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EX-32.2 - CERTIFICATION - China Green Agriculture, Inc.f10k2017ex32-2_chinagreen.htm
EX-32.1 - CERTIFICATION - China Green Agriculture, Inc.f10k2017ex32-1_chinagreen.htm
EX-31.2 - CERTIFICATION - China Green Agriculture, Inc.f10k2017ex31-2_chinagreen.htm
EX-31.1 - CERTIFICATION - China Green Agriculture, Inc.f10k2017ex31-1_chinagreen.htm
EX-21.1 - LIST OF SUBSIDIARIES OF THE COMPANY. - China Green Agriculture, Inc.f10k2017ex21-1_chinagreen.htm

 

    

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended June 30, 2017

 

or

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________ to _____________

  

Commission file number: 001-34260

 

CHINA GREEN AGRICULTURE, INC.

 (Exact name of registrant as specified in its charter)

 

Nevada   36-3526027
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

Third floor, Borough A, Block A. No. 181, South Taibai Road

Xi’an, Shaanxi Province, PRC 710065

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number: +86-29-88266368

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
Common Stock, $0.001 Par Value Per Share   NYSE

 

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 ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒

 

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 report(s)), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 ☒ No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer   ☐ Smaller reporting company ☒
Do not check if a smaller reporting company Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $31,605,055 as of December 31, 2016, based on the closing price $1.20 of the Company’s common stock on such date.

 

The number of outstanding shares of the registrant’s common stock on October 19, 2017, was 38,551,265.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 

 

  

TABLE OF CONTENTS

TO ANNUAL REPORT ON FORM 10-K

FOR FISCAL YEAR ENDED JUNE 30, 2017

 

  PAGE
PART I  
Item 1. Business 1
Item 1A. Risk Factors 19
Item 1B. Unresolved Staff Comments 33
Item 2. Properties 33
Item 3. Legal Proceedings 34
Item 4. Mine Safety Disclosures 34
   
PART II  
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 35
Item 6. Selected Financial Data 37
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 38
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 48
Item 8. Financial Statements and Supplementary Data 49
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 49
Item 9A. Controls and Procedures 49
Item 9B. Other Information 50
   
PART III  
Item 10. Directors, Executive Officers and Corporate Governance 51
Item 11. Executive Compensation 56
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters 65
Item 13. Certain Relationships and Related Transactions, and Director Independence 66
Item 14. Principal Accountant Fees and Services 68
   
PART IV  
Item 15. Exhibits and Financial Statement Schedules 69
   
SIGNATURES S-1
EXHIBIT INDEX E-1
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA F-1

  

 

 

 

PART I

 

Item 1.Business

 

China Green Agriculture, Inc. (‘we” or “the Company”) is primarily engaged in the research, development, production and sale of various types of fertilizers and agricultural products in the People’s Republic of China (“PRC”) through its wholly-owned Chinese subsidiaries, Jinong Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd. (“Jinong”), and Beijing Gufeng Chemical Products Co., Ltd., (“Gufeng”), both of which are engaged in fertilizer production. In addition, we operate through variable interest entities (the “VIEs”), including Xi’an Hu County Yuxing Agriculture Technology Development Co., Ltd. (“Yuxing”), engaged in agricultural products production, and another eight VIE companies that we acquired since June 2016. Our primary business is fertilizer products, specifically humic acid-based compound fertilizer produced through Jinong; and compound fertilizer, blended fertilizer, organic compound fertilizer, slow-release fertilizers, highly-concentrated water-soluble fertilizers and mixed organic-inorganic compound fertilizer produced through Gufeng. In addition, through Yuxing, we develop and produce agricultural products, such as top-grade fruits, vegetables, flowers and colored seedlings.

 

Since June 2016, the Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition agreements and a series of contractual agreements with the shareholders of the following eight companies that are organized under the laws of the PRC and are deemed as VIEs: Shaanxi Lishijie Agrochemical Co., Ltd., Songyuan Jinyangguang Sannong Service Co., Ltd., Shenqiu County Zhenbai Agriculture Co., Ltd., Weinan City Linwei District Wangtian Agricultural Materials Co., Ltd., Aksu Xindeguo Agricultural Materials Co., Ltd., and Xinjiang Xinyulei Eco-agriculture Science and Technology Co., Ltd., Sunwu County Xiangrong Agricultural Materials Co., Ltd., and Anhui Fengnong Seed Co., Ltd. (collectively hereafter referred to as “the VIE Companies.”)

 

Fertilizer production is our core business and we generated approximately $211,088,271, $260,378,357, and $259,030,774, or 74%, 96.9%, and 98.4% of our total revenues for the years ended June 30, 2017, 2016 and 2015, respectively. Our total annual production capacity was 555,000 metric tons as of June 30, 2017.

 

As of June 30, 2017, we sold our products through a network of 1,947 regional distributors covering 22 provinces, 4 autonomous regions and 4 central government-controlled municipalities in China. We do not rely on any single distributor. Our top five distributors accounted for approximately 35% of our fertilizer revenues for the fiscal year ended June 30, 2017.

 

As of June 30, 2017, we have developed 717 different fertilizer products. We conduct our research and development activities through Yuxing, one of Jinong’s VIEs, which tests new fertilizers and grows high quality flowers, vegetables and seedlings for commercial sales.

 

During the fiscal years ended June 30, 2017, 2016, and 2015, our revenues were $285,213,040, $268,785,020, and $263,354,28, respectively; our net income were $25,152,154, $24,704,193, and $31,445,126, respectively.

 

 1 

 

 

Recent Developments

 

Strategic Acquisitions:

 

On June 30, 2016 and January 1, 2017, through Jinong, we entered into (i) Strategic Acquisition Agreements (the “SAA”), and (ii) Agreements for Convertible Notes (the “ACN”), with the shareholders of the companies as identified below (the “Targets”).

 

June 30, 2016:

  

      Cash   Principal of 
      Payment for   Notes for 
      Acquisition   Acquisition 
Company Name  Business Scope  (RMB[1])   (RMB) 
Shaanxi Lishijie Agrochemical Co., Ltd.  Sales of pesticides, agricultural chemicals, chemical fertilizers, agricultural materials; Manufacture and sales of mulches.   10,000,000    3,000,000 
              
Songyuan Jinyangguang Sannong Service Co., Ltd.  Promotion and consulting services regarding agricultural technologies; Retail sales of chemical fertilizers (including compound fertilizers and organic fertilizers); Wholesale and retail sales of pesticides, agricultural machinery and accessories; Collection of agricultural information; Development of saline-alkali soil; Promotion and development of high-efficiency agriculture and related information technology solutions for agriculture, agricultural and biological engineering high technologies; E-commerce; Cultivation of freshwater fish, poultry, fruits, flowers, vegetables, and seeds; Recycling and complex utilization of straw and stalk; Technology transfer and training; Recycling of agricultural materials; Ecological industry planning.   8,000,000    12,000,000 
              
Shenqiu County Zhenbai Agriculture Co., Ltd.  Cultivation of crops; Storage, sales, preliminary processing and logistics distribution of agricultural by-products; Promotion and application of agricultural technologies; Purchase and sales of agricultural materials; Electronic commerce.   3,000,000    12,000,000 
              
Weinan City Linwei District Wangtian Agricultural Materials Co., Ltd.  Promotion and application of new agricultural technologies; Professional prevention of plant diseases and insect pests; Sales of plant protection products, plastic mulches, material, chemical fertilizers, pesticides, agricultural medicines, micronutrient fertilizers, hormones, agricultural machinery and medicines, and gardening tools.   6,000,000    12,000,000 
              
Aksu Xindeguo Agricultural Materials Co., Ltd.  Wholesale and retail sales of pesticides; Sales of chemical fertilizers, packaged seeds, agricultural mulches, micronutrient fertilizers, compound fertilizers, plant growth regulators, agricultural machinery, and water economizers; Consulting services for agricultural technologies; Purchase and sales of agricultural by- products.   10,000,000    12,000,000 
              
Xinjiang Xinyulei Eco-agriculture Science and Technology Co., Ltd  Sales of chemical fertilizers, packaged seeds, agricultural mulches, micronutrient fertilizers, organic fertilizers, plant growth regulators, agricultural machineries, and water economizers; Purchase and sales of agricultural by-products; Cultivation of fruits and vegetables; Consulting services and training for agricultural technologies; Storage services; Sales of articles of daily use, food and oil; On-line sales of the above-mentioned products.        
              
Total      37,000,000    51,000,000 

 

(1)The exchange rate between RMB and U.S. dollars on June 30, 2016 is RMB1=US$0.1508, according to the exchange rate published by Bank of China.

 

 2 

 

 

January 1, 2017:

 

Company Name  Business Scope  Cash Payment for   Principal of Notes for 
     

Acquisition

   Acquisition 
      (RMB[1])   (RMB) 
Sunwu County Xiangrong Agricultural Materials Co., Ltd.  Sales of pesticides, agricultural chemicals, chemical fertilizers, agricultural materials; Manufacture and sales of mulches.   4,000,000    6,000,000 
              
Anhui Fengnong Seed Co., Ltd.  Wholesale and retail sales of pesticides; Sales of chemical fertilizers, packaged seeds, agricultural mulches, micronutrient fertilizers, compound fertilizers and plant growth regulators   4,000,000    6,000,000 
              
Total      8,000,000    12,000,000 

 

(1)The exchange rate between RMB and U.S. dollars on January 1, 2017 is RMB1=US$0.144, according to the exchange rate published by Bank of China.

 

Pursuant to the SAA and the ACN, the shareholders of the Targets, while retaining possession of the equity interests and continuing to be the legal owners of such interests, agreed to pledge and entrust all of their equity interests, including the proceeds thereof (but excluding any claims or encumbrances), and the operations and management of its business to Jinong, in exchange for an aggregate amount of RMB45,000,000 (approximately $6,731,600), to be paid by Jinong within three days following the execution of the SAA, ACN and the VIE Agreements, and convertible notes with an aggregate face value of RMB63,000,000 (approximately $9,418,800), with an annual fixed compound interest rate of 3% and a term of three years.

 

The SAA contains representations and warranties by both Jinong and the shareholders of the Targets, including:

 

Should the shareholders of the Targets fail to satisfy the conditions listed in the exhibit to the SAA, i.e., the entry into the VIE Agreements, or breach of any the representations or warranties in the SAA, other than the direct and consequential damages that may cause to Jinong, they are to pay RMB100,000 (approximately $15,080) as liquidated damages.

 

The shareholders of the Targets also agreed to ensure that its management and principal technology employees enter into noncompetition agreements prohibiting them from any direct or indirect operation or ownership of any business that is in competition with the Targets.

 

The shareholders of the Targets also represented that there are no claims or encumbrances against their interests, as defined in the SAA, and that there are no actions or other legal proceedings pending against the Targets that would have a material adverse effect on the Target’s capacity to fulfill their contractual obligations. The Targets are to have a minimum of 10% annual compound growth rate (the “Growth Rate”) within the three years after the closing of the acquisitions (the “Closing”).

 

Pursuant to the SAA, all the existing employees continue to be the employees of the Targets after the Closing based on their current employment terms, subject to the decisions of the new Boards of Directors of the Targets to be formed after the Closing.

 

Under the agreements relating to the convertible notes, each convertible note has a face value of RMB100, with a term of three years and an annual fixed compound interest rate of 3%. The convertible notes take priority over the preferred stock and common stock of Jinong, and any other class or series of capital stock Jinong issues in the future, in terms of interest and payments in the event of any liquidation, dissolution or winding up of Jinong. On or after the third anniversary of the issuance date of each note (the “Maturity Date”), noteholders may convert the notes into Common Stock of the Company. The noteholders may not convert the notes prior to the Maturity Date. If a note is converted into the Company’s common stock, the noteholder will become a holder of the Company’s common stock.

 

The per share conversion price of the notes is the greater of the following: (i) $5.00 per share or (ii) 75% of the closing price of the Company’s common stock on the date the noteholder delivers the conversion notice.

 

If the profits of the Targets hit certain levels of sales set by the parties, i.e., the Growth Rate, Jinong may, at its discretion, convert the notes to (i) cash, (ii) the Company’s common stock, or (iii) to a combination of cash and the Company’s common stock, in the amount of the face value of the notes with compound interest for three years.

 

Upon the Maturity Date of the note, the noteholder can (i) request Jinong to convert all or a part of the note; (ii) continue to hold the note until the holder elects to deliver a conversion request; however, if the holder chooses to hold the note after the Maturity Date, no interest accrues on the note after the three-year term.

 

 3 

 

 

In the event that the actions of the Targets or noteholders materially impair Jinong or if any of the Targets fail to achieve the Growth Rate, Jinong may request noteholders to redeem the shares they hold of the Targets for (i) an amount represented by the convertible notes including the accrued interest and the cash payment Jinong made on the Closing of the acquisition and (ii) 15% of the amount under (i) mentioned immediately prior to this item. However, the noteholder can elect to offset the payment of the interest of the note by the annual increase rate the Targets realizes, despite a lower rate.

 

VIE Structure with the Targets

 

Jinong, the Targets, and the shareholders of the Targets also entered into a series of contractual agreements for the Targets to qualify as variable interest entities or VIEs (the “VIE Agreements”). The VIE Agreements can be summarized as follows:

 

Entrusted Management Agreements

 

Pursuant to the terms of certain Entrusted Management Agreements dated June 30, 2016 and January 1, 2017, between Jinong and the shareholders of the Targets (the “Entrusted Management Agreements”), the Targets and their shareholders agreed to entrust the operations and management of their respective businesses to Jinong. According to the Entrusted Management Agreement, Jinong possesses the full and exclusive right to manage the Targets’ operations, assets and personnel, has the right to control all the Targets' cash flows through an entrusted bank account, is entitled to the Targets' net profits as a management fee, is obligated to pay all the Targets’ payables and loan payments, and bears all losses of the Targets. The Entrusted Management Agreements will remain in effect until (i) the parties mutually agree to terminate the agreement; (ii) the dissolution of the Targets; or (iii) Jinong acquires all the assets or equity of the Targets (as more fully described below under “Exclusive Option Agreements”).

