orchard Land Operating Certificates (19) | approximately 4,420 mu | Orchards | Ningdu county | Various, from 2019 to 2064 | ||||||
| 1 | 0 | General Fruit | Orchard Land Operating Certificates (6) | approximately 5,608 mu | Orchards | Xingguo county | Various, from 2031 to 2034 |
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We are not currently a party to any material legal or administrative proceedings and are not aware of any pending legal or administrative proceedings against us. We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Common Stock is quoted on the OTC Bulletin Board under the symbol “GELT”.
The following table represents the high and low per share bid information for our common stock for each quarterly period in fiscal 2015 and 2014. Such high and low bid information reflects inter-dealer quotes, without retail markup, markdown or commissions and may not represent actual transactions.
Year Ended September 30, 2015
| High | Low | |||||||
| Quarter ended September 30 | $ | 5.10 | 5.10 | |||||
| Quarter ended June 30 | 5.10 | 5.10 | ||||||
| Quarter ended March 31 | 5.10 | 5.10 | ||||||
| Quarter ended December 31 | 5.10 | 5.10 | ||||||
Year Ended September 30, 2014
| High | Low | |||||||
| Quarter ended September 30 | $ | 5.10 | 5.10 | |||||
| Quarter ended June 30 | 5.10 | 5.10 | ||||||
| Quarter ended March 31 | 5.10 | 5.10 | ||||||
| Quarter ended December 31 | 5.10 | 5.10 | ||||||
Holders of Common Stock
As of December 1, 2015, there were approximately 630 record holders of Common Stock. Since our inception, we have not paid any dividends on our Common Stock, and we do not anticipate that we will pay dividends in the foreseeable future.
Dividend Policy
We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our Common Stock for the foreseeable future.
Future cash dividends, if any, will be at the discretion of our Board of Directors and will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors as our Board of Directors may deem relevant. Dividends or other distributions will only be paid or made if we are able to pay our debts as they fall due in the ordinary course of business.
In addition, under PRC Company Law and relevant rules and regulations, our PRC subsidiaries may pay dividends only out of their retained earnings/net profit, if any, calculated according to PRC accounting standards, and only after accumulated losses from preceding years have been fully covered and the following appropriations have been made:
(a) appropriations to the statutory surplus reserve equivalent to 10% of its net profits less any accumulated losses, as determined under PRC GAAP; no further appropriations to the statutory surplus reserve are required once this reserve reaches an amount equal to 50% of its respective registered capital;
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(b) appropriations to a discretionary surplus reserve as approved by the shareholders in shareholders' meeting.
Securities Authorized for Issuance under Equity Compensation Plans
As of September 30, 2015, we did not have any equity compensation plans in effect, although our board of directors may approve from time to time the issuance of equity compensation to our employees as additional compensation outside of an equity compensation plan.
Sales of Unregistered Securities
During the fiscal year ended September 30, 2015, the Company made no sales of unregistered shares.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and accompanying notes thereto, for the fiscal years ended September 30, 2015 and 2014, included elsewhere herein.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements. See “Special Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results may differ materially from those contained in any forward-looking statements.
Our financial statements are prepared in U.S. Dollars and in accordance with accounting principles generally accepted in the United States. See “Critical Accounting Policies and Estimates — Foreign currency translation” below for information concerning the exchanges rates at which Renminbi 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.
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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.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, inventories, recovery of long-lived assets, income taxes, and the valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we 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 audited consolidated financial statements for the years ended September 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 their estimated useful life of 50 years.
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Foreign Currency Translation and Transactions
The accompanying consolidated financial statements are presented in U.S. Dollars (“$”). Greater China International’s functional currency is the Hong Kong Dollar (“HKD”) and Nanchang Hanxin Agriculture Technology Co., Ltd, General Fruit and General Preservation’s functional currency is the 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.
Cash flows from the Company’s operations included in the statement 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:
| September 30, | ||||||||
| 2015 | 2014 | |||||||
| Period end RMB:USD exchange rate | 0.1572 | 0.1624 | ||||||
| Average RMB:USD exchange rate | 0.1622 | 0.1627 | ||||||
| Period end HKD:USD exchange rate | 0.1290 | 0.1288 | ||||||
| Average HKD:USD exchange rate | 0.1290 | 0.1290 | ||||||
Results of Operations for the Year Ended September 30, 2015 Compared to the Year Ended September 30, 2014
Revenues
For the year ended September 30, 2015, we had net revenues of $22,463,365, as compared to those of $19,451,820 for the year ended September 30, 2014, an increase of approximately $3,011,545 or 15.5%. The increase in net revenue is mainly because the quantity of navel oranges sold in the year ended September 30, 2015 increased approximately 3,608,820, or 14.4% compared to the quantity of navel oranges sold in the year ended September 30, 2014, and the unit price increased 0.01 or 1.3% to $0.78 per KG during the year ended September 30, 2015 from $0.77 per KG during the year ended September 30, 2014.
| Years ended | Sales Volume (in KG) | Sale Price Per KG (in US$) | Total Sales Revenue | |||||||||
| September 30, 2015 | 28,749,675 | 0.78 | 22,463,365 | |||||||||
| September 30, 2014 | 25,140,855 | 0.77 | 19,451,820 | |||||||||
| Variance | 3,608,820 | 0.01 | 3,011,545 | |||||||||
| % Variance | 14.4 | % | 1.3 | % | 15.5 | % | ||||||
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Cost of sales
Cost of sales increased by $1,817,444, or 22.2%, from $8,195,629 for the year ended September 30, 2014 to $10,013,073 for the year ended September 30, 2015. The increase is attributable to the increase in volume of sales and an increase in the unit price of outsourced navel oranges during the year ended September 30, 2015 compared last year.
Gross profit
Our gross profit was $12,450,292 for the year ended September 30, 2015 as compared to $11,256,191 for the year ended September 30, 2014, representing a gross margin of 55.4% and 57.9%, respectively. The decrease of 2.4% in our gross profit margin for the year ended September 30, 2015 was mainly attributable to the reasons in the above discussion of cost of sales. 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 land use rights due to the lower acquisition cost in the current year.
Selling expenses
Selling expenses were $140,829 and $151,142 for the years ended September 30, 2015 and 2014, respectively, a decrease of $10,313 or 6.8%, mainly due to a decrease in advertising and marketing since our products have built a good reputation on the market. Selling expenses consisted of the following:
| Years Ended September 30, | Increase/decrease | |||||||||||||||
| 2015 | 2014 | $ | % | |||||||||||||
| Shipping and handling | 21,653 | 25,062 | (3,409 | ) | -13.6 | % | ||||||||||
| Compensations and related benefits | 24,763 | 31,167 | (6,404 | ) | -20.5 | % | ||||||||||
| Advertising and promotion | 66,598 | 52,132 | 14,466 | 27.7 | % | |||||||||||
| Others | 27,815 | 42,781 | (14,966 | ) | -35.0 | % | ||||||||||
| Total | 140,829 | 151,142 | (10,313 | ) | -6.8 | % | ||||||||||
| Selling expenses as % of revenue | 0.63 | % | 0.78 | % | -0.15 | % | -19.2 | % | ||||||||
General and administrative expenses
General and administrative expenses amounted to $1,146,228 for the year ended September 30, 2015, as compared to $1,306,695 for the same period in 2014, a decrease of $160,467 or 12.3%. General and administrative expenses consisted of the following:
| Years Ended September 30, | Increase/decrease | |||||||||||||||
| 2015 | 2014 | $ | % | |||||||||||||
| Compensation and related benefits | 300,699 | 346,290 | (45,591 | ) | -13.2 | % | ||||||||||
| Depreciation | 99,230 | 97,077 | 2,153 | 2.2 | % | |||||||||||
| Professional services | 602,814 | 695,912 | (93,098 | ) | -13.4 | % | ||||||||||
| Office expenses | 20,036 | 16,828 | 3,208 | 19.1 | % | |||||||||||
| Meals and entertainment | 17,231 | 44,513 | (27,282 | ) | -61.3 | % | ||||||||||
| Other | 106,218 | 106,075 | 143 | 0.1 | % | |||||||||||
| Total | 1,146,228 | 1,306,695 | (160,467 | ) | -12.3 | % | ||||||||||
| G&A expense as a percentage of revenues | 0.51 | % | 6.72 | % | -6.21 | % | -92.4 | % | ||||||||
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Professional service fees decreased by $93,098 due to lower costs in connection with the Company’s proposed public offering incurred during the year ended September 30, 2015.