 

Exclusive Technology Supply Agreements

 

Pursuant to the terms of certain Exclusive Technology Supply Agreements dated June 30, 2016 and January 1, 2017, between Jinong and the Targets (the “Exclusive Technology Supply Agreements”), Jinong is the exclusive technology provider to the Targets. The Targets agreed to pay Jinong all fees payable for technology supply prior to making any payments under the Entrusted Management Agreement. The Exclusive Technology Supply Agreements remain in effect until (i) the parties mutually agree to terminate the agreement; (ii) the dissolution of the Targets; or (iii) Jinong acquires the Targets (as more fully described below under “Exclusive Option Agreements”).

 

Shareholder’s Voting Proxy Agreements

 

Pursuant to the terms of certain Shareholder’s Voting Proxy Agreements dated June 30, 2016 and January 1, 2017, among Jinong and the shareholders of the Targets (the “Shareholder’s Voting Proxy Agreements”), the shareholders of the Targets irrevocably appointed Jinong as their proxy to exercise on such shareholders’ behalf all of their voting rights as shareholders pursuant to PRC law and the Articles of Association of the Targets, including the appointment and election of directors of the Targets. Jinong agreed that it will maintain a board of directors, the composition and appointment of which will be approved by the Board of the Company. The Shareholder’s Voting Proxy Agreements will remain in effect until Jinong acquires all the assets or equity of the Targets.

 

Exclusive Option Agreements

 

Pursuant to the terms of certain Exclusive Option Agreements dated June 30, 2016 and January 1, 2017, among Jinong, the Targets, and the shareholders of the Targets (the “Exclusive Option Agreements”), the shareholders of the Targets granted Jinong an irrevocable and exclusive purchase option (the “Option”) to acquire the Targets’ equity interests and/or remaining assets, but only to the extent that the acquisition does not violate limitations imposed by PRC law on such transactions. The Option is exercisable at any time at Jinong’s discretion so long as such exercise and subsequent acquisition of the Targets does not violate PRC law. The consideration for the exercise of the Option is to be determined by the parties and memorialized in the future by definitive agreements setting forth the kind and value of such consideration. Jinong may transfer all rights and obligations under the Exclusive Option Agreements to any third parties without the approval of the shareholders of the Targets so long as a written notice is provided. The Exclusive Option Agreements may be terminated by mutual agreement or by 30 days written notice by Jinong.

 

 4 

 

 

Equity Pledge Agreements

 

Pursuant to the terms of certain Equity Pledge Agreements dated June 30, 2016 and January 1, 2017, among Jinong and the shareholders of the Targets (the “Pledge Agreements”), the shareholders of the Targets pledged all of their equity interests in the Targets to Jinong, including the proceeds thereof, to guarantee all of Jinong's rights and benefits under the Entrusted Management Agreements, the Exclusive Technology Supply Agreements, the Shareholder’s Voting Proxy Agreements and the Exclusive Option Agreements. Prior to termination of the Pledge Agreements, the pledged equity interests cannot be transferred without Jinong's prior written consent. The Pledge Agreements may be terminated only upon the written agreement of the parties.

 

Non-Compete Agreements

 

Pursuant to the terms of certain Non-Compete Agreements dated June 30, 2016 and January 1, 2017, among Jinong and the shareholders of the Targets (the “Non-Compete Agreements”), the shareholders of the Targets agreed that during the period beginning on the initial date of their services with Jinong, and ending five (5) years after termination of their services with Jinong, without Jinong’s prior written consent, they will not provide services or accept positions (including partners, directors, shareholders, managers, proxies or consultants) with by any profit making organizations with businesses that may compete with Jinong. They will not solicit or interfere with any of Jinong’s customers, or solicit, induce, recruit or encourage any person engaged or employed by Jinong to terminate his or her service or engagement.

 

Jinong acquired the Targets using the VIE arrangement based on our need to further develop our business and comply with the regulatory requirements under the PRC laws.

 

As our business focuses on the production of fertilizer, all our business activities intertwine with those in the agriculture industry in China. Specifically, we deal with compliance, regulation, safety, inspection, and licenses in fertilizer production, farm land use and transfer, growing and distribution of agriculture goods, agriculture basic supplies, seeds, pesticides, and trades of grains. It is an industry in which stringent regulations are implemented and strictly enforced. In addition, e-commerce, which is also under strict government regulations in the PRC, has lately become a sale and distribution channel for agricultural products. Currently, we are developing an online platform to connect the physical distribution network we either own or lease.

 

Compared with the regulatory environment in other jurisdictions, the regulatory environment in the PRC is unique. For example, On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Merger and Acquisition of Domestic Companies by Foreign Investors (the “M&A Rules”), which became effective on September 8, 2006. The M&A Rules require that an offshore special purpose vehicle controlled directly or indirectly by PRC companies or individuals and formed for purposes of overseas listing through acquisition of PRC domestic interests held by such PRC companies or individuals obtain the approval of the China Securities Regulatory Commission (the “CSRC”) prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published procedures regarding its approval of overseas listings by special purpose vehicles.

 

For both e-commerce and agriculture industries, PRC regulators limit the investment from foreign entities and set particular rules for foreign-owned entities to conduct business. We expect these limitations on foreign-owned entities will continue to exist in e-commerce and agriculture industries. VIE arrangements, however, provide feasibility for obtaining administrative approval process and avoiding industry restrictions that may be imposed on an entity that is a wholly-owned subsidiary of a foreign entity. The VIE agreements reduce uncertainty and the current limitation risk. It is our understanding that the VIE agreements, as well as the control we obtained through VIE arrangement, are valid and enforceable. We believe that this legal structure does not violate the known, published, and current PRC laws. While there are substantial uncertainties regarding the interpretation and application of PRC Laws and future PRC laws and regulations, and there can be no assurance that the PRC authorities will take a view that is not contrary to or otherwise different from our belief and understanding stated above, we believe the substantial difficulty that we experienced previously to conduct business in agriculture as a foreign ownership company can be greatly reduced by the VIE arrangement. Further, as an integral part of the VIE arrangement, the underlying equity pledge agreements provide legal protection for the control we obtained. Pursuant to the equity pledge agreements, we have completed the equity pledge processes with the Targets to ensure the complete control of the interests in the Targets. The shareholders of the Targets are not entitled to transfer any shares to the third party under the exclusive option agreements. If necessary, they may transfer shares to us without consideration.

 

 5 

 

 

While the VIE arrangement provides us with the feasibility to conduct our business in the e-commerce and agriculture industries, validity and enforceability of VIE arrangement is subject to (i) any applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or similar laws affecting creditors’ rights generally, (ii) possible judicial or administrative actions or any PRC Laws affecting creditors’ rights, (iii) certain equitable, legal or statutory principles affecting the validity and enforceability of contractual rights generally under concepts of public interest, interests of the State, national security, reasonableness, good faith and fair dealing, and applicable statutes of limitation; (iv) any circumstance in connection with formulation, execution or implementation of any legal documents that would be deemed materially mistaken, clearly unconscionable, fraudulent, coercive at the conclusions thereof; and (v) judicial discretion with respect to the availability of indemnifications, remedies or defenses, the calculation of damages, the entitlement to attorney’s fees and other costs, and the waiver of immunity from jurisdiction of any court or from legal process. Validity and enforceability of VIE arrangements is also subject to risk derived from the discretion of any competent PRC legislative, administrative or judicial bodies in exercising their authority in the PRC. As a result, there can no assurance that any of such PRC Laws will not be changed, amended or replaced in the immediate future or in the longer term with or without retrospective effect.

 

Our History

 

The Company was incorporated under the laws of the state of Kansas on February 6, 1987 under the name Videophone, Inc. The Company had no operations from December 1996 to December 2007. In October 2007, the Company was reincorporated in the state of Nevada. On December 26, 2007, the Company acquired all the issued and outstanding capital stock of Green New Jersey, through a share exchange (the “Share Exchange”). Because of the Share Exchange, the Company owns 100% of Green New Jersey. The Share Exchange occurred simultaneously with a private placement of $20,519,255 on December 26, 2007.

 

Green New Jersey was incorporated on January 27, 2007 under the laws of the State of New Jersey. On August 24, 2007, Green New Jersey acquired 100% of the outstanding shares of Jinong, a company incorporated in the PRC on June 19, 2000.

 

After the acquisition of Green New Jersey, the Company changed its name to China Green Agriculture, Inc., effective on February 5, 2008.

 

On July 23, 2009, Yuxing became a direct, wholly-owned subsidiary of Jinong to facilitate the research and development of agricultural products and fertilizers. Effective June 16, 2013, Yuxing was converted into a PRC domestic enterprise wholly owned by an individual who entered into a series of contractual agreements with Jinong pursuant to which Yuxing became Jinong’s variable interest entity, or VIE.

 

On March 9, 2009, the Company’s common stock was listed on the NYSE MKT, formerly known as NYSE Amex Equities under the trading symbol “CGA”. On December 4, 2009, the Company voluntarily ceased trading its common stock on the NYSE Amex Equities and transferred its listing to the New York Stock Exchange on December 7, 2009. The Company’s ticker symbol remains “CGA”.

 

On July 2, 2010, the Company, through Jinong, consummated a transaction to acquire all equity interests of Gufeng and its subsidiary Tianjuyuan. As a result, Gufeng and Tianjuyuan became wholly-owned subsidiaries of Jinong and indirect subsidiaries of the Company.

 

On June 30, 2016, the Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition agreements and a series of contractual agreements with the shareholders of the following six companies that are organized under the laws of the PRC and would be deemed as our VIEs: Shaanxi Lishijie Agrochemical Co., Ltd., Songyuan Jinyangguang Sannong Service Co., Ltd., Shenqiu County Zhenbai Agriculture Co., Ltd., Weinan City Linwei District Wangtian Agricultural Materials Co., Ltd., Aksu Xindeguo Agricultural Materials Co., Ltd., and Xinjiang Xinyulei Eco-agriculture Science and Technology Co., Ltd.

 

On January 1, 2017, the Company, through its wholly-owned subsidiary Jinong, entered into strategic acquisition agreements and a series of contractual agreements with the shareholders of the following two companies that are organized under the laws of the PRC and would be deemed as our VIEs: Sunwu County Xiangrong Agricultural Materials Co., Ltd. and Anhui Fengnong Seed Co., Ltd.

 

Our principal executive offices are located at 3rd Floor, Borough A, Block A. No. 181, South Taibai Road, Xi’an, Shaanxi Province, People’s Republic of China 710065 and our telephone number is +86-29-88266368. Our website address is www.cgagri.com. The Company routinely posts important information on its website.

 

 6 

 

 

Our current corporate structure is set forth in the following diagram:

 


 

Yuxing, Lishijie, Jinyangguang, Zhenbai, Wangtian, Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred to as “the VIE Companies”; Lishijie, Jinyangguang, Zhenbai, Wangtian, Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred to as the “sales VIEs”

 

 7 

 

 

Industry Analysis

 

Fertilizer Market in China

 

Influenced by the sluggish demand in domestic and international fertilizer markets, China’s fertilizer market is in a downturn during this fiscal year. In terms of production, the growth of fertilizer output remained limited during the fiscal year. Meanwhile, large inventories of fertilizer placed downward pressure on prices. Market prices of the raw material were volatile; the price of fertilizer is uncertain and can be hard to increase. In terms of domestic consumption, though grain prices increased to some extent, the domestic consumption capacity is limited; as for export, international markets are depressed continuously, resulting from the declines in export prices. During this fiscal year, the fertilizer industry was in a downward trend as profits are compressed again and the losses of enterprises are enlarged. Under the pressure of sluggish growth in the fertilizer market, industrial restructuring, merger and reorganization activity in the industry increased, reducing the number of enterprises in the market. At the same time, the production equipment and technological level was largely improved: coal-water slurry gasification technology, powdered coal pressure gasification technology, large sulfur-based compound fertilizer technology and beneficiation technology of mid-low-grade phosphate were widely used, while new fertilizer products such as slow controlled release fertilizer and microbial fertilizer have been rapidly developed and resulted in significant market expansion. In the last few years, as the growth of China’s economy has gradually slowed down and the risk of economic downturn therefore exists, the government has adopted various measures to maintain the growth and the Company needs structural adjustment and growth pattern transformation.

 

On the one hand, government’s support to agricultural production includes intensive agricultural investment, subsidies and minimum purchasing price increases for farm products. China has seen another bumper year of grain production which added fertilizer consumption scale to remain highly uncertain. The country has achieved consecutive years of rising grain harvests since the founding of the People’s Republic of China in 1949. As the concentration of fertilizer industry is steadily improving, the influence on market from key enterprises have increased, which appeared to help to ease the weakened market volatility. On the other hand, the current oversupply problem is difficult to relieve. Mechanisms of price reform for raw materials (such as coal, natural gas, sulfur phosphate ore, etc.) are accelerating, which caused pressure on production costs. A stricter export tariff policy is expected to last for long, and the external economic situation may limit the operation and expansion of fertilizer enterprises in international markets.

 

The interaction of the above factors complicated the situation in fertilizer markets in 2016 and 2017.The overall growth rate of this industry has continually slowed down and the market has fluctuated violently. The transformation for China’s fertilizer industry from quantitative growth pattern to qualitative growth pattern is irreversible. The centralization of production, high-end oriented product, service oriented marketing and market-oriented raw materials dominated the developments in fertilizer market.

 

Additionally, government support for the agriculture industry in China can act as an additional boost to the fertilizer industry in China. However, we anticipate organic fertilizers will become an emerging segment in the coming years given the additional subsidies for farming, elimination of certain land taxes, land reform initiatives to be implemented by the PRC government to promote the growing of organic produce. We believe the demand for fertilizer will continue to grow because of increase in food demand, decrease in arable land and reduction of crop yields. The demand for fertilizers nationwide is continuously expected to increase by millions of tons of nutrient by 2017, with a compound annual growth rate of 5.7% between 2012-2017.

 

Organic versus Chemical Fertilizers

 

In general, fertilizer products are categorized into organic and chemical fertilizers. Organic fertilizers can be natural or developed artificially. Natural organic fertilizers include manure, slurry, worm castings, peat, seaweed, humic acid, brassin and guano. Artificial organic fertilizers include compost, blood meal, bone meal, humic acid, and are typically supplemented with other nutrient ingredients. Chemical fertilizers normally are composed of synthetic chemicals such as phosphate and potassium compounds. The primary difference between organic fertilizers and chemical fertilizers is in the sourcing process of ingredients, as the nutrient contents are largely the same.

 

Over the past 20 years, the use of chemical fertilizers in China substantially increased, but years of use created unintended consequences for the agriculture industry—agricultural products gradually lack certain minerals, since chemical fertilizers applied fell short of natural minerals which made soil infertile.

 

In addition, heavy use of chemical fertilizers can create "fertilizer burn", the over-fertilization of a single nutrient such as nitrogen, which can dry roots and suspend crop growth due to the upset of balance in compound salts and soil acidification. Another drawback caused by chemical fertilizers is that soil is easily depleted by irrigation, rainfall and flooding. In addition, the production of chemical fertilizers consumes a great deal of natural resources. For example, the production of synthetic ammonia, a common chemical fertilizer, consumes about 5% of the world’s natural gas consumption.

 

Organic fertilizers, on the other hand, improve the biodiversity and long-term productivity of soil. Organic nutrients increase the abundance of soil organisms by providing organic micronutrients. Unlike chemical fertilizers, organic fertilizer nutrients are diluted with better solubility. It requires less application on soil to reach the same result as of chemical fertilizers, which maintains soil fertility and avoid the runoff caused by components like soluble nitrogen and phosphorus. However, the composition of organic fertilizer is more complex and costly than chemical products. As an alternative to pure chemical fertilizer use, farmers can also use inorganic fertilizer supplemented with small portion of organic fertilizers.

 

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Since the 1980s, China has intensified the use of chemical fertilizers to increase crop yields. While the increase in crop yield slowed down in recent years, the overuse of chemical fertilizers also caused many environmental issues ranging from water pollution to soil damage. As a result, the PRC government has been promoting the use of environmental friendly green fertilizers, such as humic acid-based organic compound fertilizers and mixed organic-inorganic compound fertilizers, because they provide crops with incremental yield by adding various nutrients essential to soil. Although being relatively new to farmers, the demand for these green fertilizers is increasing and we expect this trend to continue in the coming years. Although we expanded business among other Asian and Southeast Asian countries, the PRC remained our principal market for organic compound fertilizers and related agricultural products.

 

The “Green Food” Industry in the PRC

 

The rise of the PRC industry for food free from pollutants or harmful chemicals, or “green food,” raises the demand for organic fertilizers. “Green Food”, the certificate for agricultural products promoted by Chinese Government, positioned between ordinary agricultural food from common farming practice and the organic food has two levels: “AA Green Food” and “A Green Food”. The “AA Green Food” standard indicates or equals to that of organic agriculture. Since the market for organic agricultural products in China has huge potential, it is forecasted that the increase of organic agricultural products consumption in China will exceed that of the average organic agricultural products consumption in the world in the next few years, and the market of Chinese organic agricultural products will reach RMB 24.8 billion-59.4 billion in 2015, with an incremental 15 percent increase year over year during the following years.

 

With the rapid development of the organic food industry in China, an increasing number of companies have been entering into the green food sector to utilize market opportunities. In 1990, the PRC Ministry of Agriculture began to promote the production of green food. In 1992, the PRC Ministry of Agriculture established the China Green Food Development Center (CGFDC) to supervise the development and management of green food at the national and provincial levels in the PRC. In 1993, the PRC Ministry of Agriculture established regulations for green food labeling; in 1996, a trademark for green food was registered and put into use in the PRC.

 

Crops grown with the use of our products are qualified for the “AA Green Food” certificate. As mentioned above, the “AA” rating indicates that the crops contain minimal chemical residue from fertilizers. Although our products are not qualified for the “AA Green Food” certificate, they are (except for the products from Gufeng) certified as “Green Food Production Material” by the CGFDC.

 

According to the statistics from the CGFDC, China's annual output of green food reached 15 million tons in 2008. However, the domestic consumption level remains relatively low, comprising approximately 3% of the market share of food commodities. The low consumption level is primarily due to: (i) small scale of production of green food; (ii) lack of consumer awareness of green food and (iii) the presence of counterfeit green food products that adversely affect consumers’ purchase.

 

As described by the CGFDC, the development strategy for China’s green food industry are as follows: first, maintain high quality standards and focus on developing key products; second, promote and facilitate the industrialization of green food; third, implement an integrated development strategy emphasizing producers, production base and farmers; fourth, accelerate the pace of development with the aid of the government; and fifth, to carry out an international development strategy aimed at promoting exports.

 

According to the Investment and Forecast Report on China Green Food Industry 2012-2016 by Research in China, a Chinese market research company, the green food industry is a high growth industry with significant investment potential. According to the report, leading green food producers will experience huge growth when they achieve national and provincial agricultural industrialization with the supports of favorable government policies and tax breaks.

 

Growth Strategy

 

We believe that our increased production capacity, our research and development capability, along with the new sales segment positioned us to benefit from the anticipated growth of the PRC fertilizer market. We expect to expand sales and grow revenues through the following strategies:

 

   Expand Capacity and Diversify Product Offerings. Our current annual fertilizer production capacity is 555,000 metric tons and our production portfolio of fertilizers includes 466 products. In the future, we will expand our existing production lines, develop new products and acquire certain PRC fertilizer manufacturers that complement our product lines.

 

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    Capitalize on Synergies Created by Research and Development Efforts. Regarding the construction of Yuxing’s research and development center, we have established 98 sunlight greenhouses and six “intelligent” greenhouses. We expect the Yuxing facility to help us shorten the fertilizer market cycle by providing an advanced testing field for new products which are manufactured by Jinong. In addition, by making efforts in research and development, we expect to simultaneously facilitate the production of superior agricultural products, such as flower bulbs, flowers, fruits and vegetables, which would eventually increase revenues.

 

    Develop new advanced high efficient fertilizers. The new fertilizer products represented by slow controlled-release fertilizer, microbial fertilizer and others, are developed rapidly with high market expansion. Gufeng has signed a cooperation agreement with Anhui Diyuan Biological Technology Co., LTD (“Anhui Diyuan”) to produce the “Tianjuyuan” controlled-release fertilizer. The objective is to provide Gufeng with fertilizer agent supplied by Anhui Diyuan to improve the control release effectiveness when producing controlled-release compound fertilizers. In the agreement, Chinese Academy of Sciences (“CAS”) and Anhui Diyuan authorized Gufeng to refer to CAS and Anhui Diyuan’s name in marketing related fertilizer products. We expect that Gufeng’s controlled-release compound fertilizer will stay an advantageous position in the market.

 

    Develop proprietary sales segment. Our business started and was rooted in fertilizer production. Since 2016, we added a new business segment, the sales of fertilizer and other agriculture material products, to the existing manufacturing segments. We believe adding this sales segment will be beneficial to our manufacturing segments: this sales segment can provide supplemental revenue and earnings by covering more market areas, and selling more products not only produced by ourselves but also by other manufacturers. In the downstream of fertilizer value lines, a sales segment can offset the impact on profitability when the demand for our produced fertilizer is softened; it also can mitigate the counterparty risk for manufacturers when the creditworthiness of a manufacturer’s distributor is weakened. Thus, a sales segment is a natural hedge to manufacturing segments, as it improves product portfolio, customer base, and capital structure. We had been developing the sales segment mainly by acquiring the control of eight established VIE sales ventures to build this new segment rapidly.

 

Products

 

Our principal products are our own fertilizers, which consist of liquid, granular and powdered fertilizers and various kinds of compound fertilizers developed to increase crop yields. We can manufacture 466 fertilizer products from humic acid-based fertilizers to compound fertilizers. In Yuxing, we produce high quality agricultural products such as fruits, vegetables and flowers for commercial sale. In sales segment, we sell various products such as fertilizers, pesticides, and seeds. These products are either manufactured by ourselves or by other manufacturers.

 

Fertilizer Products

 

Fertilizer manufacturing is our core business, which accounts for approximately 74% of total revenues. The self-manufactured fertilizers are produced and sale through Jinong, Gufeng, and sales VIEs. We believe that Jinong utilizes one of the most advanced automated humic acid production lines in China. Humic acid is a complex with natural, organic ingredient essential to make soil fertile. Humic acid-rich material, such as peat, lignite or weathered coal generating naturally from decomposed plant or animal remains, is one of the major organic constituents for soil composition. Humic acid exhibits a high capacity for cation exchange (a chemical process in which cations of like charge are exchanged equally between a solid and a solution), which serves to chelate plant nutrient elements and release them as the plant requires. The chelation process prevents leaching of nutrients by holding them in the soil solution. Moreover, humic acids can bind soil toxins along with plant nutrients, thereby strongly stabilize soil. The regular use of humic acid organic liquid compound fertilizer can effectively reduce the use of chemical fertilizer, insecticide, herbicide and water. This mechanism contributes to environmental protection by preventing contamination of water sources caused by runoff.

 

In nature, humic acid improves soil structure and aeration, nutrient absorption and water retention. It also increases soil’s buffering capacity against fluctuations in PH levels, and reduces soil crusting and erosion from wind and water as well as radical toxic pollutants. Humic acid promotes the developing of root systems, seed germination and overall plant growth. It also enhances health, resilience and overall appearance of plants. We believe there is no synthetic material currently known to match humic acid's effectiveness and versatility.

 

The pure humic acid used in our fertilizers is distilled and extracted from weathered coal by way of alkaline digestion and acid recrystallization. Our Jinong fertilizers are principally used as a foliar fertilizer (a liquid, water soluble fertilizer applied to a plant’s foliage by a fine spray so the plant absorbs the nutrients through its leaves), through spraying directly on soil or injecting into the irrigation systems. Benefits of using our products are to stimulate the growth and yield of plants, protecting them from drought, disease and temperature damages while improving soil structure and fertility.

  

Gufeng and Tianjuyuan produce compound fertilizer, blended fertilizer, organic compound fertilizer, slow-release fertilizers, highly-concentrated water-soluble fertilizers and mixed organic-inorganic compound fertilizer. Gufeng sells its products under four brands: “KEBA”, “Mei Er An”, “Huang Cheng Gen” and “SPR HOP”, which are all registered trademarks in the PRC. Tianjuyuan’s products are marketed under the brands “AGR GFJ” and “T.J.Y.” which are both PRC registered trademarks.

 

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We have a multi-tiered product line of 466 fertilizer products, covering humic acid-based compound fertilizer produced through Jinong, and organic/inorganic compound fertilizer through Gufeng.

 

During the fiscal years ended June 30, 2017, 2016, and 2015, we recorded $211,088,271, $260,378,357, and $259,030,774, respectively, in gross revenues from sales of our fertilizer products, representing 74.1%, 96.9%, and 98.4% of our total revenues for such periods. Gufeng and Tianjuyuan manufacture a total of 332 fertilizer products. 52.2% of Gufeng’s fertilizer revenue came from humic acid compound fertilizers and 10.4% from compound fertilizer for the fiscal year ended June 30, 2017.

 

Agricultural Products

 

Our subsidiary, Yuxing, one of Jinong’s VIEs, produces top-grade fruits, vegetables, flowers and colored seedlings for commercial sale. The gross revenues from the sale of our agricultural products for the fiscal years ended June 30, 2017, 2016, and 2015, were $8,517,231, $8,406,663, and $4,323,514, respectively, representing 3.0%, 1.6%, and 1.6% of our total revenues, respectively.

 

Yuxing was originally established to be the research and development base for humic acid fertilizers produced by Jinong. By simulating the growing conditions and cycles of various plants, such as flowers, vegetables and seedlings, Yuxing regularly conducts experimental testing to enhance the efficacy of our new fertilizers.

 

Sales Products

 

Our sales segment, consisting of eight sales VIEs we acquired control of since 2016, procure various agriculture materials that farmers need, such as, fertilizers, pesticides, seeds, mulches, and soil conditioners etc., from different manufacturers and wholesalers. In turn, they sell these materials to their customers: farmers, distributors, and other parties. The gross revenues from the sales segment for the fiscal years ended June 30, 2017 were $65,607,538, representing 23.0% of our total revenues.

 

Fertilizer Manufacturing Process

 

Our production lines employ scientifically-designed production procedures and strict quality control systems to ensure high quality in our products. These production lines are fully automated and ran by a central control system with minimal manual input by technicians. The machinery and vats for the line are supplied by a local medical machinery manufacturer and the automatic control systems were developed by us. Our access management system protects the proprietary ingredient mixes from any unauthorized use at all time. Our computer server is connected to the electronic scales on each of the material input bins to ensure that the exact quantity of each elements or ingredients is delivered correctly, thus maintain product quality and reduce waste. Our production line producing liquid fertilizer and powered fertilizer is centrally controlled by a wireless panoramic audio and video monitoring system that allows connectivity with mobile terminals such as cell phones.

 

In Jinong, we operate 6,495 square meters (69,911 square feet) production facility that manufactures liquid fertilizer products and a 13,803-square meter (148,576 square feet) production facility that produces liquid and highly concentrated (powdered) fertilizers. Jinong’s total annual production capacity of these facilities is 55,000 metric tons.

 

In Gufeng and Tianjuyuan, we operate eight manufacturing facilities located in No. 6 Mafang Logistics Park, Pinggu, Beijing. These facilities produce various kinds of fertilizers and have a total annual production capacity of 500,000 metric tons.

 

The manufacturing techniques utilized by Gufeng include extruder granulation, rotary drum steam granulation, urea-based spraying granulation and resin-coated sustained release, which enable Gufeng to effectively meet the production requirements of all different compound fertilizers. To ensure high quality, Gufeng and Tianjuyuan employ strict quality controls from the raw materials purchases to the products sales to end users.

 

We produced and sold a total of approximately 361,388 metric tons of fertilizer products during the fiscal year ended June 30, 2017.

 

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Raw Materials and Suppliers

 

Fertilizer Products

 

Among the three materials utilized to produce humic acid (weathered coal, lignite and peat), we have chosen weathered coal as a key raw material because it is abundant and economical for production. We have been sourcing the humic acid from different regions including Shaanxi and Shanxi provinces, and Inner Mongolia Autonomous Region.