Meals and entertainment decreased by $27,282 due to more strict control in expenditures and the decrease in marketing since our products have built good reputations in the markets during the year ended September 30, 2015.
Income from operations
For the year ended September 30, 2015, income from operations was $11,163,235, as compared to $9,798,354 for the year ended September 30, 2014, an increase of $1,364,881 or 13.9%, mainly due to the reasons discussed above.
Other income (expenses)
For the years ended September 30, 2015 and 2014, other expenses amounted to $162,612 as compared to other income of $99,161 for the same period in 2014. For the years ended September 30, 2015 and 2014, other expenses mainly included: (i) interest expense, which decreased by $74,189 or 23.6%. The decrease in interest expense was mainly because the Company paid off the short-term bank loan in July 2015, and (ii) received government subsidies income of $477,036 during the year ended September 30, 2014.
Income tax expense
For the years ended September 30, 2015 and 2014, income tax amounted to $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 years ended September 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 years ended September 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 years ended September 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 years ended September 30, 2015 and 2014 was $11,000,623 and $9,897,515, respectively.
Foreign currency translation gain
The functional currency of our subsidiaries operating in the PRC is the Chinese Yuan or Renminbi (“RMB”). The financial statements of our subsidiaries are translated to U.S. dollars using period end rates of exchange for assets and liabilities, and average rates of exchange (for the period) for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. As a result of these translations, which are a non-cash adjustment, we reported foreign currency translation loss of $1,872,132 and $153,500 for the years ended September 30, 2015 and 2014, respectively. These non-cash loss had the effect of decreasing our reported comprehensive income
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Comprehensive income
For the years ended September 30, 2015 and 2014, comprehensive income of $9,128,491 and $9,744,015 were derived from the sum of our net income of $11,000,623 and $9,897,515 plus foreign currency translation losses of $1,872,132 and $153,500, 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 through operations, which it believes will be sufficient to sustain current level operations for at least the next twelve months.
As of September 30, 2015 and 2014, our balance of cash and cash equivalents was $464,046 and $3,352,045, respectively, a decrease of $2,887,999 or 86.2%, mainly due to net cash used in financing activities.
The following summarizes the key components of the Company’s cash flows as follows:
| Years Ended September 30, | Increase/decrease | |||||||||||||||
| 2015 | 2014 | $ | % | |||||||||||||
| Net cash provided by operating activities | $ | 3,196,495 | $ | 1,226,381 | 1,970,114 | 160.6 | % | |||||||||
| Net cash used in investing activities | (22,475 | ) | (83,206 | ) | 60,731 | -73.0 | % | |||||||||
| Net cash used in financing activities | (5,968,118 | ) | (189,030 | ) | (5,779,088 | ) | 3057.2 | % | ||||||||
| Effect of foreign currency translation | (93,901 | ) | (10,620 | ) | (83,281 | ) | 784.2 | % | ||||||||
| Net decrease (increase) in cash and cash equivalents | $ | (2,887,999 | ) | $ | 943,525 | (3,831,524 | ) | -406.1 | % | |||||||
In summary, our cash flows were:
Net cash provided by operating activities increased in the year ended September 30, 2015 by $1,970,114 to $3,196,495 from net cash provided by operating activities of $1,226,381 for the year ended September 30, 2014. These changes were mainly brought about by the following factors: a change in net income of $1,103,108, a change in cash used in advance payment of $573,861 and a change in prepaid leases of $1,255,579.
Net cash used in investing activity decreased by $60,731, from $83,206 to $22,475 in the year ended September 30, 2015 compared to the same period ended in 2014, which is mainly due to less cash expenditures on property and equipment.
Net cash used in financing activities increased by $5,779,088 to $5,968,118 in the year ended September 30, 2015 from $189,030 used in financing activities at the same period ended in 2014. This was due to repayment of $1,426,518 of loans from related parties loans and of $4,541,600 of short-term bank loans.
Working capital increased by $6,919,187 to $14,803,354 as of September 30, 2015 from working capital of $7,884,167 as of September 30, 2014. In order to stay cost competitive in the long-run, we leased 112,650 orange trees in the year ended September 30, 2015. Based on the lease rate of approximately $64.88 (RMB400) per tree in 2015, the total lease amounts were $7.3 million (RMB 45.1 million) during the year ended September 30, 2015.
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As we are listed by our lending bank as a good credit customer, we believe that we will be able to borrow short-term bank loans if requirements are met. During the year ended September 30, 2015, the Company paid off $4.5 million (RMB28,000,000) of short-term bank loans to Agricultural Development Bank of China.
On September 29, 2014, the Company entered into 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.
On October 13, 2015, the Company entered into a short-term bank loan agreements with Agricultural Development Bank of China for RMB 26 million (about $4.1M). Pursuant to the Loan Agreements, the principle will be due on August 8, 2016. The interest is being calculated using an annual fixed interest rate of 5.28%. The loan is guaranteed by Xingping Hou, CEO of the Company, and also guaranteed by Ganzhou Jinshengyuan Guarantee Co., Ltd., an unrelated party. The Company will pay 4% of the principle to the guarantor as a guarantee fee for the above bank loan. As of the report date, the Company received RMB10,000,000 ($1,572,000) of the loan. This bank loan is for working capital purposes.
As of September 30, 2015 and 2014, the Company had outstanding debts from a related party, Hua Mei Investments Limited (“Hua Mei”), of $154,571 and $1,508,566, respectively. These debts are non-interest bearing and payable on demand. The proceeds of these debts were primarily utilized to pay various professional fees involved with the being the public company in the U.S.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated audited financial statements and notes of General Agriculture Corporation and subsidiaries as of September 30, 2015 and 2014 are thereto attached as Annex at the end of this Form 10-K Annual Report.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
On October 10, 2013, we dismissed our independent registered public accounting firm Patrizio & Zhao, LLC. The decision to dismiss Patrizio & Zhao, LLC was adopted by the Board of Directors based on the fact that on September 30, 2013, Patrizio & Zhao , LLC was denied the ability to practice before the Securities and Exchange Commission, pursuant to Rule 102 (e)(i)(ii) of the Commission’s Rules of Practice and Section 4C of the Exchange Act.
None of the reports of Patrizio & Zhao, LLC, on the Company's financial statements for either of the past two years or subsequent interim period contained an adverse opinion or disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles.
There were no disagreements between the Company and Patrizio & Zhao, LLC, for the two most recent fiscal years and any subsequent interim period through October 10, 2013 (date of dismissal) on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of Patrizio & Zhao, LLC, would have caused them to make reference to the subject matter of the disagreement in connection with its report. Further, Patrizio & Zhao, LLC has not advised the Company that: 1) internal controls necessary to develop reliable financial statements did not exist; or 2) information has come to the attention of Patrizio & Zhao, LLC which made it unwilling to rely upon management's representations, or made it unwilling to be associated with the financial statements prepared by management; or 3) the scope of the audit should be expanded significantly, or information has come to the attention of Patrizio & Zhao, LLC that they have concluded will, or if further investigated, might materially impact the fairness or reliability of a previously issued audit report or the underlying financial statements, or the financial statements issued or to be issued covering the fiscal year ended September 30, 2013.
On November 6, 2013, the Board of Directors of the Company approved the engagement of YSL & Associates LLC as its principal accountant to audit the Company's financial statements. During the years ended September 30, 2012 and 2013 and the interim period through November 6, 2013, neither the Company nor anyone on its behalf consulted YSL & Associates LLC regarding (i) the application of accounting principles to a specific completed or contemplated transaction, (ii) the type of audit opinion that might be rendered on the Company's financial statements, or (iii) any matter regarding the Company that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and related instructions to Item 304 of Regulation S-K) or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K).
On April 3, 2014, subsequent to the filing of the original Report, we dismissed YSL & Associates LLC. The decision to dismiss YSL & Associates LLC was adopted by the Board of Directors. None of the reports of YSL & Associates LLC on the Company’s financial statements for either of the past two years or subsequent interim period contained an adverse opinion or disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles.
There were no disagreements between the Company and YSL & Associates LLC for the two most recent fiscal years and any subsequent interim period through April 3, 2014 (date of dismissal) on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of YSL & Associates LLC, would have caused them to make reference to the subject matter of the disagreement in connection with its report. Further, YSL & Associates LLC has not advised the Company that: 1) internal controls necessary to develop reliable financial statements did not exist; or 2) information has come to the attention of YSL & Associates LLC which made it unwilling to rely upon management; or 3) the scope of the audit should have been expanded significantly, or information has come to the attention of YSL & Associates LLC that they have concluded will, or if further investigated, might materially impact the fairness or reliability of a previously issued audit report or the underlying financial statements, or the financial statements issued or to be issued covering the fiscal year ended September 30, 2013.
On April 3, 2014, the Board of Directors of the Company approved the engagement of Friedman LLP as its principal accountant to audit the Company’s financial statements. During the years ended September 30, 2012 and 2013 and the interim period through April 3, 2014, neither the Company nor anyone on its behalf consulted Friedman LLP regarding (i) the application of accounting principles to a specific completed or contemplated transaction, (ii) the type of audit opinion that might be rendered on the Company’s financial statements or (iii) any matter regarding the Company that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and related instructions to Item 304 of Regulation S-K) or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K).
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ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures” is defined in Rule 13a-14(c) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the required time periods and are accumulated and communicated to the company’s management as appropriate to allow timely decisions regarding required disclosure. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2015, and have concluded that as of that date, our disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act, subject to certain material weaknesses in our internal control over financial reporting discussed immediately below under the caption “Management’s Report on Internal Control over Financial Reporting”.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected in a timely manner. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.
As disclosed in our Form 10K for the year ended September 30, 2014, our principal executive officer and principal financial and accounting officer concluded that our internal control over financial reporting was not effective 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 a 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.
In the third and fourth quarters of 2015, the Company began 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.
Additionally, in the third and fourth quarters of 2015 management established 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 execute financial statements, review the adjusted entries and the closing entries and add accounting memos, if necessary. Testing of the effectiveness of new process is planned in the fiscal year ending September 30, 2016.
Conclusion
As of September 30, 2015, we completed our remediation efforts related to this material weakness by hiring a Chief Financial Officer and electing an audit committee and establishing a formal process for closing the Company’s books and preparing and reviewing its financial statements. Management believes the foregoing efforts have effectively remediated the material weakness. 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 above there were no significant changes in our internal controls over financial reporting identified in connection with this evaluation that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our Company’s internal controls over financial reporting.
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Attestation Report of the Registered Public Accounting Firm
This Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. As a smaller reporting company, management’s report is not subject to attestation by our registered public accounting firm.
None.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Set forth below is information regarding our current directors, executive officers and director nominee.
| Name | Age | Position | ||
| Xingping Hou | 55 | Director, Chairman, Chief Executive Officer and President | ||
| Yanhong (Amy) Xue | 43 | Chief Financial Officer | ||
| Shaokang Zeng | 37 | Director, Secretary and Treasurer | ||
| Liwei Jia | 37 | Independent Director | ||
| Wei Lu | 40 | Independent Director | ||
| Hongcai Li | 42 | Independent Director |
Xingping Hou, 55 has been the Company’s Chairman of the Board, Chief Executive Officer and President since July 2012. Mr. Hou has served as the Executive Director, Manager of General Fruit since March 2003 and as the Executive Director, Manager of General Preservation since July 2003. Mr. Hou has also served as the Chairman of the Board for each of General Red Industry Group Co., Ltd. and Shaanxi General Red Agricultural Development Co., Ltd. since May 2010 and October 2010, respectively. He has also served as the Chairman of the Board and President of General Red International, Inc. since November 2007. Since May 2011, Mr. Hou has served as the Chief Executive Officer, President and Chairman of General Red Holding, Inc. Mr. Hou has also served as a director of Hua Mei Investments Limited and Han Glory International Limited since April 2011. Mr. Hou graduated from the PLA Nanchang Army Institute. Mr. Hou brings historical and operational expertise and experience to the Board. Mr. Hou also brings many years of food industry experience to the Board. Mr. Hou devotes as much time as necessary to the business of the Company and currently holds no other directorships in any other reporting company.
Amy Xue, 43, is the Chief Financial Officer of the Company. She has extensive experience in U.S. GAAP financial reporting and public accounting, and she has performed audit and accounting services for a number of listed companies in a variety of industries. From October 2010 to June 2013, she was the partner of Wall Street CPA Services, LLC, an accounting firm in New York City that provided financial advisory and accounting services to listed and unlisted companies. From September 2007 to October 2010, Ms. Xue was a senior manager of Acquavella, Chiarelli, Shuster, Berkower & Co., LLP, a public accounting firm in New Jersey with an office in New York that provided audit services to listed and unlisted companies. Ms. Xue holds a M.S. in Accounting from Binghamton University and a B.S. in Law from Peking University in Beijing, China. She is a U.S. Certified Public Accountant in New York and a member of the American Institute of Certified Public Accountants (AICPA).
Shaokang Zeng, 37, is the Company’s Director, Secretary and Treasurer. Mr. Zeng has served as the Finance Department Manager of General Fruit since December 2006. Mr. Zeng graduated from the People’s University of China where he studied accounting and received an MBA from Beijing University of Chemical Technology, College of Business Administration. Mr. Zeng brings financial and strategic experience to the Company’s Board of Directors. Mr. Zeng devotes as much time as necessary to the business of the Company and currently holds no other directorships in any other reporting company.
Liwei Jia, 37 is the independent director. He graduated with a Bachelor’s Degree in Economics from Beijing Industry and Commerce University in June 2001. Mr. Jia is a Chinese Certified Public Accountant and an International Certified Internal Auditor. From July 2001 to December 2003, Mr. Jia was the project manager at Zhongrui Hengxin Accounting Firm. From January 2004 to December 2011, Mr. Jia was the Senior Audit Manager at PricewaterhouseCoopers Zhong Tian LLP and participated in the financial audit and internal control audits of a number of large Chinese public companies. From November 2011 to April 2012, Mr. Jia was the Executive Director of Funds and Assets Management of Beijing Shangyin Zhisheng Investments and Funds Management Co., Ltd. From December 2012 to the present, Mr. Jia is the managing director of Zhongfu Runde Investments Co., Ltd.
Wei Lu, 40, is the independent director. He graduated with a Master of Business Administration from University of Southern California, Marshall Business School in May 2003. From September 2003 to April 2007, Mr. Lu was the director of Fidelity Capital Investment Partners, providing advisory services for Chinese companies’ oversea listings. From May 2007 to December 2009, Mr. Lu was the managing director of World Capital Market Inc, providing consulting service for Chinese companies’ mergers & acquisitions. From January 2010 to May 2011, Mr. Lu was the Chief Financial Officer of Chongqing Maotian Group, assisting with the external financial audit, road shows and reorganization. From May 2011 to the present, Mr. Lu is a partner of Newmargin Capital, providing services for private equity and corporate finance.
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Hongcai Li, 42, is the independent director. He earned a Bachelor’s degree in Economics from Chongqing Institute of Industrial Management. Mr Li is a certified intermediate level accountant. From July 1998 to March 2001, Mr Li served as the accounting manager of Chognqing Chaohua Technology Co., Ltd. From April 2001 to November 2006, Mr Li served as the Department Manager of Guomei Electronics Co Ltd. From December 2006 to March 2011, Mr Li was the Vice President of Accounting of Tianyin Pharmaceutical Co, Inc, a NYSE MKT listed company and handled the preparation of financial statements and accounting reporting. From April 2011 to the present, Mr Li served as the chief financial officer of Sichuan Qiangjiang Stone Company and Sichuan Huide Financing and Guaranty Company.
Independent Directors
Liwei Jia, Wei Lu and Hongcai Li are independent directors pursuant to the required standards set forth in Rule 10A-3(b) of the Securities Exchange Act of 1934, as amended, based on an evaluation of the relationships between the Company and each of them.
Liwei Jia, Lu and Li to serve on the Company’s Audit Committee. The Board has determined that each of the members of the Audit Committee is independent pursuant to the required standards set forth in Rule 10A-3(b) of the Securities Exchange Act of 1934, as amended, based on an evaluation of the relationships between the Company and each of the members. Mr. Jia will serve as Chairman of the Audit Committee. Each of Mssrs. Jia and Li were designated by the Board as an “audit committee financial expert” as defined by Item 407(d)(5) of Regulation S-K under the Securities Act of 1933, as amended, based on the Board’s evaluation of his knowledge of accounting, qualifications and experience and has appropriate experience or background which results in his financial sophistication in accordance with the additional audit committee requirements of Rule 5605(c)(2)(A) of the NASDAQ Listing Rules.
Wei Lu and Hongcai Li serve on each of the Company’s Compensation Committee and Nominating and Governance Committee. Mr. Li will serve as Chairman of the Compensation Committee and Mr. Lu will serve as Chairman of the Nominating and Governance Committee.