 

In addition to weathered coal, we also use approximately 50 different components in our production process, including elements such as sodium, calcium, zinc, iron and potassium, all of which can be readily obtained from local markets. We utilize spectral analysis technology to select raw materials with the best quality, and we have specially-trained buyers to ensure the consistency of raw materials procured.

 

The fertilizer products that Gufeng and Tianjuyuan manufacture incorporate over 50 different raw materials, including coal, sulfuric acid and NPK (nitrogen, phosphorus and potassium) related compounds such as amide and hydro nitrogen. Gufeng sources these supplies largely from neighboring provinces and regions, such as Hebei and Shaanxi provinces, and the Municipality of Beijing, for the economical transportation costs.

 

Our products are packaged in bottles, bags and boxes. Each type of packaging material, along with packaging labels, is readily available for purchase from manufacturers in Shaanxi, Beijing, Shandong and Zhejiang provinces.

 

Agricultural Products

 

The plants that generate our top-grade flowers and multi-colored seedlings are mainly planted and cultivated in research and development facilities maintained by Yuxing. We purchase seeds of green vegetables and fruits from agricultural companies, such as RijkZwaan Company, which imports the seeds from foreign markets, including Holland. We cultivate our agricultural products by applying fertilizers produced by Jinong.

 

Inventory

 

For our fertilizer products, our efficient production methods allow us to maintain appropriate inventory levels, which keep inventory costs reasonable. We purchase raw materials and packaging materials based on demands and business forecasts. Products, in various formulas and different batches, with customized volumes, are shipped to distributors and users after production in response to the orders if we received.

 

For our agricultural products, we maintain corresponding inventory to both the anticipated demand from customers and other needs, as we often use certain agricultural products to serve our product testing base for research and development purpose.

 

Return Policy

 

The Company accepts returns of defective fertilizer products. During the fiscal year ended June 30, 2017, the Company did not experience any significant returns.

 

Seasonality

 

The peak season to sell fertilizer products is from January through June. However, during the fiscal year ended June 30, 2017, Jinong did not experience significant seasonal variation with respect to its fertilizer sales since approximately 46% of its annual sales revenue occurred in the third fiscal quarter (winter) and the fourth fiscal quarter (spring). Usually, Gufeng’s sales of compound fertilizer undergoes significant seasonal variation in China. Correspondingly, during the fiscal year ended June 30, 2017, Gufeng experienced seasonal variation. The purchase of its raw material, basic fertilizers, is affected by the supply and demand in the fertilizer market with seasonality. Over non-peak sales season, when the raw material price is low and economical, Gufeng may choose to place larger orders for raw materials as its export business offsets the seasonality when exports are made to southern Asia, such as India is needed, where their selling season corresponds to the non-peak season in China.

 

The peak selling season for our agricultural products is from October till March, namely our second fiscal quarter (fall) and the third fiscal quarter (winter). This was primarily due to the strong demand for high-end fruits and decorative flowers during the holiday seasons. However, Yuxing did not have seasonal variation problems during the period from October 2016 through March 2017, it generated approximately 5.2 million, or 62% of our annual sales of agricultural products.

 

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Marketing, Distribution and Customers

 

Overview

 

We currently market our own fertilizer products to private wholesalers and retailers of agricultural farm products in 22 provinces, 4 autonomous regions and 4 central government-controlled municipalities in China. For the fiscal year 2017, the following five PRC provinces, collectively accounted for 41% of our fertilizer manufacturing revenue: Inner Mongolia (5%), Hebei (16%), Shaanxi (5%), Heilongjiang (8%) and Liaoning (6%). We believe this geographically diverse distribution helps us to become a leader in the compound fertilizer market as compared to regional competitors because we are not heavily dependent on any single geographic area for sales and are able to raise our brand and product awareness nationwide. We also manufacture our fertilizer products for export through contracted distributors in foreign countries, including India and Africa. Total revenues from exported products accounted for approximately 0.1% of our total fertilizer revenues in fiscal 2017.

 

Our agricultural products are distributed through various channels in Shaanxi Province and other provinces. Decorative flowers are usually sold through our fertilizer distributors to end-users such as flower shops, luxury hotels and government agencies. Fruits and vegetables are sold to high-end supermarkets and upscale restaurants. Seedlings are sold primarily to departments of city planning.

 

A multi-tiered product strategy allows us to tailor our fertilizer products to the needs and preferences of the various geographic regions in China. Our fertilizers can be tailored to different crops grown in varying climate and soil conditions. For example, climate and rainfall conditions in Southern and Eastern China allow farmers to grow high margin crops such as fruit and seasonal vegetables. As a result, these farmers are willing to invest in expensive and specialized fertilizers. In contrast, we market low-cost fertilizers to farmers in the Northwest areas of China due to the inclement weather.

 

Our research and development capabilities allow us to tailor products to meet specific farming needs in considering different factors such as crops species, humidity, weather and soil conditions.

 

The sales segment utilizes each sales VIE’s distribution network to deliver various agriculture materials from upstream providers such as manufacturers and wholesalers to downstream users and retailers. We aim to expand the sales VIEs network and integrate them together to better meet customer’s demands with improved distribution efficiencies.

 

Marketing

 

Our marketing staff is trained to closely work with distributors and customers, including retailers and farmers, providing professional advice on customizing our products to customer needs and offering agricultural knowledge and other extensive customer support. In addition, our employees educate and communicate with distributors and customers by regularly organizing training courses on new agricultural techniques.

 

Compared with industry norms, we believe our product development cycle of three to nine months is relatively short. Through our regular collection of market data, including growth records of a variety of plants cultivated in different soil and climate conditions, together with feedbacks from our end-users, we can conduct nationwide market analysis, ascertain new product needs, estimate demand and customer demographics and develop new products tailored to current market needs.

 

Although we utilize television advertisements and mass media, most of our marketing efforts are conducted through joint activities with distributors. Our sales and marketing staff works with and trains distributors and retail clients through lectures and interactive meetings. We emphasize the technological components of our products to end-users to help them understand the differences in products and how to effectively use them. Word-of-mouth advertising and sample trials of new products in new areas are also essential components of our marketing efforts. In addition, we have established nationwide telephone hotlines to answer questions and have constructed an SMS text message platform to have real-time interaction with customers.

 

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Our best-selling self-manufactured fertilizers, based on revenues for the fiscal year ended June 30, 2017, are listed below:

 

                    Percent of  
        Volume     Revenues     Fertilizer  
Ranking   Product Names   (Tons)     (USD)     Sales  
1   Organic/Inorganic Compound Fertilizer (humic acid) NPK46%     131,238       447,419,420       16.6 %
2   Compound Fertilizer NPK40%     130,862       42,854,133       15.0 %
3   Jinong Guangpu Fertilizer (humic acid)     2,135       7,379,179       2.6 %
4   Jinong FHF Fertilizer (humic acid)     15,218       5,911,716       2.1 %
5   Jinong HXSGJ Fertilizer (humic acid)     1,331       4,954,832       1.7 %

 

Fertilizer Products

 

The fertilizer product market in China is highly fragmented. Our primary sales strategy is to establish contractual relationships with qualified distributors throughout the country, who, in turn, will distribute our products to wholesalers and retailers, and ultimately, the farmers.

 

As of June 30, 2017, we sold our products through a nationwide constructed network of about 1,917 distributors covering 22 provinces, 4 autonomous regions and 4 central government-controlled municipalities in China.

 

The distributors sell our products to the smaller, local wholesale and retail outlets who then sell to the end-users, typically farmers. We do not grant provincial or regional exclusivity because there is currently no single distributor sufficiently dominant to warrant exclusivity. We enter into non-exclusive written distribution agreements with chosen distributors that demonstrate their ability in regional sales networks. The distribution agreements do not dictate distribution quantity because changes in weather and local market could dramatically affect sales quotas.

 

For the fiscal year ended June 30, 2017, self-manufactured sales to our top five distributors accounted for approximately 30% of our revenues. As we do not depend on specific customers, we believe that the loss of single customers would not have any significant effect on our business.

 

Agricultural Products

 

We distribute our agricultural products through several networks depending on the type of product. Our top-grade flowers are mainly distributed through our fertilizer distribution network; our green vegetables and fruits are mainly distributed to a variety of wholesale markets and supermarkets in Xi’an, while our multi-colored seedlings are distributed to the seedling centers and planting companies in China with which we have had long-term cooperation. For the fiscal year ended June 30, 2017. Yuxing’s customers accounted for approximately 29.7% of the total revenues from Yuxing’s agricultural products.

 

Retail Stores and Authorized Retailers

 

We have successfully implemented two marketing programs in Shaanxi, Hebei, Anhui, Jiangsu and Guangzhou provinces. These marketing programs consist of: (i) establishment of Company directly-owned retail stores to sell fertilizer products produced by Jinong and Gufeng through the designated sales personnel (the “Pilot Program”) and (ii) selection of qualified retailers from the Company's distributor base to be designated as authorized retailers. With the Pilot Program, we have worked closely with our distributors, with each distributor’s outlet having an assigned territory in order not to compete with other existing distributors. We have entered into agreements with these retailers on their exhibits, and have well-positioned standardized shelf and product displays in their retail stores. In addition, we provide the retailers with educational materials on proper product use and billboard ads with our product logo to attract target farmers.

 

Sales Segment

 

Strategically, supplemental to our manufacturing business, we added a new business segment, the sales of fertilizer and other agriculture material products, to our business since 2016. The sales segment had provided supplemental revenue and earnings by covering more market areas, and selling more products not only produced by ourselves but also by other manufacturers. We had been developing the sales segment mainly by acquiring control of established sales ventures and continue to grow them. The sales segment utilizes the distribution network acquired from the sales ventures to deliver various agriculture materials. For the fiscal year ended June 30, 2017, the sales segment sold $65,607,538 of agriculture materials, and accounted for 23% of our revenues.

 

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Research and Development

 

We conduct the bulk of our research and development activities through Yuxing. Through Yuxing, we cultivate high-quality flowers, green vegetables and fruits in our own greenhouses and sell them to various end-users, including airlines, hotels and restaurants. Yuxing operates advanced research and development facilities that: (i) provide testing and an experimental data collection base for new fertilizers produced by Jinong by simulating the growing conditions and development stages of a variety of plants, such as flowers, vegetables and seedlings, (ii) increase our capability to produce more products while shortening the new product development cycle, which allows us to release products to market quickly, thus increasing revenues and market share. In addition, our research and development capabilities allow us to develop products tailored to specific farming needs generated by different crop species, humidity, weather and soil conditions. Flowers, fruits and vegetables grown from experimental testing of Jinong’s humic acid compound fertilizers are of high quality and are sold to local supermarkets and airline companies.

 

The capital expenditure and other payments on Yuxing’s construction, net of accumulated depreciation, were approximately $12,124,940, $13,300,313 and $15,761,896 during the fiscal years ending of June 30, 2017, 2016 and 2015, respectively. The research and development center helps expanding our output of high quality agricultural products for commercial sale while providing an advanced testing field for new products. The facility at Yuxing enhances our capability to produce more products while shortening the development cycle, thus increase revenues and market share. In addition to developing new humic acid-based fertilizer products, we plan to develop other agricultural derivatives such as humic-acid based organic pesticides, which can provide additional revenue sources. For the fiscal year ended June 30, 2017, we sold approximately $8,517,231 of these agricultural products.

 

   FY 2017   FY 2016   FY 2015 
Machines, Buildings and Equipment  $12,120,687   $13,236,949   $15,692,975 
Construction in Progress  $63,253   $63,364   $68,921 
Total  $12,124,940   $13,300,313   $15,761,896 

 

New Product

 

With our research and development capabilities, we have developed 466 products and continued to develop new products. During the fiscal year ended June 30, 2017, we developed 7 new products, among which include several powder fertilizers, liquid fertilizers and compound fertilizers.

 

In addition to developing new fertilizer products, we also developed soilless seeding and breeding of colored-leaf plants, rare flowers and new species of fruits and vegetables.

 

Intellectual Property

 

We hold the following trademarks registered with the PRC Trademark Offices of National Industrial and Commerce Administrative Bureau (the “PRC Trademark Offices”):

 

Trademark  Registration Number  Valid term
Huang Cheng Gen  No.5219720  June 28, 2009 to June 27, 2019
Mei Er An  No.1508004  January 21, 2011 to January 20, 2021
KEBA  No.10045980  December 07, 2012 to December 06, 2022
KEBA  No.10046405  December 14, 2012 to December 13, 2022
KEBA  No.10045898  March 07, 2013 to March 06, 2023
KEBA  No.10046344  March 07, 2013 to March 06, 2013
AGR GFJ  No.3320281  May 28, 2014 to May 27, 2024
SPR HOP  No.3320282  May 28, 2014 to May 27, 2024
T.J.Y  No.3320283  May 28, 2014 to May 27, 2024
KEBA  No.760379  August 14, 2005 to August 13, 2025

 

A registered trademark is protected in China for a term of 10 years, and is renewable for another 10-year term under the PRC trademark law, if the renewal application is submitted to the PRC Trademark Offices within 6 months prior to the expiration of the previous term.

 

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Listed below are Jinong’s four patents for a fertilizer formulation and a proprietary production line and manufacturing processes.

 

         Inventor’s     Date of
Patent/Pending     Patent No.  Name and  Date of  Publication and
Patent Application  Type of Patent  /Application No.  Patent Holder  Application  Term
Patent:  Utility Model Patent No.: ZL  Inventor: Tao Li  May 29, 2007  May 14, 2008; 10
Production facility of Humic Acid Products    Patent NL 2007 20031884.2   
 
Patent Holder:
Jinong
 
 
 
 
 
 
years
                
Patent:  Utility Model  Application No.:  Applicant:  February 1, 2007  November 24,
Method and recipe of the  water  soluble humic acid fertilizers   Patent  ZL200710017334.x   Jinong
 
 
 
 
 
 
 
 
 
 
 
2010;
20 years
 
              
Patent:  Utility Model  Application No.:  Applicant:  September 22, 2011  December 4, 2013;
Production method of Organic Fertilizer    Patent   
 
ZL201110282544.8
 
 
 
Jinong
 
 
 
 
 
 
 
20 years
 
                
Patent:  Utility Model  Application No.:  Applicant:  January 17, 2014  October 19, 2014;
Production method of Multifunctional liquid calcium fertilizer   Patent  
NL 201410020442.2
  Jinong  20 Years 

 

The PRC Patent Law was adopted by the PRC National People's Congress in 1984 and was subsequently amended in 1992 and 2000. Under the PRC Patent Law, an invention patent is valid for a term of 20 years and a utility or design patent is valid for a term of 10 years. Both of our registered patents are all utility patents. Any use of our patent without consent or a proper license from us constitutes an infringement of patent rights.

 

In addition to trademark and patent protection in China, we also rely on contractual confidentiality provisions to protect our brand and intellectual property rights. To safeguard these rights our research and development personnel and executive officers are subject to confidentiality agreements. They are also subject to a non-compete covenant following the termination of employment. They also agree that all work products belong to us. Moreover, we take steps to limit the number of personnel involved in the production process and, instead of disclosing fertilizer ingredients to employees, we refer to the ingredients by numbers.

 

Competitive Strengths

 

We believe our products possess the following competitive advantages which enable us to compete in the PRC fertilizer market.

 

Nation-wide sales network. In the highly fragmented Chinese fertilizer market, we have established our own distribution channels with private distributors that sell our products to retail stores and farmers throughout China. We have over 1,947 distributors nationwide across 22 provinces, 4 autonomous regions and 4 central government-controlled municipalities in China. Most of our competitors do not have a sales team as large as ours that specializes in the sale of compound fertilizer products. Moreover, we believe the regional strengths of Gufeng’s distribution network have expanded and will continue to expand our sales coverage to certain cities and counties as well as foreign markets.

 

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Strong Research and Development. Our research and development is managed effectively. Typically, it takes only three to nine months from the decision to develop a new product to mass production, which ensures product flow and helps to maintain market share. Our strong research and development department is based on our intelligent greenhouse facilities. The advanced equipment and soil-free techniques in such facilities simulate the natural environment in different areas and control selected factors. Since most of Jinong’s experimental work is conducted in Yuxing’s greenhouse facilities, thereby speeding up development cycles, we can reduce costs without sacrificing accurate results. During the fiscal year ended June 30, 2017, we generated approximately $8,517,231 revenue from sales of Yuxing’s agricultural products, and we anticipate that this source of revenue will grow in the future. We have built 98 sunlight greenhouses and six intelligent greenhouses over an 88-acre parcel of land relating to Yuxing's pending research and development center, which expands output of high quality agricultural products for commercial sale while providing an advanced testing field for new products.

 

Gufeng and Tianjuyuan have developed seven technologies:

 

(1)     Drying fan for urea-based compound fertilizer;

 

(2)     Heat balance control system for flexible compound fertilizer;

 

(3)     Automatic control system for the anti-block of compound fertilizer;

 

(4)     Water control technology for low nitrogen, low potassium and high phosphorus compound fertilizer;

 

(5)     Manufacturing technology for salt-alkaline resistance and soil improvement of compound fertilizer (The company won the third prize for “Progress in Science and Technology in Pinggu District Beijing” with this technology);

 

(6)     Manufacturing technology for compound HA fertilizer with high density (NPK ≥ 51%);

 

(7)      Manufacturing technology for the sustained release of blending and compound fertilizer

 

While we believe our greenhouse facilities provide us with a competitive advantage over the competitors, some of them may still have better understanding in certain local markets where they successfully marketed products over a period and have developed specifically formulated fertilizers for local plants, soil and climate conditions. To enhance our competitiveness, we will seek to diversify our fertilizers to benefit a wider range of plants and soil conditions.

 

Well-known Brands. We believe customers have strong brand recognition and make purchase decisions accordingly. “Jinong”, “KEBA” and “T.J.Y” are registered trademarks and are well recognized by end users; in addition, certain large national fertilizer traders, such as Sinoagri Holding Company Limited, one of the largest domestic fertilizer traders in China, had strong brand preference for Gufeng’s fertilizer products. Gufeng sells its products under four brands, namely “KEBA”, “Mei Er An”, “Huangchenggen” and “SPR HOP”. Tianjuyuan’s products are marketed under the brands “AGR GFJ” and “T.J.Y.” The primary products sold under the Gufeng and Tianjuyuan brands include organic/inorganic compound fertilizer (humic acid) with NPK ≥ 40%, and organic /inorganic compound fertilizer (humic acid) with NPK ≥ 48%.

 

Automated Production Line and Process. All Jinong’s major production procedures are controlled by a centralized computer system only accessible by authorized personnel. Jinong’s production lines are fully automated to ensure that content in each product is measured exactly according to its recipe by linking the computer server with the electronic weights on each material input bin. In addition, spectral analysis is used to accurately check the composition of materials. During the fiscal year 2017, Jinong’s highly advanced production lines can manufacture a multi-tiered line of 134 fertilizer products, and we believe that Jinong’s production lines are among the few advanced lines in the Chinese industry. As mentioned above, we have patent protection for Jinong’s two proprietary production lines, one of which has medical grade production equipment with precise quality control, and the other can produce liquid, powder and granular fertilizers. We currently have an annual production capacity of 555,000 metric tons. 

 

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Competition

 

Fertilizer Products

 

Based on our internal estimates, there are approximately 2,000 organic fertilizer manufacturers in China, with no discernible market leaders in the sector. We believe our competitors are currently comprised of approximately 90% small-sized local manufacturers and 10% large national manufacturers. We believe we are among the large national fertilizer manufacturers.

 

Gufeng’s primary competitor is Stanley Fertilizer Co., Ltd. (“Stanley”), a compound fertilizer manufacturer based in Linyi, Shandong Province, which was listed on Shenzhen Stock Exchange (China) in June 2011. Stanley manufactures various kinds of compound fertilizers and tailored fertilizers which directly compete with Gufeng.

 

The smaller competitors of ours are generally producers of amino acid compound fertilizers, which are very price competitive.

 

However, lacking adequate quality or process control technologies, these companies often sell products with inconsistent quality.

 

The Chinese fertilizer market has been fully opened to foreign companies since China’s entry into the World Trade Organization in December 2006. Accordingly, the PRC government has increased its fertilizer import quota and, since January 2007, has reduced the import tariffs on foreign fertilizer to 1%. However, foreign fertilizers are generally more expensive than PRC manufactured fertilizers and are not customized to soil conditions influenced by China’s diverse climate and terrains.

 

Agricultural Products

 

The competitive market of our agriculture products varies among our three main products: Top-grade flowers, green vegetables and fruits, multi-colored seedlings.

 

Top-grade Flowers: The growers in the flowers and flower seedlings businesses are largely local based. We believe that our flower products have comparative advantages in terms of the advanced technologies we apply, the superior species of the seedlings we select and the efficiency and stability due to strict quality control. In addition, our greenhouse facilities enable us to produce flower seedlings year-round.

 

Green Vegetables and Fruits: Our competitors are primarily the vegetable planting centers and planters in Shaanxi, Shandong and Gansu provinces that produce vegetables such as cucumbers and peppers. With the aid from our green fertilizers that improve soil conditions and limit bacterial growth, our competitive advantage lies in the advanced greenhouse facilities which contribute to the pollution-free end products.

 

Multi-colored Seedlings: In the market of Multi-colored seedlings, one of our competitors is Kunming Anthura Horticulture Co., Ltd. Some of our products, such as red photiniaserrulata, are also imported from other countries with high survival rates.

 

Government Regulation

 

Our business operations are subject to various laws, including environmental, health and workplace safety laws issued by governmental agencies on the provincial and state levels. Business and company registrations, along with the products, are monitored through the issuance of licenses and certificates including the following:

 

“Green” Certification. Except for those manufactured by Gufeng and Tianjuyuan, all our fertilizer products are certified by the CGFDC as “Green Food Production Material”. Currently, the CGFDC provides two different certifications within the green food industry: "Green Food Certification" granted to edible foods, and "Green Food Production Material Certification" granted to production materials such as our fertilizers. A “Green Food Production Material Certification” was issued to Jinong on March 2015 and will expire in March 2018. The certificate is renewable with an application within 90 days prior to the expiration.

 

Operating license. Our operating license enables us to (1) undertake research and development, production, sales and services of humic-acid liquid fertilizer, (2) sales of pesticides, and (3) export and import of products, technology and equipment. Jinong’s license (Registration No. 610000100003655) is valid until August 8, 2057, and the license is renewable. Gufeng and Tianjuyuan maintain valid operating licenses with expiration dates of August 1, 2043 (for the license with Registration No. 110000008250498) and August 7, 2021 (for the license with Registration No.110117003157142), respectively.

 

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Fertilizer Registration. Fertilizer registration is issued by the Ministry of Agriculture of the PRC and is required for producing fertilizers. There are two kinds of registrations: interim registration and formal registration. The interim registration is valid for one year and applies to fertilizers in the stages of in-the-field testing and test selling; Fertilizers that have completed in-the-field testing and test selling must obtain formal registration, which, if granted, is valid for five years, and thereafter must be renewed every five years. Jinong currently holds 16 formal fertilizer registration certificates. Gufeng and Tianjuyuan hold 11 interim fertilizer certificates and 259 formal certificates.

 

As of the date of this Report, we believe we are in material compliance with all registrations and requirements for the issuance and maintenance of all licenses required to conduct our businesses and operations.

 

Item 1a. Risk Factors

 

Investing in our securities involves risk. Before making an investment decision, you should carefully consider the following information about these risks, together with the other information contained in this Report. Our business, results of operations or financial condition could be adversely affected by any of these risks, which could result in a decline in the market price of our securities, causing you to lose all or part of your investment.

 

Risks Related to Our Business

 

The industry in which we do business is highly fragmented and competitive and we face competition from numerous fertilizer manufacturers in China and elsewhere.

 

We compete with numerous local Chinese fertilizer manufacturers. Although we may have greater resources than many of our competitors, most of which are small local fertilizer companies and it is possible that these competitors have better access in certain local markets, an enhanced ability to customize products to certain regions and better established local distribution channels. We also compete with large national competitors in the PRC. Although we have advanced automated humic acid-based fertilizer production lines and greenhouse supported research and development centers, we cannot assure that such large competitors will not develop their own similar production or research and development facilities. Further, China’s access into the World Trade Organization has led to increased foreign competition for us. International producers and traders import products into China that generally are of higher quality than those produced by the local Chinese manufacturers. If they are localized and become familiar with fertilizers we produce, we may face additional competition. If we are not successful in our research, development and production of new products and/or in our marketing and advertising efforts to increase awareness of our brands, our revenues could decline, which might have a material adverse effect on our business, financial condition, results of operations and share price.

 

Our major competitors may be able to endure downturns in our industrial sector more than we are. When facing reduced demand for our products, we can either choose to maintain market share by reducing selling prices to meet competition, or to maintain the prices while sacrificing a portion of market share. The overall profitability would be reduced in either case. In addition, we cannot assure you that additional competitors will not enter into our existing markets, or that we will be able to compete successfully against existing or new competitors.

 

If we are unable to design, manufacture, and market fertilizer products in a timely and efficient manner, we may not remain as competitive.

 

Many of our fertilizer products are characterized by short product development cycles as they target at the unique climate and soil conditions where our customers are located. Accordingly, we devote a substantial amount of resources to product development. To compete successfully, we must develop new and/or improved fertilizer products that cater to customer needs. New fertilizers may not be easily developed. As a result, we may experience performance difficulties, which may result in delays, setbacks and cost overruns. Our inability to develop and offer new and/or improved fertilizer products or to achieve customer acceptance of these products could limit our ability to compete in the market or to grow revenues at a desired rate.

 

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Our proprietary fertilizer formula may become obsolete or be unintentionally disclosed to competitors, which could materially adversely affect the competitiveness of our future fertilizer products.

 

Our proprietary fertilizer formula is the base for producing our fertilizer. Our future success will depend upon our ability to address the increasingly sophisticated needs of our customers by supplying existing humic acid fertilizer products and by developing new products on a timely basis that keep pace with the evolving industry standards and changing customer requests. If our proprietary formula becomes obsolete as our competitors develop better products than ours, our future business and financial results could be adversely affected. In addition, although we have entered into confidentiality agreements with key employees, we cannot assure that if there is a breach of such agreement by an employee, we would not lose any competitive advantage that we currently have with respect to our proprietary fertilizer formula. If we are forced to take legal action to protect our proprietary formula, significant expense will incur and a favorable outcome cannot be guaranteed.

 

If our warehouse selling and credit sales of certain fertilizer products continue to increase and we fail to collect the accounts receivables that are due in a timely manner, our financial condition and results of operation may be materially adversely affected.

 

We had accounts receivable of $141,665,179 as of June 30, 2017, as compared to $118,021,105 and $68,528,598 as of June 30, 2016 and 2015, respectively, increases of $24,609,803 and $49,492,507, or 21.0% and 72.2% year over year. The increase was primarily due to the increased credit sales of our fertilizer products and added receivables from sales segments, and the marketing of Jinong’s humic acid fertilizer products including liquid and powder fertilizers. We offer a tentative credit period up to 180 days to our customers. Although we perform routine assessment of our customers’ creditworthiness, evaluate the structure and collectability of accounts receivable and provide an allowance for doubtful accounts when necessary, we may not be able to receive or collect payment for our products on time or at all if our customers encounter financial difficulties. Any such failure may have a material adverse impact on our financial condition and results of operation.

 

Our concentration of customers could have a material adverse effect on us.

 

Gufeng’s top five distributors accounted for 71.8% of its revenues, with its largest distributor accounting for 14.9% of total revenues for the fiscal year of 2017. Jinong’s top five distributors accounted for 2.4% of its fertilizer revenues for the fiscal year ended June 30, 2017. If those major customers reduce or discontinue their product purchases from us and we are unable to find their replacements, it would adversely affect our results of operations.

 

If we fail to adequately protect or enforce our intellectual property rights, we may be exposed to intellectual property infringement and the value of our intellectual property rights could diminish.