Family Relationships
There are no family relationships between any of our directors or executive officers.
Involvement in Certain Legal Proceedings
There have been no events under any bankruptcy act, no criminal proceedings and no judgments, injunctions, orders or decrees material to the evaluation of the ability and integrity of any director, executive officer, promoter or control person of our Company during the past ten years.
Code of Ethics
We adopted a Code of Business Conduct and Ethics on August 5, 2012. The Code of Ethics, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K, constitutes our Code of Ethics for our principal executive officer, our principal financial and accounting officer and our other senior financial officers. The Code of Ethics is intended to promote honest and ethical conduct, full and accurate reporting, and compliance with laws as well as other matters. A printed copy of the Code of Ethics may be obtained free of charge by writing to.
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Committees of the Board of Directors
Our board of directors has an audit committee, a compensation committee and a nominating and governance committee. Each of the committees of the board of directors has the composition and responsibilities described below.
Audit Committee
Liwei Jia, Hongcai Li and Wei Lu are members of our audit committee. Liwei Jia is the Chairman of the Audit Committee. Each of Liwei Jia and Wei Lu were designated by the Board as an “audit committee financial expert” as defined by Item 407(d)(5) of Regulation S-K under the Securities Act of 1933, as amended, based on the Board’s evaluation of his knowledge of accounting, qualifications and experience and has appropriate experience or background which results in his financial sophistication in accordance with the additional audit committee requirements of Rule 5605(c)(2)(A) of the NASDAQ Listing Rules.
Our Audit Committee is responsible, in accordance with the Audit Committee charter, recommending our independent auditors, and overseeing our audit activities and certain financial matters to protect against improper and unsound practices and to furnish adequate protection to all assets and records.
Our Audit Committee pre-approves all audit and non-audit services provided by our independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to particular service or category of services and is generally subject to a specific budget. The Audit Committee has delegated pre-approval authority to its Chairman when expedition of services is necessary. The independent auditors and management are required to periodically report to the full Audit Committee regarding the extent of services provided by the independent auditor in accordance with this pre-approval, and the fees for the services performed to date.
Compensation Committee
Hongcai Li and Wei Lu are members of our Compensation Committee and Hongcai Li is the chairman of the Compensation Committee. All members of our Compensation Committee are independent under the current definition promulgated by NYSE Amex and NASDAQ. In accordance with the Compensation Committee’s Charter, the Compensation Committee is responsible for overseeing and, and as appropriate, making recommendations to the Board regarding the annual salaries and other compensation of our executive officers and general employees and other polices, providing assistance and recommendations with respect to our compensation policies and practices.
Nominating and Governance Committee
Liwei Jia and Wei Lu are currently the members of our Nominating and Governance Committee and Wei Lu is the chairman of Nominating and Governance Committee. All members of our Nominating and Governance Committee will be qualified as independent under the current definition promulgated by NYSE Amex and NASDAQ. In accordance with the Nominating and Governance Committee’s Charter, our Nominating and Governance Committee is responsible to identify and nominate members for election to the board of directors; develop and recommend to the board of directors a set of corporate governance principles applicable to our company; and oversee the evaluation of the board of directors and management.
Security Holder Recommendations for Board Nominees
There have been no changes to the procedures by which our stockholders may recommend nominees to the Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers, directors and holders of more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Based solely on our review of the copies of these reports and on information provided by the reporting persons, we believe that during the fiscal year ended September 30, 2015, all filing requirements for reporting persons were met.
48
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth certain summary information concerning all plan and non-plan compensation awarded to, earned by, or paid to the named executive officers and directors by any person for all services rendered in all capacities to the Company in the past two fiscal years:
| Name of Executive Officer and/or Director | Position | Fiscal Years | Salary | Bonus and Other Compensation | Securities Stock | |||||||||||||
| Xingping Hou | President/Chief Executive Officer/Director | 2015 | $ | 20,000 | (1) | $ | - | $ | - | |||||||||
| 2014 | $ | 20,000 | (1) | $ | - | $ | - | |||||||||||
| Amy Xue | Chief Financial Officer | 2015 | $ | 71,500 | $ | - | $ | - | ||||||||||
| 2014 | $ | 65,000 | $ | - | $ | - | ||||||||||||
| Shaokang Zeng | Secretary, Treasurer, Director | 2015 | $ | 15,000 | (1) | $ | - | $ | - | |||||||||
| 2014 | $ | 15,000 | (1) | $ | - | $ | - | |||||||||||
| Yongjun Zeng | Former Director | 2015 | $ | 10,000 | (1) | $ | - | $ | - | |||||||||
| 2014 | $ | 10,000 | (1) | $ | - | $ | - | |||||||||||
| (1) | The salary set forth was earned for service as director of the Company but declined by the director. No compensation was earned by Xingping Hou, Shaokang Zeng or Yongjun Zeng for service as an executive officer of the Company. |
Employment Agreements
On January 31, 2013, the Company entered into agreements with Xingping Hou and Shaokang Zeng, and Yongjun Zeng, in connection with their service as directors of the Company. Pursuant to the agreements, Xingping Hou will be entitled to receive annual compensation of $20,000, Shaokang Zeng will be entitled to receive annual compensation of $15,000, and Yongjun Zeng will be entitled to receive annual compensation of $10,000 for their services. The Company will reimburse each director for reasonable expenses incurred in connection with his performance of duties as a director of the Company, including travel expenses. The Company also agrees to include each director as an insured under its directors and officers insurance policy and indemnify him for any expenses incurred in connection with his performance of duties as a director of the Company. The employment agreement with Yongjun Zeng was terminated on September 5, 2013 when Yongjun Zeng resigned from the position of board director.
On July 1, 2013, Yanhong Xue (also known as “Amy Xue”, hereinafter referred to as “Amy Xue”) was appointed the Chief Financial Officer by the board of directors of the Company and entered into an employment agreement dated July 1, 2013 with Amy Xue (the “Employment Agreement”).
Under the Employment Agreement, Amy Xue is employed by the Company for a term of 36 months commencing on July 1, 2013. The Company may terminate the Employment Agreement upon an aggregate thirty (30) business days' prior written notice and opportunity to cure. Amy Xue may terminate this Agreement immediately if (a) Company fails to make when due any payments to her under the Employment Agreement; (b) if she determines, in her sole discretion, that Company has failed to provide complete and accurate information necessary for her to perform the services required by the Employment Agreement, or that Company is acting or has acted in a manner that damages or could potentially damage her reputation in the business community, or (c) if Company (i) becomes insolvent; (ii) fails to pay its debts or perform its obligations in the ordinary course of business as they mature; (iii) is declared insolvent or admits in writing its insolvency or inability to pay its debts or perform its obligations as they mature; (iv) becomes the subject of any voluntary or involuntary proceeding in bankruptcy, liquidation, dissolution, receivership, attachment or composition or general assignment for the benefit of creditors, provided that, in the case of an involuntary proceeding, the proceeding is not dismissed with prejudice within sixty (60) days after the institution thereof; or (v) if Company becomes the subject of a Federal, State, SEC or NASD investigation into its business practices, accounting or officers and directors.
49
The thirty-six (36) month term of the Employment Agreement shall be deemed automatically renewed unless the Company gives notice to Amy Xue of an intention to terminate at the expiration of the original term. The notice must be in writing, received by Amy Xue at least thirty (30) days prior to the end of the term, and specifically address the automatic renewal provision of the Employment Agreement.
The Company agrees to pay Amy Xue a monthly salary of RMB 33,580 for the first year and a monthly salary increased by 10% for the second year and thereafter. In the event that Amy Xue, in her capacity as CFO, introduces any funding source to Company and Company successfully obtains funding from such source, Company shall pay Amy Xue a bonus equal to 5% of the total amount of funding obtained from such source at the closing date(s) of such funding transaction(s). Any compensation payment over-due fifteen (15) days will accrue interests at 1.5% compounded (one and a half percent) every thirty days.
Director Compensation
Xingping Hou is entitled to receive annual compensation of $20,000 and Shaokang Zeng is entitled to receive annual compensation of $15,000 for their service as directors.