 

Our success, competitive position and future revenues will depend in part on our ability to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties.

 

Jinong is the holder of four registered patents. The first patent is a fertilizer formulation named “Method and Recipe of the Water Soluble Humic Acid Fertilizers”. The second patent, “Production Facility of Humic Acid Products”, relates to our proprietary production line and manufacturing processes in the PRC. The third patent is “Production Method of Organic Fertilizer”. The fourth patent is “Production method of Multifunctional liquid calcium fertilizer”. Gufeng and Tianjuyuan do not have patents but currently possess seven proprietary technologies. However, we cannot predict the degree and range of protection patents and confidentiality agreements with respect to proprietary technologies will defense us against competitors. Third parties may find ways to invalidate or otherwise circumvent our patents and proprietary technologies. Third parties may attempt to obtain patents claiming aspects like our patent applications. We cannot assure you that our current or potential competitors do not have, and will not obtain, patents that will prevent, limit or interfere with our ability to make, use or sell our products in the PRC.

 

If we need to initiate litigation or administrative proceedings, such actions may be costly and may divert management attention as well as consume other resources which could otherwise have been devoted to our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. In addition, historically, implementation of PRC intellectual property-related laws has been lacking, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as that in the United States or other countries, which increases the risk that we may not be able to adequately protect our intellectual property. Moreover, litigation may be necessary in the future to enforce our intellectual property rights. Future litigation could result in substantial costs and diversion of our management’s attention and resources, and could disrupt our business, as well as have a material adverse effect on our financial condition and results of operations. Given the relative unpredictability of China’s legal system and potential difficulties enforcing court judgments in China, there is no guarantee that we would be able to halt any unauthorized use of our intellectual property through litigation.

 

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If we infringe on the intellectual property rights of third parties, we could be prevented from selling products, forced to pay damages and compelled to defend against claims by third parties, which, if successful, could cause us to pay significant damage awards and incur other costs.

 

Our success also depends in large part on our ability to use and develop our technology and know-how without infringing the intellectual property rights of third parties. As litigation becomes more common in the PRC in resolving commercial disputes, we face a higher risk of being the subject of intellectual property infringement claims. The validity and scope of claims relating to humic acid fertilizer production technology and related devices and machine patents involve complex technical, legal and factual questions and analysis and, therefore, may be highly uncertain. The defense and prosecution of intellectual property suits, patent opposition proceedings and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability, including damage awards to third parties, require us to seek licenses from third parties (which may not be available on commercially reasonable terms, if at all), to pay ongoing royalties, or to redesign our products or subject us to injunctions preventing the manufacture and sale of our products. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation.

 

Disruptions in the supply of raw materials used in our products could cause us to be unable to meet customer demand in a timely manner, which could result in the loss of customers and net sales or could result in a lower profit margin for us.

 

Jinong is supplied with approximately 50 different types of raw materials, of which weathered coal is the primary one as it is the raw material from which humic acid is extracted and applied to the manufacturing of our products. Although there are numerous weathered coal suppliers available in market, we have been using Inner Mongolia Tianlibao Fertilizer Co., Ltd. (“Tianlibao”) as our main supplier of weathered coal because of the abundance and high quality of weathered coal in the Inner Mongolia Autonomous Region. Our supply agreement with Tianlibao is renewed monthly. If Tianlibao does not intend to renew the supply agreement with us for any reason, or if there are any business interruptions at Tianlibao and we are unable to locate an alternative supplier in a timely manner or on the same terms, we may not be able to meet customer demand on humic acid-based fertilizers in a timely manner or maintain our standards of quality for humic acid-based fertilizers during the transitional period, which may result in the loss of customers and net sales or we may not be able to keep our profit margin as before for our humic acid-based fertilizers.

 

Gufeng and Tianjuyuan are supplied with over fifty types of raw materials from a diversified pool of suppliers. Neither Gufeng nor Tianjuyuan are dependent on any single supplier for its raw materials; however, if we experience a significant increase in demand or if we need to replace any of these suppliers, we cannot be assured that the adequate supply of raw materials or a replacement supplier will be acquired in a timely manner to avoid any material adverse effect on our business operations and financial condition.

 

Any significant fluctuation in our production costs may have a material adverse effect on our operating results.

 

The prices for the raw materials and other inputs to manufacture our fertilizer products are subject to market forces largely beyond our control, including the price of weathered coal, energy costs, mineral and non-mineral elements, and freight costs. The costs for these inputs may fluctuate significantly based upon changes in the economy and markets. Although we may pass any increase of such costs to our customers, in the event we are unable to do so, we could incur significant losses and a diminution of our share price.

 

We do not presently maintain business disruption insurance. Any disruption of the operations in our factories would damage our business.

 

Our operations could be interrupted by fire, flood, earthquake and other events beyond our control for which we do not carry adequate insurance. While we have property damage insurance and automobile insurance, we do not carry business disruption insurance, which is not readily available in China. Any disruption of the operations in our factories would have a significant negative impact on our ability to manufacture and deliver products, which would cause a potential diminution in sales, the cancellation of orders, damage to our reputation and potential lawsuits.

 

We do not presently maintain product liability insurance, and our property and equipment insurance does not cover the full value of our property and equipment, which leaves us with exposure in the event of loss or damage to our properties or claims filed against us.

 

We currently do not carry any product liability or other similar insurance. We cannot assure that we would not face liability in the event of the failure of any of our products. We also cannot assure you that, especially as China’s domestic consumer economy and industrial economy continues to expand, product liability exposure and litigation will not become more commonplace in the PRC, or that we will not face product liability exposure or actual liability as we expand our sales into international markets where product liability claims could be more prevalent.

 

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The occurrence of any acts of God, war, terrorist attacks and other emergencies which are beyond our control may have a material adverse effect on our business operations and financial condition.

 

Acts of God, war, terrorist attacks and other emergencies which are beyond our control may have a material adverse effect on the economy and infrastructure in the PRC and on the livelihood of the Chinese population. Our business operations and financial condition may be materially and adversely affected should such events occur. We cannot give assurance that any acts of God such as floods, earthquakes, drought or any war, terrorist attack or other hostilities in any part of the PRC or even the world, potential or threatened, will not, directly or indirectly, have a material adverse effect on our business, financial condition and operating results.

 

If we cannot renew our fertilizer registration certificates, we will be unable to sell some or all our products. If we do not receive the formal fertilizer registration certificates for our new products, upon the expiration of the temporary registration certificates, we cannot continue to produce such new products.

 

All fertilizers produced in China must be registered with the PRC Ministry of Agriculture. No fertilizer can be manufactured without such registration. There are two kinds of registrations: interim registration and formal registration. The interim registration is valid for one year and applies to fertilizers in the stages of in-the-field testing and test selling. Fertilizers that have completed in-the-field testing and test selling must obtain formal registration, which is valid for five years, and thereafter must be renewed each five year. Jinong has 16 formal registration certificates. Gufeng and Tianjuyuan have 19 interim fertilizer certificates and 259 formal certificates. We plan to apply for formal certificates for each of our interim certificates before the applicable expiration dates.

 

Our belief is that the PRC Ministry of Agriculture generally grants an application for renewal in the absence of illegal activity by the applicant. However, there is no assurance that the PRC Ministry of Agriculture will grant renewal of our formal Fertilizer Registration Certificates. If we cannot obtain the necessary renewal, we will not be able to manufacture and sell such fertilizer products without certificates which will cause the termination of commercial operations for such fertilizer products. With respect to the transformation of the interim fertilizer registration certificates to formal fertilizer registration certificates, we believe that we can receive formal fertilizer registration certificates for our 19 interim fertilizer registration certificates in due course; however, if the government imposes additional burden on the application procedure or put temporary suspension on its certificate granting process due to any unexpected incidents in China, we cannot assure that our formal fertilizer registration certificates can be obtained without delay or can be obtained at all in which case our production could be adversely affected.

 

We may not possess all the licenses required to operate our business, or may fail to maintain the licenses we currently hold. This could subject us to fines and other penalties, which could have a material adverse effect on our results of operations.

 

In addition to a fertilizer registration certificate, we are required to hold a variety of other permits, licenses and certificates to conduct our business in China. We may not possess or receive all the permits, licenses and certificates required for our business or for which application has been made. In addition, there may be circumstances under which the approvals, permits, licenses or certificates granted by the governmental agencies are subject to change without substantial notice in advance. If we fail to obtain or to maintain such permits, licenses or certificates or 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 would be able to offer. As a result, our business, result of operations and financial condition could be materially and adversely affected.

 

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Potential environmental liability could have a material adverse effect on our operations and financial condition.

 

Our manufacturing operations are subject to numerous laws, regulations, rules and specifications relating to the environment, including, among others, the Integrated Emission Standard of Air Pollutants GB 16297-1996 and the Standard of Environmental Noise of Urban Area GB 3096-93. Failure to comply with any laws and regulations and future changes to them may result in significant consequences to us, including civil and criminal penalties, liability for damages and negative publicity. Our business and operating results may be materially and adversely affected if we were to be held liable for violating existing environmental regulations or if we were to incur significant expenditures to comply with environmental regulations affecting our operations.

 

Our success depends on our management team and other key personnel, the loss of any of whom could disrupt our business operations.

 

We depend, to a large extent, on the abilities and participation of our current management team, with a reliance upon Mr. Tao Li, our CEO and Chairman of the Board of Directors. The loss of the services of Mr. Li, for any reason, may have a material adverse effect on our business and prospects. We cannot assure you that the services of Mr. Li will continue to be available to us, or that we will be able to find a suitable replacement for him in the event his services are not available to us. We do not carry key man life insurance for our key personnel.

 

The agricultural chemicals business is specialized and requires the employment of personnel with significant scientific and operational experience in the industry. Accordingly, we must attract, recruit and retain a sizeable workforce of technically and scientifically competent employees. Our ability to effectively implement our business strategy will depend upon, among other factors, the successful recruitment and retention of additional management and other key personnel that have the necessary scientific, technical and operational skills and experience with the fertilizer industry. These individuals are difficult to find in the PRC and we may not be able to retain such skilled employees. If we are unable to hire individuals with the requisite experience, we may not be able to produce enough products to optimize profits, and the research and development initiatives may be delayed which will negatively impact our financial condition, results of operations and share price.

 

Mr. Tao Li, our Chairman and CEO may not devote all his time to our business.

 

Our Chairman and CEO, Mr. Tao Li, also serves as Chairman of Xi’an Techteam Science & Technology Industry (Group) Co. Ltd., a company engaged in hi-tech application fields in China, Chairman and CEO of Xi’an Techteam Investment Holding (Group) Co., Ltd, a holding company for certain entities such as Gem Grain, and Chairman of Kingtone Wirelessinfo Solution Holding Ltd, a publicly-traded, China-based developer and provider of mobile enterprise solutions. This may give rise to further allocation of Mr. Li’s time to each business. While Mr. Li anticipates having sufficient time to devote to our business, a lack of adequate time spent by him on our business may adversely affect our business, financial condition, results of operations and share price.

 

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential investors could lose confidence in our financial reporting, which could harm our business and have an adverse effect on our stock price.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to annually furnish a report by our management on our internal control over financial reporting. Such report must contain, among other matters, an assessment by our principal executive officer and our principal financial officer on the effectiveness of our internal control over financial reporting, including a statement as to whether our internal control over financial reporting is effective as of the end of our fiscal year. This assessment must include disclosure of any material weakness in our internal control over financial reporting identified by management. Performing the system and process documentation and evaluation needed to comply with Section 404 are both costly and challenging. If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. We cannot provide assurance that we will not fail to achieve and maintain an effective internal control environment on an ongoing basis, which may cause investors to lose confidence in our reported financial information and have a material adverse effect on the price of our common stock.

 

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We are responsible for the indemnification of our officers and directors.

 

Our Bylaws provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against costs and expenses incurred by them in any litigation to which they become a party arising from their association with or activities on our behalf. Consequently, we may be required to expend substantial funds to satisfy these indemnity obligations.

 

Our inability to effectively improve the financial performance of Gufeng may have a material adverse effect on our business, financial condition and results of operations.

 

While Gufeng had sales revenues of $104,446,239 for its fiscal year ended June 30, 2017, Gufeng’s net income for such period was $6,264,392. This was primarily due to the lower profit margins on Gufeng’s products, inefficiencies in production and daily operations and negative working capital. In addition, rising transportation costs passed on by Gufeng’s distributors may further erode margins on Gufeng’s products. As Gufeng is based in Beijing, it is susceptible to rising costs of labor common in large cities such as Beijing, which may make it difficult for us to expand the workforce of Gufeng and Tianjuyuan to meet our strategic goals

 

Although we have made progress in terms of integrating Gufeng’s employees, products and distribution network into our business during the past 12 months, there is no assurance that we will be able to continue effectively to do so, which may result in a material adverse effect on our business, financial condition and results of operations.

 

We have not obtained the land use right over the premises on which certain facilities of Gufeng, our indirect, wholly-owned subsidiary, is located. As a result, the lack of a proper title certificate may jeopardize our right to use the premises and our possession of the buildings we built on such premises.

 

Through Tianjuyuan, we lease approximately 47,333 square meters (509,488 square feet) of land in the Ping Gu District of Beijing (the “Premises”). Under the lease dated February 16, 2004 with the village committee of Dong Gao Village and Zhen Nan Zhang Dai Village in the Beijing Ping Gu District (the “Lease”), Tianjuyuan leases the land at an annual rent of RMB 35,500 (approximately $5,783). The term of the Lease is from February 1, 2004 to January 31, 2054. We were informed by our PRC counsel that the Lease is invalid and unenforceable pursuant to the PRC Land Administration Law and related regulations. Therefore, we have been in the process of applying for the proper land use right certificate from the relevant government authorities to legitimize our right over the Premises. As of the date of this report, we were informed by the local government that our application materials for the land use right in issue has been moved up from the department in charge of general matters to the land administrative department of the local government and is under their review. However, there can be no assurance that such land use right certificate will be granted to us. Until we obtain the land use right certificate, there is a risk that the PRC government may declare the Lease invalid, evict our personnel from the Premises and tear down the buildings we built on the Premises. As of the date of this Report, we have no knowledge of any pending or threatened governmental actions relating to the Premises.

 

A severe or prolonged downturn in the global economy could materially and adversely affect our business and results of operations.

 

The global market and economic conditions during the years 2008 through 2010 were unprecedented and challenging, with recessions occurring in most major economies. Continued concerns about the systemic impact of potential long-term and wide-spread recession, energy costs, geopolitical issues, and the availability and cost of credit have contributed to increased market volatility and diminished expectations for economic growth around the world. The difficult economic outlook has negatively affected businesses and consumer confidence and contributed to volatility of unprecedented levels.

 

The PRC economy also faces challenges. The PRC government has implemented various measures recently to curb inflation. If economic growth slows or an economic downturn occurs, our business and results of operations may be materially and adversely affected.

 

Risks Related to Doing Business in the PRC

 

Substantially all our assets and operations are in the PRC, and substantially all our revenue is sourced from the PRC. Accordingly, our results of operations and financial position are subject to a significant degree to economic, political and legal developments in the PRC, including the following risks:

 

Changes in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and the profitability of such business.

 

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The PRC’s economy is in a transition from a planned economy to a market oriented economy, subject to five-year and annual plans adopted by the government that set national economic development goals. Policies of the PRC government can have significant effects on economic conditions in China. Our interests may be adversely affected by changes in policies by the PRC government, including:

 

changes in laws, regulations or their interpretation;

 

confiscatory taxation;

 

restrictions on currency conversion, imports or sources of supplies and export tariff;

 

expropriation or nationalization of private enterprises.

 

Although the PRC government has been pursuing economic reform policies for more than two decades, we cannot assure you that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting political, economic and social life in China.

 

The PRC laws and regulations governing our current business operations are sometimes vague and uncertain. Any changes in such PRC laws and regulations may have a material and adverse effect on our business.

 

We and any future subsidiaries are considered foreign persons or foreign funded enterprises under PRC laws, and we are subject to PRC laws and regulations. These laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance from foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business.

 

We derive a substantial portion of our revenues from sales in the PRC and any downturn in the Chinese economy could have a material adverse effect on our business and financial condition.

 

Substantially all our operations are conducted in the PRC and substantially all our revenues are generated from sales in the PRC. We anticipate that revenues from sales of our products in the PRC will continue to represent a substantial proportion of our total revenues soon. Any significant decline in the condition of the PRC economy could, among other things, adversely affect the consumption of our products, which in turn would have a material adverse effect on our revenues and profitability.

 

Inflation in the PRC could negatively affect our profitability and growth.

 

While the PRC economy has experienced rapid growth, it has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products do not rise at a rate that is sufficient to fully absorb inflation-driven increases in our costs of supplies, our profitability can be adversely affected.

 

According to the International Monetary Fund or IMF, the inflation rate in China fluctuated on an annual basis from a low rate of -1.4% in 1999 to the highest rate of 5.9% in 2008. The inflation rate was 1.5%, 1.4%, and 3% in 2014, 2015 and 2016, respectively. These fluctuations and economic factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. To control inflation in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. The implementation of these and other similar policies can impede economic growth and thereby harm the market for our products.

 

Our subsidiaries are subject to restrictions on paying dividends and making other payments to our subsidiary, Green New Jersey; as a result, we might therefore be unable to pay dividends to you.

 

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We are a holding company incorporated in the State of Nevada and do not have any assets or conduct any business operations other than our investments in our subsidiaries, Green New Jersey, Jinong, Gufeng, and the VIE companies. Because of our holding company structure, we rely entirely on dividends payments from our subsidiaries in the PRC. PRC regulations currently permit payment of dividends only out of accumulated profits, as determined in accordance with PRC accounting standards and regulations. Our subsidiaries are also required to set aside a portion of its after-tax profits according to PRC accounting standards and regulations to fund certain reserve funds. We may experience difficulties such as lengthy processing time from the foreign exchange administrative bureau’s side and formality requirement on paperwork in completing the administrative procedures necessary to obtain and remit foreign currency. Furthermore, if any of our subsidiaries incurs debt on its own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments. If we or Green New Jersey are unable to receive any profits from the operations of our subsidiaries in the PRC, we may be unable to pay dividends to our common stock holders.

 

Governmental control of currency conversion may affect the value of our common stock.

 

The PRC government imposes controls on the convertibility of Renminbi (“RMB”) into foreign currencies and, in certain cases, the remittance of currency out of the PRC. We receive substantially all our revenues in RMB, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where RMB is to be converted into foreign currency and remitted out of the PRC to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.

 

The PRC government also may at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due.

 

The fluctuation of RMB may materially and adversely affect our common stock.

 

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC's political and economic conditions. As we rely entirely on revenues earned in the PRC, any significant revaluation of RMB may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into RMB for our operations, appreciation of the RMB against the U.S. dollar could lead the RMB equivalent of the U.S. dollars be reduced and could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert our RMB into U.S. dollars for making dividend payments on our common stock or for other business purposes and the U.S. dollar appreciates against the RMB, the U.S. dollar equivalent of the RMB we convert would be reduced. In August 2015, China’s currency dropped by a cumulative 4.4% against the U.S. dollar on hopes of boosting the domestic economy, making Chinese exports cheaper and imports into China more expensive by that amount. The effect on trade can be substantial. In addition, the depreciation of significant U.S. dollar denominated assets could result in a charge to our income statement and a reduction in the value of these assets.

 

PRC regulations relating to the establishment of offshore special purpose companies by PRC domestic residents may subject our PRC resident beneficial owners to personal liability, limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

 

SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 (the “SAFE Notice”) requires PRC residents to register with local branches of SAFE regarding their direct establishment or indirect control of an offshore entity, for overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle” (the “SPV”). SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. Under the SAFE Notice, failure to comply with the registration procedures set forth above could result in liability under Chinese law for foreign exchange evasion and may result in penalties and legal sanctions, including fines, the imposition of restrictions on a Chinese subsidiary’s foreign exchange activities and its ability to distribute dividends to the SPV, its ability to pay the SPV proceeds from any reduction in capital, share transfer or liquidation in respect of the Chinese subsidiary and the SPV’s ability to contribute additional capital into or provide loans to the Chinese subsidiary. After consultation with China counsel, we do not believe that any of our PRC domestic resident stockholders are subject to the SAFE registration requirement. However, we cannot provide any assurances that all our stockholders who are PRC residents will not be required to make or obtain any applicable registrations or approvals required by these SAFE regulations in the future. The failure or inability of our PRC resident stockholders to comply with the registration procedures set forth therein may subject us to fines and legal sanctions, restrict our cross-border investment activities, or limit our PRC subsidiaries’ ability to distribute dividends or obtain foreign-exchange-dominated loans to our company.

 

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As it is uncertain how the SAFE regulations will be interpreted or implemented, we cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our results of operations and financial condition. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the SAFE regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

 

We may be subject to fines and legal sanctions by SAFE or other PRC government authorities if we or our employees who are PRC citizens fail to comply with PRC regulations relating to employee stock options granted by offshore listed companies to PRC citizens.

 

On March 28, 2007, SAFE promulgated the Operating Procedures for Foreign Exchange Administration of Domestic Individuals Participating in Employee Stock Ownership Plans and Stock Option Plans of Offshore Listed Companies, or Circular 78. Under Circular 78, Chinese citizens who are granted share options by an offshore listed company are required, through a Chinese agent or Chinese subsidiary of the offshore listed company, to register with SAFE and complete certain other procedures, including applications for foreign exchange purchase quotas and opening special bank accounts. We and our Chinese employees who have been granted share options are subject to Circular 78. Failure to comply with these regulations may subject us or our Chinese employees to fines and legal sanctions imposed by SAFE or other PRC government authorities and may prevent us from further granting options under our share incentive plans to our employees. Such events could adversely affect our business operations.

 

Our business and financial performance may be materially adversely affected if the PRC regulatory authorities determine that our acquisition of Jinong constitutes a Round-trip Investment without the PRC Ministry of Commerce (“MOFCOM”) approval.

 

On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Merger and Acquisition of Domestic Companies by Foreign Investors (the “2006 M&A Rules”), which became effective on September 8, 2006. According to the 2006 M&A Rules, a “Round-trip Investment” is defined as having taken place when a PRC business that is owned, directly or indirectly, by PRC individual(s) is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individual(s) and their PRC affiliates. Under the 2006 M&A Rules, any Round-trip Investment must be approved by the MOFCOM. The application of the 2006 M&A Rules with respect to the definition of Round-trip Investment remains unclear with no consensus currently existing among the leading PRC law firms regarding the definition, scope of the applicability of the MOFCOM approval.

 

We, through Green New Jersey, acquired 100% capital stock of Jinong (the “Jinong Acquisition”), Jinong was a PRC business whose stockholders were two PRC individuals and a PRC entity, of which Mr. Tao Li, our current Chairman and CEO, was the controlling stockholder, holding 31% of its shares. The PRC regulatory authorities may take the view that the Jinong Acquisition could be part of a Round-trip Investment. The PRC legal counsel of Jinong has opinioned that the Jinong Acquisition did not violate any PRC law, which would include the 2006 M&A Rules. We, however, cannot be assured you that the PRC regulatory authorities, MOFCOM, may take the same view as the PRC legal counsel. If the PRC regulatory authorities take the view that the Jinong Acquisition constitutes a Round-trip Investment under the 2006 M&A Rules, we cannot be assured that we may be able to obtain the approval required from MOFCOM.

 

If the PRC regulatory authorities take the view that the Jinong Acquisition constitutes a Round-trip Investment without MOFCOM approval, they could invalidate our acquisition and ownership of Jinong. Additionally, the PRC regulatory authorities may take the view that the Jinong Acquisition constitutes a transaction which requires the prior approval of the China Securities Regulatory Commission, or CSRC, before MOFCOM approval is obtained. We believe that if this takes place, we may be able to find a way to re-establish control of Jinong’s business operations through a series of contractual arrangements rather than an outright purchase of Jinong. We cannot assure you that such contractual arrangements will be protected by PRC law or that we can receive as complete or effective economic benefit and overall control of Jinong’s business than if the Company had direct ownership of Jinong. In addition, we cannot assure you that such contractual arrangements can be successfully effected under PRC law. If we cannot obtain MOFCOM or CSRC approval if required by the PRC regulatory authorities to do so, and if we cannot put in place or enforce relevant contractual arrangements as an alternative and equivalent means of control of Jinong, our corporate structure the control asserted by the shareholders in the United States will be materially adversely affected.

 

Jinong’s contractual arrangements with Yuxing may result in adverse tax consequences to us.

 

We could face material and adverse tax consequences if the PRC tax authorities determine that Jinong’s contractual arrangements with Yuxing were not made on an arm’s length basis and adjust our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment. A transfer pricing adjustment could result in a reduction, for PRC tax purposes, of adjustments recorded by Yuxing, which could adversely affect us by increasing Yuxing’s tax liability without reducing Jinong’s tax liability, which could further result in late payment fees and other penalties to Yuxing for underpaid taxes.

 

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We control Yuxing through contractual arrangements which may not be as effective in providing control over Yuxing as direct ownership, and if Yuxing or its shareholders breach the contractual arrangements, we would have to rely on legal remedies under PRC law, which may not be available or effective, to enforce or protect our rights.

 

Effective June 16, 2013, we conduct substantially all our operations on agriculture products, and generate substantially all our revenues from agriculture products, through contractual arrangements with our VIE, Yuxing, that provide us, through our ownership of Green New Jersey and its ownership of Jinong, with effective control over Yuxing. We have no direct ownership interest in Yuxing. We depend on Yuxing to hold and maintain agriculture products contracts with our customers. Yuxing also owns substantially all our property, facilities and other assets relating to the operation of our agriculture products business, and employs the personnel for substantially all our agriculture products business. Neither our company nor Jinong has any ownership interest in Yuxing. Although we believe that that each contract under Jinong’s contractual arrangements with Yuxing is valid, binding and enforceable under current PRC laws and regulations in effect, these contractual arrangements may not be as effective in providing us with control over Yuxing as direct ownership of Yuxing would be. In addition, Yuxing may breach the contractual arrangements. For example, Yuxing may decide not to make contractual payments to Jinong, and consequently to our company, in accordance with the existing contractual arrangements. In the event of any such breach, we would have to rely on legal remedies under PRC law. These remedies may not always be available or effective, particularly considering uncertainties in the PRC legal system.

 

Yuxing may also seek to renew its agreements on terms that are disadvantageous to us. Although we have entered into a series of agreements that provide us with substantial ability to control Yuxing, we may not succeed in enforcing our rights under them insofar as our contractual rights and legal remedies under PRC law are inadequate. If we are unable to renew these agreements on favorable terms when these agreements expire or enter into similar agreements with other parties, our business may not be able to operate or expand, and our operating expenses may significantly increase.

 

In addition, although we do not rely on Yuxing’s revenue, Yuxing’s VIE structure is subject to uncertainty amid the PRC’s changing legislative practice. In January 2015, China’s Ministry of Commerce unveiled a draft legislation that could change how the government is regulating corporate structures, especially for VIEs controlled by foreign investments. Instead of looking at “ownership”, the draft law focused on the entities or individuals hold control of a VIE. If a VIE is deemed to be controlled by foreign investors, it may be barred from operating in restricted sectors or the prohibited sectors listed on a “negative list”, where only companies controlled by Chinese nationals could operate, even if structured as VIEs.

 

If the draft law is implemented in any form, and that the Company’s business was characterized as one of the “restricted” or “prohibited” sectors, Yuxing may be barred from operation which will materially adversely affect our business.

 

PRC laws and regulations governing our businesses and the validity of certain of our contractual arrangements are uncertain. If we are found to be in violation of such PRC laws and regulations, we could be subject to sanctions. In addition, changes in such PRC laws and regulations may materially and adversely affect our business.

 

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business, or the enforcement and performance of Yuxing’s contractual arrangements with Jinong. Jinong is considered a foreign invested enterprise under PRC law. As a result, Jinong is subject to PRC law limitations on its businesses and foreign ownership of Chinese companies. These laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.