Liwei Jia, Hongcai Li and Wei Lu receive $1,297 (8,000 RMB Yuan) per month as set forth in the Company’s Compensation Committee Charter
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding beneficial ownership of our Common Stock as of December 1, 2015 (after giving effect to the Share Exchange and the related issuances) by (i) each person (or group of affiliated persons) who is known by us to own more than five percent of the outstanding shares of our Common Stock, (ii) each director, executive officer and director nominee, and (iii) all of our directors, executive officers and director nominees as a group. As of December 1, 2015, we had 15,918,940 shares of Common Stock issued and outstanding.
Beneficial ownership is determined in accordance with SEC rules and generally includes voting or investment power with respect to securities. Unless otherwise noted, the principal address of each of the stockholders, directors and officers listed below is Room 801, Plaza B, Yonghe Building, No.28 AnDingMen East Street, Dongcheng District, Beijing, China
| Name & Address of Beneficial Owner | Amount & Nature of Beneficial Ownership (1) | Percent of Class (2) | ||||||
| Xingping Hou (3) | 9,997,841 | 62.80 | % | |||||
| Shaokang Zeng | - | - | ||||||
| Amy Xue | - | - | ||||||
| Liwei Jia | - | - | ||||||
| Wei Lu | - | - | ||||||
| Hongeai Li | - | - | ||||||
| Across Asia Investments Limited (4) | 1,082,500 | 6.80 | % | |||||
| Ever Shining Investments Limited (5) | 1,083,750 | 6.81 | % | |||||
| Hua Mei Investments Limited (6) | 9,997,841 | 62.80 | % | |||||
| Zhihao Sabio Zhang (3) | 9,997,841 | |||||||
| All officers and directors as a group (5 persons) | 9,997,841 | 62.80 | % | |||||
| All 5% and more stockholders | 12,164,091 | 76.41 | % | |||||
50
| (1) | Pursuant to Rule 13d-3 under the Exchange Act, a person has beneficial ownership of any securities as to which such person, directly or indirectly, through any contract, arrangement, undertaking, relationship or otherwise has or shares voting power and/or investment power or as to which such person has the right to acquire such voting and/or or investment power within 60 days. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of the shares. |
| (2) | Based on 15,918,940 shares of Common Stock outstanding as of December 1, 2015. |
| (3) | Xingping Hou is the sole director of Hua Mei Investments Limited, and Zhihao Sabio Zhang owns all of the outstanding shares of Hua Mei Investments Limited. Pursuant to a call option agreement dated July 1, 2012, Mr. Hou has the right to purchase all of the shares in Hua Mei Investments Limited held by Mr. Zhang. Such option vests in three annual installments over a period of three years, of which 34% becomes exercisable on July 1, 2013, 33% becomes exercisable on July 1, 2014, and the remaining 33% becomes exercisable on July 1, 2015. The option expires on July 1, 2017. |
| (4) | The address of Across Asia Investment Limited (“Across Asia”) is Room 1605, Plaza A, Xin-Tian-Di, No. Jia-1, Xi-Ba-He Nan Road, Chaoyng District, Beijing City, 100028, China. Shiqiu Xiao is the sole director and shareholder of Across Asia and may be deemed to beneficially own the 1,082,500 shares of common stock of the Company owned by Across Asia. |
| (5) | The address of Ever Shining Investment Limited (“Ever Shining”) is Room 1605, Plaza A, Xin-Tian-Di, No. Kia-1, Xi-Ba-He Nan Road, Chaoyang District, Beijing City, 100028, China. Chunquan Luo is the sole director and shareholder of Ever Shining and may be deemed to beneficially own the 1,083,750 shares of common stock of the Company owned by Ever Shining. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships And Related Party Transactions
Other than as disclosed below, there were no transactions with related parties during the Transition Period or the fiscal years ended September 30, 2015 and 2014.
As of September 30, 2015 and 2014, the Company owed Hua Mei Investments Limited (“Hua Mei”), a related party (controlled by Mr. Hou Xingping, CEO of the Company), $154,571 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.
Independent Directors
Liwei Jia, Wei Lu and Hongcai Li are independent directors pursuant to the required standards set forth in Rule 10A-3(b) of the Securities Exchange Act of 1934, as amended, based on an evaluation of the relationships between the Company and each of them.
Changes in Control
There are no arrangements known to us, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in control of the Company.
51
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
| September 30, 2015 | September 30, 2014 | |||||||
| Audit Fees (1) | $ | 180,000 | $ | 160,000 | ||||
| Audit Related Fees(2) | - | |||||||
| Tax Fees(3) | 5,000 | 5,000 | ||||||
| (1) | Audit Fees consist of fees billed for professional services rendered for the audit of our consolidated annual financial statements for the years ended September 30, 2015 and 2014 and each interim consolidated financial statements in fiscal year 2015 and 2014. |
| (2) | Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported under “Audit Fees.” This category includes audit-related services related to acquisitions by the Company. |
| (3) | Tax Fees consist of fees billed for professional services rendered for tax compliance, tax advice and tax planning (domestic and international). These services include assistance regarding federal, state and international tax compliance and international tax planning. The fees billed for professional services rendered for tax service of year ended September 30, 2015 and 2013 were $5,000 and $5,000, respectively. |
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
The following consolidated financial statements of the Company are included in Part II, Item 8 of this Report:
Schedules are omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule or because the information required is given in the consolidated financial statements or the notes thereto.
(b) Exhibits
| Exhibit No. | Description | |
| 3.1 | Amended and Restated Certificate of Incorporation, as amended (10) | |
| 3.2 | Amended and Restated By-laws (8) | |
| 10.1 | Agreement dated September 25, 2012 by and between Hua Mei Investments Limited and Greater China Investment Limited (1) | |
| 10.2 | Form of Navel Orange Trees Leasing Agreement (3) | |
| 10.3 | Employment Agreement dated as of July 1, 2013 by and between the Company and Amy Xue (4) | |
| 10.4 | Director Agreement dated as of January 31, 2013, by and between the Company and Xingping Hou (2) | |
| 10.5 | Director Agreement dated as of January 31, 2013, by and between the Company and Shaokang Zeng (2) | |
| 10.6 | Director Agreement dated as of January 31, 2013, by and between the Company and Yongjun Zeng (2) | |
| 10.7 | Company Manager Employment Contract dated January 31, 2013, by and between Xingguo General Fruit Industry Development Co., Ltd. and Xingping Hou (2) | |
| 10.8 | Labor Contract dated January 31, 2013, by and between Xingguo General Fruit Industry Development Co., Ltd. And Shaokang Zeng (2) | |
| 10.9 | Call Option Agreement dated July 1, 2012 by and between Zhang Zhihao and Xingping Hou (6) | |
| 10.10 | Form of Orange Purchase Contract (7) | |
| 10.11 | Property Use Certificates dated August 30, 2007 (translation)(7) | |
| 10.12 | Office Lease Contracted dated March 1, 2011 between General Fruit and Shiyong Xu (translation)(7) | |
| 10.13 | Office Lease Contract dated February 10, 2012 between General Fruit and Taixang Want (translation)(7) | |
| 14.1 | Code of Ethics (5) | |
| 21.1 | Subsidiaries (9) |
52
| 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.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 |
| (1) | Incorporated by reference to our Transitional Report on Form 10-KT for the transition period from January 1, 2012 to September 30, 2012, filed with the SEC on December 28, 2012. |
| (2) | Incorporated by reference to our Current Report on Form 8-K dated January 31, 2013, filed with the SEC on February 1, 2013. |
| (3) | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, filed with the SEC on May 15, 2013. |
| (4) | Incorporated by reference to our Current Report on Form 8-K dated July 1, 2013, filed with the SEC on July 8, 2013. |
| (5) | Incorporated by reference to our Current Report on Form 8-K dated September 5, 2013, filed with the SEC on September 6, 2013. |
| (6) | Incorporated by reference to Amendment No. 2 to our Current Report on Form 8-K dated July 11, 2012, filed with the SEC on August 29, 2012. |
| (7) | Incorporated by reference to our Current Report on Form 8-K dated July 11, 2012, filed with the SEC on July 17, 2012. |
| (8) | Incorporated by reference to our Current Report on Form 8-K dated July 6, 2012, filed with the SEC on July 12, 2012. |
| (9) | Incorporated by reference to Amendment No. 1 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2013, filed with the SEC on June 4, 2014. |
| (10) | Incorporated by Reference to our Current Report on Form 8-K dated September 2, 2014, filed with the SEC on September 8, 2014. |
FINANCIAL STATEMENTS
Consolidated audited financial statements and notes of General Agriculture Corporation (formerly Geltology Inc.) and subsidiaries as of September 30, 2015 and 2014 are attached hereto as Annex at the end of this Form 10-K Annual Report.
53
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.
|
Dated: December 29, 2015 |
General Agriculture Corporation | |
| By: | /s/ Xingping Hou | |
| Xingping Hou | ||
| Chief Executive Officer | ||
|
Dated: December 29, 2015 |
||
| By: | /s/ Amy Xue | |
| Amy Xue | ||
| Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Name | Title | Date | ||
| /s/ Xingping Hou | ||||
| Xingping Hou | Director, Chairman, Chief Executive Officer and President (Principal Executive Officer) | December 29, 2015 | ||
| /s/ Amy Xue | ||||
| Amy Xue | Chief Financial Officer (Principal Financial and Accounting Officer) | December 29, 2015 | ||
| /s/ Shaokang Zeng | ||||
| Shaokang Zeng | Director, Secretary | December 29, 2015 | ||
| /s/ Liwei Jai | ||||
| Liwei Jai | Director | December 29, 2015 | ||
| /s/ Wei Lu | ||||
| Wei Lu | Director | December 29, 2015 | ||
| /s/ Hongeai Li | ||||
| Hongeai Li | Director | December 29, 2015 |
54
EXHIBIT INDEX
| Exhibit No. | Description | |
| 3.1 | Amended and Restated Certificate of Incorporation, as amended (10) | |
| 3.2 | Amended and Restated By-laws (8) | |
| 10.1 | Agreement dated September 25, 2012 by and between Hua Mei Investments Limited and Greater China Investment Limited (1) | |
| 10.2 | Form of Navel Orange Trees Leasing Agreement (3) | |
| 10.3 | Employment Agreement dated as of July 1, 2013 by and between the Company and Amy Xue (4) | |
| 10.4 | Director Agreement dated as of January 31, 2013, by and between the Company and Xingping Hou (2) | |
| 10.5 | Director Agreement dated as of January 31, 2013, by and between the Company and Shaokang Zeng (2) | |
| 10.6 | Director Agreement dated as of January 31, 2013, by and between the Company and Yongjun Zeng (2) | |
| 10.7 | Company Manager Employment Contract dated January 31, 2013, by and between Xingguo General Fruit Industry Development Co., Ltd. and Xingping Hou (2) | |
| 10.8 | Labor Contract dated January 31, 2013, by and between Xingguo General Fruit Industry Development Co., Ltd. And Shaokang Zeng (2) | |
| 10.9 | Call Option Agreement dated July 1, 2012 by and between Zhang Zhihao and Xingping Hou (6) | |
| 10.10 | Form of Orange Purchase Contract (7) | |
| 10.11 | Property Use Certificates dated August 30, 2007 (translation)(7) | |
| 10.12 | Office Lease Contracted dated March 1, 2011 between General Fruit and Shiyong Xu (translation)(7) | |
| 10.13 | Office Lease Contract dated February 10, 2012 between General Fruit and Taixang Want (translation)(7) | |
| 14.1 | Code of Ethics (5) | |
| 21.1 | Subsidiaries (9) | |
| 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.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 |
| (1) | Incorporated by reference to our Transitional Report on Form 10-KT for the transition period from January 1, 2012 to September 30, 2012, filed with the SEC on December 28, 2012. |
| (2) | Incorporated by reference to our Current Report on Form 8-K dated January 31, 2013, filed with the SEC on February 1, 2013. |
| (3) | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, filed with the SEC on May 15, 2013. |
| (4) | Incorporated by reference to our Current Report on Form 8-K dated July 1, 2013, filed with the SEC on July 8, 2013. |
| (5) | Incorporated by reference to our Current Report on Form 8-K dated September 5, 2013, filed with the SEC on September 6, 2013. |
| (6) | Incorporated by reference to Amendment No. 2 to our Current Report on Form 8-K dated July 11, 2012, filed with the SEC on August 29, 2012. |
| (7) | Incorporated by reference to our Current Report on Form 8-K dated July 11, 2012, filed with the SEC on July 17, 2012. |
| (8) | Incorporated by reference to our Current Report on Form 8-K dated July 6, 2012, filed with the SEC on July 12, 2012. |
| (9) | Incorporated by reference to Amendment No. 1 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2013, filed with the SEC on June 4, 2014. |
| (10) | Incorporated by Reference to our Current Report on Form 8-K dated September 2, 2014, filed with the SEC on September 8, 2014. |
GENERAL AGRICULTURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015 AND 2014
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of General Agriculture Corporation
We have audited the accompanying consolidated balance sheets of General Agriculture Corporation and subsidiaries (the “Company”) as of September 30, 2015 and 2014, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the two-year period ended September 30, 2015 and 2014. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the two-year period ended September 30, 2015 in conformity with accounting principles generally accepted in the United States of America.
/s/ Friedman LLP
New York, NY
December 29, 2015
1
GENERAL AGRICULTURE CORPORATION
CONSOLIDATED BALANCE SHEETS
| September 30, 2015 | September 30, 2014 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 464,046 | $ | 3,352,045 | ||||
| Inventory | 5,469,102 | 4,951,273 | ||||||
| Advance payments | 4,778,733 | 2,189,956 | ||||||
| Prepaid leases | 4,360,899 | 3,773,379 | ||||||
| Other current assets | 162,326 | 11,572 | ||||||
| Total Current Assets | 15,235,106 | 14,278,225 | ||||||
| Property and equipment, net | 12,427,415 | 13,985,305 | ||||||
| Other Assets | ||||||||
| Intangibles, net | 145,183 | 153,712 | ||||||
| Prepaid leases, net of current portion | 27,143,650 | 23,367,927 | ||||||
| Total Other Assets | 27,288,833 | 23,521,639 | ||||||
| TOTAL ASSETS | $ | 54,951,354 | $ | 51,785,169 | ||||
| LIABILITIES | ||||||||
| Current Liabilities: | ||||||||
| Short-term bank loans | $ | - | $ | 4,547,200 | ||||
| Accounts payable and accrued expenses | 215,422 | 276,443 | ||||||
| Due to related parties | 154,571 | 1,508,566 | ||||||
| Other current liabilities | 61,759 | 61,849 | ||||||
| Total Current Liabilities | 431,752 | 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 September 30, 2015 and 2014, respectively | 1,592 | 1,592 | ||||||
| Additional paid-in capital | 4,909,572 | 4,909,572 | ||||||
| Statutory reserves | 2,572,619 | 2,539,170 | ||||||
| Retained earnings | 46,512,259 | 35,545,085 | ||||||
| Accumulated other comprehensive income | 523,560 | 2,395,692 | ||||||
| Total stockholders’ equity | 54,519,602 | 45,391,111 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 54,951,354 | $ | 51,785,169 | ||||
See accompanying notes to the consolidated financial statements
2
GENERAL AGRICULTURE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
| For the Years Ended September 30, | ||||||||
| 2015 | 2014 | |||||||
| Sales | $ | 22,463,365 | $ | 19,451,820 | ||||
| Cost of sales | 10,013,073 | 8,195,629 | ||||||
| Gross profit | 12,450,292 | 11,256,191 | ||||||
| Operating expenses | ||||||||
| Selling expenses | 140,829 | 151,142 | ||||||
| General and administrative expenses | 1,146,228 | 1,306,695 | ||||||
| Total operating expenses | 1,287,057 | 1,457,837 | ||||||
| Income from operations | 11,163,235 | 9,798,354 | ||||||
| Other income (expenses): | ||||||||
| Government subsidy | - | 477,036 | ||||||
| Interest income | 19,366 | 12,613 | ||||||
| Interest expense | (239,922 | ) | (314,111 | ) | ||||
| Other income (expense), net | 57,944 | (76,377 | ) | |||||
| Total other income (expenses) | (162,612 | ) | 99,161 | |||||
| Income before provision for income taxes | 11,000,623 | 9,897,515 | ||||||
| Provision for income taxes | - | - | ||||||
| Net income | 11,000,623 | 9,897,515 | ||||||
| Other comprehensive income | ||||||||
| Foreign currency translation adjustment | (1,872,132 | ) | (153,500 | ) | ||||
| Total comprehensive income | $ | 9,128,491 | $ | 9,744,015 | ||||
| Earnings per share: | ||||||||
| Basic and dulited | $ | 0.69 | $ | 0.62 | ||||
| Weighted average number of common stock outstanding | ||||||||
| Basic and dulited | 15,918,940 | 15,918,940 | ||||||
See accompanying notes to the consolidated financial statements
3
GENERAL AGRICULTURE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EUQITY
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||
| Common | Stock | Paid in | Statutory | Retained | Comprehensive | Stockholders’ | ||||||||||||||||||||||
| Shares | Value | Capital | Reserve | Earnings | Income | Equity | ||||||||||||||||||||||
| Balance at September 30, 2013 | 15,918,940 | $ | 1,592 | $ | 4,909,572 | $ | 2,508,735 | $ | 25,678,005 | $ | 2,549,192 | $ | 35,647,096 | |||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net income | - | - | - | - | 9,897,515 | - | 9,897,515 | |||||||||||||||||||||
| Foreign currency translation gain | - | - | - | - | - | (153,500 | ) | (153,500 | ) | |||||||||||||||||||
| Statutory reserve | - | - | - | 30,435 | (30,435 | ) | - | - | ||||||||||||||||||||
| Balance at September 30, 2014 | 15,918,940 | 1,592 | 4,909,572 | 2,539,170 | 35,545,085 | 2,395,692 | 45,391,111 | |||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net income | - | - | - | - | 11,000,623 | - | 11,000,623 | |||||||||||||||||||||
| Foreign currency translation loss | - | - | - | - | - | (1,872,132 | ) | (1,872,132 | ) | |||||||||||||||||||
| Statutory reserve | - | - | - | 33,449 | (33,449 | ) | - | - | ||||||||||||||||||||
| Balance at September 30, 2015 | 15,918,940 | $ | 1,592 | $ | 4,909,572 | $ | 2,572,619 | $ | 46,512,259 | $ | 523,560 | $ | 54,519,602 | |||||||||||||||
See accompanying notes to the consolidated financial statements
4
GENERAL AGRICULTURE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended September 30, | ||||||||
| 2015 | 2014 | |||||||
| Cash flows from operating activities: | ||||||||
| Net Income | $ | 11,000,623 | $ | 9,897,515 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Amortization of prepaid leases | 3,383,507 | 3,181,613 | ||||||
| Depreciation and amortization | 1,171,590 | 1,150,145 | ||||||
| Loss on disposal of property and equipment | 75,225 | 5,879 | ||||||
| Provision for bad debts | 22,395 | - | ||||||
| Changes in current assets and current liabilities: | ||||||||
| Accounts receivable | (22,395 | ) | - | |||||
| Inventory | (697,879 | ) | (893,753 | ) | ||||
| Advance payments | (2,743,469 | ) | (2,169,608 | ) | ||||
| Prepaid leases | (8,782,228 | ) | (10,037,807 | ) | ||||
| Other current assets | (155,930 | ) | 4,002 | |||||
| Accounts payable and accrued expenses | (56,892 | ) | 69,949 | |||||
| Customer deposits | - | - | ||||||
| Other current liabilities | 1,950 | 18,446 | ||||||
| Net cash provided by operating activities | 3,196,495 | 1,226,381 | ||||||
| Cash flows from investing activities: | ||||||||
| Acquisition of property and equipment | (22,475 | ) | (88,944 | ) | ||||
| Proceeds from disposal of property and equipment | - | 5,738 | ||||||
| Net cash used in investing activities | (22,475 | ) | (83,206 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from short-term bank loans | - | 4,555,600 | ||||||
| Repayment of short-term bank loans | (4,541,600 | ) | (5,531,800 | ) | ||||
| Proceeds from (Repayment to) related parties, net | (1,426,518 | ) | 787,170 | |||||
| Net cash used in financing activities | (5,968,118 | ) | (189,030 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | (93,901 | ) | (10,620 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | (2,887,999 | ) | 943,525 | |||||
| Cash and cash equivalents – beginning of year | 3,352,045 | 2,408,520 | ||||||
| Cash and cash equivalents – ending of year | $ | 464,046 | $ | 3,352,045 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 239,922 | $ | 314,111 | ||||
| Supplemental schedule of non-cash activities | ||||||||
| Construction in progress transferred to property and equipment | $ | - | $ | 305,118 | ||||
See accompany notes to the consolidated financial statements
5
GENERAL AGRICULTURE CORPORATION
Notes to Consolidated Financial Statements
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
General Agriculture Corporation (“GELT”), 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.
Through a series of reorganizations, GELT currently owns 100% of General Red Holdings, Inc. (“GRH”), which was established, under the laws of the State of Delaware, on January 18, 2011. GRH owns 100% interest of Han Glory International Investment Limited (“Han Glory”), a company incorporated on April 28, 2011 under the laws of British Virgin Islands. Han Glory is a sole owner of Greater China International Investment Limited (“Greater China International”), a company incorporated on December 4, 2009 under the laws of Hong Kong.
On January 13, 2010, Greater China International formed Nanchang Hanxin Agriculture Technology Co., Ltd, a wholly foreign-owned enterprise (the “WFOE”) in the city of Nanchang, Jiangxi Province, the People’s Republic of China (“PRC”). On February 5, 2010, the WFOE acquired all the shares of Xingguo General Fruit Industry Development Co., Ltd (“General Fruit”) through essentially a capital recapitalization transaction. General Fruit was formed in Xingguo County, Jiangxi Province, under the corporate laws of PRC on March 5, 2003. The primary business of General Fruits is to grow and sell navel oranges. General Fruit owns 100% interest of General Red Navel Orange Preservation Company, Ltd. (“General Preservation”), a citrus fruits company primarily engaged in preserving, packaging and marketing premium navel oranges. General Preservation provides wholesale, retail, and institutional customers throughout PRC and several other countries with premium navel orange fruits under the trademark of “General Red”.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The consolidated financial statements include the accounts of General Agriculture Corporation and its wholly-owned subsidiaries (collectively referred to as the “Company”). 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 consolidated financial statements are presented in U.S. dollars (“USD”). Greater China International’s functional currency is the 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.
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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:
| September 30, | ||||||||
| 2015 | 2014 | |||||||
| Year end RMB:USD exchange rate | 0.1572 | 0.1624 | ||||||
| Average Yearly RMB:USD exchange rate | 0.1622 | 0.1627 | ||||||
| Year end HKD:USD exchange rate | 0.1290 | 0.1288 | ||||||
| Average Yearly HKD:USD exchange rate | 0.1290 | 0.1290 | ||||||
Use of Estimates
The preparation of 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.
Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s financial statements.
If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and short-term cash investments that are highly liquid in nature and have original maturities of three months or less.
7
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. The balance of allowance for doubtful accounts amounted $21,705 and $0 as of September 30, 2015 and 2014, respectively.
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 September 30, 2015 and 2014, no provisions were deemed necessary.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated based on the straight-line method over the estimated useful lives of the assets as follows:
| Estimated Useful Life | |
| Electronic equipment | 5 years |
| Vehicles | 10 years |
| Machinery and equipment | 5 to 15 years |
| Buildings and improvements | 5 to 20 years |
| Navel orange orchards | 11 to 30 years |
Construction in progress primarily represents the construction costs of buildings, machinery, equipment and agricultural improvements made to orchards. Costs incurred are capitalized and transferred to property and equipment upon completion, at which time depreciation commences.
Navel orange orchards consist of orchards the Company planted and acquired from local farmers and include costs related to land leveling, saplings, fertilizer, labor and facilities on orchard lands. The planting costs were capitalized. In 2008 and 2011, the Company directly acquired certain navel orange trees from local farmers, which were also capitalized.
Cost of repairs and maintenance is expensed as incurred. Gain or loss on disposal of property and equipment, if any, is recognized in the statements of operations and comprehensive income.
Impairment of Long-Lived Assets
Long-lived assets, including property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
8
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. As of September 30, 2015 and 2014, there was no impairment of long-lived assets.
Intangible Assets
Intangible assets with finite lives 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 impairment of intangible assets has been identified as of the balance sheet dates. Land use rights are amortized on a straight-line basis over its estimated useful life of 50 years.
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.
Income Tax
The Company applies the provisions of FASB ASC 740-10, Accounting For Uncertainty In Income Taxes, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in financial statements. ASC 740-10 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. ASC 740-10 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements.
All of the Company’s income is generated in the PRC, and accordingly, its income tax provision is calculated based on the applicable tax rates and existing legislation, interpretation and practices in respect thereof.
Comprehensive Income
Comprehensive income is defined as the change in equity of a company from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income includes net income and foreign currency translation adjustments.
Advertising Expense
The Company expenses all advertising expenses as incurred. Advertising expenses included in selling expenses were $66,598 and $52,132 for the years ended September 30, 2015 and 2014, respectively.
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NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Shipping and Handling
All shipping and handling costs are expensed as incurred and included in selling expenses. Total shipping and handling expenses were $21,653 and $25,062 for the years ended September 30, 2015 and 2014, respectively.
Statutory Reserves
Pursuant to the applicable laws in the PRC, the Company makes appropriations to two non-distributable reserve funds, the statutory surplus reserve and the statutory public welfare reserve. The appropriations are based on after-tax net earnings as determined in accordance with the PRC generally accepted accounting principles, after offsetting any prior years’ losses. Appropriation to the statutory surplus reserve is based on an amount at least equal to 10% of after-tax net earnings until the reserve is equal to 50% of the entity's registered capital. Appropriation to the statutory public welfare fund is based on 5% to 10% of after-tax net earnings and is not mandatory. The statutory public welfare reserve is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable, except in the event of liquidation.
The Company does not make appropriations to the discretionary surplus reserve fund. As of September 30, 2015 and 2014, the Company had appropriated $2,572,619 and $2,539,170 of statutory surplus reserve funds, 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.
Operating leases
Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over the shorter of the lease term or estimated useful life.
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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 September 30, 2015 and 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 year ended September 30, 2015, two customers accounted for 14% and 12% of the Company’s sales. For the year ended September 30, 2014, one customer accounted for 13% of the Company’s sales.
For the year ended September 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.
Fair Value
The Company has categorized its assets and liabilities at fair value based upon the fair value hierarchy specified by FASB ASC 820.
The levels of fair value hierarchy are as follows:
| i. | Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. |
| ii. | Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals. |
| iii. | Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity. |
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. As of September 30, 2015 and 2014, the carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, accounts payable and other payables approximate their fair values because of the short maturity of these instruments and market rates of interest available to the Company.
11
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 September 30, 2015 and 2014, there are no potentially dilutive securities outstanding.
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 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. The guidance in this Update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to illustrate the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements that will provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a reporting organization's contracts with customers. This ASU is effective for fiscal years, and interim periods within those years beginning after December 15, 2016 for public companies and 2017 for non-public entities. Management is evaluating the effect, if any, on the Company's financial position and results of operations.
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.
In August 2015, the FASB issued ASU No. 2015-15, Interest-Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which addresses line-of-credit arrangements that were omitted from ASU 2015-03 (see above). This Update states that the SEC staff would not object to an entity deferring and presenting debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortizing those costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company does not believe the adoption of this guidance will have a significant impact on the Company's consolidated financial statements.
Note 3 – Inventory
Inventory by major categories are summarized as follows:
| September 30, 2015 | September 30, 2014 | |||||||
| Raw materials | $ | 49,405 | $ | 68,780 | ||||
| Work in process | 5,419,697 | 4,882,493 | ||||||
| Total | $ | 5,469,102 | $ | 4,951,273 | ||||
Work in process consists of depreciation, amortization of prepaid lease of navel orange orchards, rental, salary, and fertilizer, utility, labor spent in cultivating and producing navel oranges. Work in process is posted to finished goods after the navel oranges are harvested. The harvest season of navel oranges usually starts in October.
12
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 September 30, 2015 and 2014, the Company had $4,778,733 and $2,189,956, respectively, 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:
| September 30, 2015 | September 30, 2014 | |||||||
| Office equipment | $ | 141,513 | $ | 142,956 | ||||
| Vehicles | 239,374 | 303,345 | ||||||
| Machinery and equipment | 2,065,967 | 2,134,306 | ||||||
| Buildings and improvements | 7,537,854 | 7,787,198 | ||||||
| Navel orange orchards | 10,454,603 | 10,800,430 | ||||||
| Subtotal | 20,439,311 | 21,168,235 | ||||||
| Less: Accumulated depreciation | 8,011,896 | 7,182,930 | ||||||
| Total | $ | 12,427,415 | $ | 13,985,305 | ||||
Depreciation expense was $1,167,868 and $1,146,412 for the years ended September 30, 2015 and 2014, respectively.
Note 6 – Intangible Assets
Intangible assets consist of the following:
| September 30, 2015 | September 30, 2014 | |||||||
| Land use rights | $ | 180,351 | $ | 185,038 | ||||
| Less: Accumulated amortization | 35,168 | 31,326 | ||||||
| Total | $ | 145,183 | $ | 153,712 | ||||
Amortization expense was $3,722 and $3,733 for the years ended September 30, 2015 and 2014, respectively.
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.
13
Note 7 – Prepaid Leases (Continued)
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 $4,220,580 and $3,181,613 for the years ended September 30, 2015 and 2014, respectively.
Lease expense attributable to future periods is as follows:
| Twelve months ended September 30: | ||||
| 2016 | $ | 4,499,605 | ||
| 2017 | 4,499,605 | |||
| 2018 | 4,499,605 | |||
| 2019 | 4,499,605 | |||
| 2020 | 4,499,605 | |||
| Thereafter | 9,006,524 | |||
| $ | 31,504,549 | |||
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 General Red 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, General Red 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.
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Note 8 – Short-Term Bank Loans(Continued)
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 – Due to Related Party
As of September 30, 2015 and 2014, the Company owed Hua Mei Investments Limited (“Hua Mei”), a related party (controlled by Mr. Hou Xingping, CEO of the Company), $154,571 and $1,508,566, respectively. These debts are non-interest bearing and payable on demand. The proceeds of these debts were primarily utilized to pay various professional fees involved with the being the public company in the U.S.
Note 10 – 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 years ended September 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 years ended September 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 years ended September 30, 2015 and 2014, there was no income tax provision for the Company.
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Note 10 – Income Taxes (Continued)
The US entities had net operating losses (“NOL”) amounting to approximately $711,000 and $890,000 during the years ended September 30, 2015 and 2014, respectively. These carryforwards will expire, if not utilized by 2035 and 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 risk, the Company has provided a 100% valuation allowance at September 30, 2015 and no deferred tax asset benefit has been recorded. As of September 30, 2105 and 2014, the valuation allowance was $750,978 and $509,301, respectively, and the net change in the valuation allowance was increased $241,677 and $302,674, respectively. The Company’s management reviews this valuation allowance periodically and makes adjustments as necessary. As of September 30, 2015, the tax years ended September 30, 2013 through September 30, 2015 for the US entities remain open for statutory examination by tax authorities.
The summary of the deferred income tax asset for US entities is as follows:
| September 30, 2015 | September 30, 2014 | |||||||
| Beginning balance | $ | 1,497,945 | $ | 607,725 | ||||
| Addition: Net operating loss | 710,814 | 890,220 | ||||||
| Total - Net operating loss carryforwards | 2,208,759 | 1,497,945 | ||||||
| Effective tax rate | 34 | % | 34 | % | ||||
| Deferred tax asset | 750,978 | 509,301 | ||||||
| Valuation allowance | (750,978 | ) | (509,301 | ) | ||||
| Ending balance | - | - | ||||||
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate as of the:
| For the Years Ended September 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 | - | - | ||||||
Note 11 – StockHOLDERs’ EQUITY
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. The Company filed with the Secretary of State of Delaware a Certificate of Amendment to the Charter (the “Charter Amendment”). Pursuant to the Charter Amendment, the Company’s Charter was amended, effective as of July 12, 2013, to affect a reverse stock split of the Company’s shares of common stock. On July 12, 2013, the Company affected the 1 for 8 reverse split of the Company’s issued and outstanding common stock, decreasing the number of outstanding shares from 127,349,551 to 15,918,940. These statements have been retroactively adjusted to reflect this reverse split.
Note 12 – Statutory Reserve
For the years ended September 30, 2015 and 2014, statutory reserve activity was as follows:
| Balance – September 30, 2014 | $ | 2,539,170 | ||
| Addition to statutory reserve | 33,449 | |||
| Balance – September 30, 2015 | $ | 2,572,619 |
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Note 13 – Subsequent event
On October 13, 2015, the Company entered into a short-term bank loan agreements with Agricultural Development Bank of China for RMB 26 million (about $4.1M). Pursuant to the Loan Agreements, the principle will be repaid on August 8, 2016. The interest is being calculated using an annual fixed interest rate of 5.28%. The loan is guaranteed by Xingping Hou, CEO of the Company, also guaranteed by Ganzhou Jinshengyuan Guarantee Co., Ltd., an unrelated party. The Company will pay 4% of total loan to the guarantor as a guarantee fee for the above bank loan. As of the report date, the Company received RMB10 million ($1.57M) of the loan. This bank loan is for working capital purposes.
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