 

The PRC government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses and requiring actions necessary for compliance. Licenses and permits issued or granted to us by relevant governmental bodies may be revoked later by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new PRC laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would not be found in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.

 

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The PRC environment laws and regulations may adversely impact on our business.

 

Our manufacturing operations are subject to numerous environment laws, ordinances and regulations. These laws, ordinances and regulations address and regulate, among other matters, wastewater discharge, air quality and the generation, handling, storage, treatment, disposal and transportation of solid and hazardous waste. It is possible that compliance with a new regulatory requirement could impose significant compliance costs on us. Such costs could have a material adverse effect on our business, financial condition and results of operations.

 

We believe that we have obtained all permits, licenses and approvals, and filed all registrations required for the conduct of our business, except where the failure to obtain such permit, license or approval, or file any registration would not have a material adverse effect on our business, financial condition and results of operations. We have not been notified by any governmental authority of any continuing noncompliance, liability or other claim relating to any of our properties or business operations, nor are we aware of any other material environmental condition with respect to any of our properties or arising out of our business operations at any other location.

 

However, no assurance can be given that all potential environmental liabilities have been identified or properly quantified or that any prior owner, operator, or tenant has not created an environmental condition unknown to us. Moreover, no assurance can be given that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of the properties will not be affected by the condition of land or operations near the properties (such as the presence of underground storage tanks), or by third parties unrelated to us.

 

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds we received from any offerings to make loans to our PRC subsidiaries or to make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

We are a holding company in the United States conducting our operations in China through our PRC subsidiaries. In utilizing the proceeds, we received from any offerings, we may make loans to our PRC subsidiaries, whether currently in existence or to be formed in the future, or make additional capital contributions to our PRC subsidiaries.

 

Any loans we make to our PRC subsidiaries cannot exceed statutory limits and must be registered with SAFE, or its local counterparts. Under applicable PRC law, the government authorities must approve a foreign-invested enterprise’s registered capital amount, which represents the total amount of capital contributions made by the stockholders that have registered with the registration authorities. In addition, the authorities must also approve the foreign-invested enterprise’s total investment, which is equal to the company’s registered capital plus the amount of stockholder loans it is permitted to borrow under the law. The ratio of registered capital to total investment cannot be lower than the minimum statutory requirement. If we make loans to our operating subsidiaries in China that does not exceed its current maximum amount of borrowings, we will have to register each loan with SAFE or its local counterpart for the issuance of a registration certificate of foreign debts. In practice, it could be time-consuming to complete such SAFE registration process. Alternatively, or concurrently with the loans, we might make capital contributions to our operating subsidiaries in China and such capital contributions involve uncertainties of their own. Further, SAFE promulgated a new circular (known as Circular 142) in August 2008 with respect to the administration of conversion of foreign exchange capital contributions of a foreign invested enterprise. The circular clarifies that RMB converted from foreign exchange capital contributions can only be used for the activities within the approved business scope of such foreign invested enterprise and cannot be used for domestic equity investments unless otherwise permitted.

 

While we do not foresee this to happen soon, with respect to future loans by us to our PRC subsidiaries or with respect to future capital contributions by us to our PRC subsidiaries, we cannot be assured that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, when the need arises. If circumstances call and if we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we receive from this offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely and materially affect our ability to fund and expand our business.

 

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If we were to be deemed as a “resident enterprise” by PRC tax authorities, we could be subject to tax on our global income at the rate of 25% under the Enterprise Income Tax Law (“2008 EIT Law”) in the PRC and our non-PRC shareholders could be subject to certain PRC taxes.

 

Under the 2008 EIT Law and the implementing rules, both of which became effective January 1, 2008, an enterprise established outside of the PRC with “de facto management bodies” within the PRC may be considered a PRC “resident enterprise” and will be subject to the enterprise income tax at the rate of 25% on its global income as well as PRC enterprise income tax reporting obligations. The implementing rules of the 2008 EIT Law define “de facto management” as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. If we were to be considered a “resident enterprise” by the PRC tax authorities, our global income would be taxable under the 2008 EIT Law at the rate of 25% and, to the extent we were to generate a substantial amount of income outside of PRC in the future, we would be subject to additional taxes. In addition, the dividends we pay to our non-PRC enterprise shareholders and gains derived by such shareholders from the transfer of our shares may also be subject to PRC withholding tax at the rate up to 10%, if such income were regarded as China-sourced income. In addition, the circular mentioned above details that certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese group enterprises will be classified as “resident enterprises” if the following are located or resident in China: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, company seal, and minutes of board meetings and stockholders’ meetings; and half or more of the directors with voting rights or senior management. However, as of the date hereof, no final interpretation on the implementation of the “resident enterprise” designation is available. Moreover, any such designation, when made by PRC tax authorities, will be determined based on the facts and circumstances of individual cases. As a result, we cannot determine the likelihood or consequences of our being designated a “resident enterprise” as of the date hereof.

 

If the PRC tax authorities determine that we are a “resident enterprise,” we may be subject to enterprise income tax at a rate of 25% on our worldwide income and dividends paid by us to our non-PRC stockholders as well as capital gains recognized by them with respect to the sale of our stock may be subject to a PRC withholding tax. This will have an impact on our effective tax rate, a material adverse effect on our net income and results of operations, and may require us to withhold tax on our non-PRC stockholders.

 

Because our principal assets are located outside of the United States and because almost all our directors and officers reside outside of the United States, it may be difficult for you to use the United States Federal securities laws to enforce your rights against us and our officers and most of our directors or to enforce judgments of United States courts against us or most of our directors and officers in the PRC.

 

Almost all our present officers and directors reside outside of the United States. In addition, our operating subsidiaries are in the PRC and substantially all their assets are located outside of the United States. It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the United States Federal securities laws against us and our officers and most of our directors in the courts of either the United States or the PRC and, even if civil judgments are obtained in courts of the United States, to enforce such judgments in PRC courts. It is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement against us or most of our directors and officers of criminal penalties, under the United States Federal securities laws or otherwise. In addition, enforcement of a foreign judgment in the PRC may be limited or otherwise affected by applicable bankruptcy, insolvency, liquidation, arrangement, moratorium or similar laws relating to or affecting creditors’ rights generally and will be subject to a statutory limitation of time within which proceedings may be brought.

 

Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

 

We are required to comply with the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions, and therefore may have a competitive advantage over us. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur in the PRC. If our competitors engage in these practices they may receive preferential treatment, giving our competitors an advantage in securing business, which would put us at a disadvantage. We can make no assurance 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 and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

 

We may have difficulty managing the risk associated with doing business in the Chinese fertilizer and agricultural products sectors.

 

In general, the fertilizer and agricultural products sectors in China is affected by a series of factors, including, but not limited to, natural, economic and social such as climate, market, technology, regulation, and globalization, which makes risk management difficult. Fertilizer and agricultural products operations in China face similar risks as present in other countries, however, in the PRC these can either be mitigated or exacerbated due to governmental intervention through policy promulgation and implementation either in the fertilizer and agricultural products or sectors which provide critical inputs to fertilizer and agricultural products such as energy or outputs such as transportation. While not an exhaustive list, the following factors could significantly affect our ability to do business:

 

food, feed, and energy demand including liquid fuels and crude oil;

 

agricultural, financial, energy and renewable energy and trade policies;

 

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input and output pricing due to market factors and regulatory policies;

 

production and crop progress due to adverse weather conditions, equipment deliveries, and water and irrigation conditions; and

 

infrastructure conditions and policies.

 

Currently, we do not hold and do not intend to purchase insurance policies to protect revenue in the case that the above conditions cause losses of revenue.

 

Risks Related to an Investment in our Stock.

 

We may not pay any cash dividends in the foreseeable future.

 

We paid a cash dividend on January 30, 2015 to stockholders of record as of the close of business on the record date of October 31, 2014. However, we may not anticipate paying cash dividends on our common stock in the foreseeable future and we may not have sufficient funds legally available to pay dividends. Even if the funds are legally available for distribution, we may nevertheless decide not to pay, or may be unable to pay, any dividends. We intend to retain all earnings for our company’s operations.

 

The market price for our common stock may be volatile and subject to wide fluctuations, which may adversely affect the price at which you can sell our shares.

 

The market price for our common stock may be volatile and subject to wide fluctuations in response to factors including the following:

 

actual or anticipated fluctuations in our quarterly operations results;

 

filing of a class action lawsuit against us and certain of our current and former officers;

 

changes in financial estimates by securities research analysts;

 

conditions in foreign or domestic fertilizer and agricultural markets;

 

changes in the economic performance or market valuations of other companies in the same industry;

 

announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments;

 

addition or departure of key personnel;

 

fluctuations of exchange rates between the RMB and the U.S. dollar;

 

intellectual property litigation;

 

general economic or political conditions in the PRC; and

 

Other events or factors, many of which are beyond our control.

 

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In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of companies. These market fluctuations may also materially and adversely affect the market price of our stock, regardless of our actual operating performance.

 

We may require additional financing in the future and our operations could be curtailed if we are unable to obtain required additional financing when needed.

 

We may need to obtain additional equity or debt financing to fund future capital expenditures. Additional equity may result in dilution to the holders of our outstanding shares of capital stock. Additional debt financing may include conditions that would restrict our freedom to operate our business, such as conditions that:

 

limit our ability to pay dividends or require us to seek consent for the payment of dividends;

 

increase our vulnerability to general adverse economic and industry conditions;

 

require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes; and

 

limit our flexibility in planning for, or reacting to, changes in our business and our industry.

 

We cannot guarantee that we will be able to obtain any additional financing on terms that are acceptable to us, or at all.

 

A SEC investor bulletin regarding reverse mergers may drive down the market price of our common stock.

 

On June 9, 2011, the SEC issued an investor bulletin in which it explained the process by which a company becomes a public company by means of a reverse merger, described the potential risks of investing in a reverse merger company and detailed recent enforcement actions taken by it against certain reverse merger companies. The investor bulletin raised specific concerns with respect to foreign companies that access the U.S. markets through the reverse merger process, as we did. The SEC investor bulletin could lead investors in our common stock to sell their shares and may cause other investors not to invest in us, thus driving down the market price of our common stock or making it more difficult for us to raise funds in the future.

 

Stockholders should have no expectation of any dividend in the futures.

 

We paid a cash dividend on January 30, 2015 to stockholders of record as of the close of business on the record date of October 31, 2014. However, the Board of Directors may not intend to declare any dividends on our common stock soon, but instead intends to retain all earnings, if any, for use in the operation and expansion of our business. If we decide to pay dividends, foreign exchange and other regulations in China may restrict our ability to distribute retained earnings from China or convert those payments from Renminbi into foreign currencies.

 

If our common stock were delisted and determined to be a “penny stock,” a broker-dealer may find it more difficult to trade our common stock and an investor may find it more difficult to acquire or dispose of our common stock in the secondary market.

 

If our common stock were removed from listing with the New York Stock Exchange, it may be subject to the so-called “penny stock” rules. The SEC has adopted regulations that define a “penny stock” to be any equity security that has a market price per share of less than $5.00, subject to certain exceptions, such as any securities listed on a national securities exchange. For any transaction involving a “penny stock,” unless exempt, the rules impose additional sales practice requirements on broker-dealers, subject to certain exceptions. If our common stock were delisted and determined to be a “penny stock,” a broker-dealer may find it more difficult to trade our common stock and an investor may find it more difficult to acquire or dispose of our common stock on the secondary market. Investors in penny stocks should be prepared for the possibility that they may lose their whole investment.

 

 32 

 

 

Item 1B. Unresolved Staff Comments

 

Not applicable.

 

Item 2. Properties

 

There is no private ownership of land in China. All land is owned by the PRC government on behalf of all Chinese citizens or collectively owned by farmers. Land use rights can be granted or transferred with or without consideration upon approval by the PRC State Land Administration Bureau or its authorized branches.

 

Our principal executive offices are located at Third floor, Borough A, Block A. No. 181, South Taibai Road, Xi’an, Shaanxi Province, PRC 710065. The office space is approximately 360 square meters (3,875 square feet). It is leased from Xi’an Kingtone Information Technology Co., Ltd. (“Kingtone Information”), for a term of two years from July 1, 2016 at monthly rent of RMB25,723 (approximately $4,000) for 612 square meters (approximately 6,588 square feet) of office space.

 

Through Jinong, we own an approximately 6,495 square meters (69,911 square feet) production facility that manufactures liquid fertilizer products and a 13,803-square meter (148,576 square feet) production facility that produces liquid and highly concentrated (powdered) fertilizers, located in the Yang Ling Agriculture High-Tech Demonstration Zone, on No. 6 Guhua 5 Road, Yangling, Xi’an, Shaanxi province, PRC 712100. The production facilities occupy approximately 30,947 square meters (333,111 square feet) of land, which contains office buildings, warehouses and research laboratories. The production lines have a total annual production capacity of 55,000 metric tons. We own the land use rights for the land Jinong’s manufacturing facilities are situated for a term of 50 years from 2001.

 

Yuxing, Jinong’s wholly-owned subsidiary, has land use rights to over 353,000 square meters (3,799,660 square feet) of land located in Hu County, Xi’an, Shaanxi Province on which we have built 98 sunlight greenhouses and 6 intelligent greenhouses as part of a research and development center currently under construction. Yuxing owns the land use rights to the property for a term of 50 years from 2009.

 

Through Gufeng and Tianjuyuan, we own an additional 17,930 square meters (approximately 192,997 square feet) of manufacturing, office and warehouse space and 47,110 square meters (approximately 507,088 square feet) of auxiliary facilities of the building located on approximately 42,726 square meters (459,898 square feet) of land located in No. 6 Mafang Logistics Park, Pinggu, Beijing. In addition, the eight manufacturing facilities of Gufeng and Tianjuyuan collectively increased our total annual production capacity by another 500,000 metric tons.

 

Tianjuyuan leases approximately 47,333 square meters (509,488 square feet) of land in the Ping Gu District of Beijing. Under the lease dated February 16, 2004 with the village committee of Dong Gao Village and Zhen Nan Zhang Dai Village in the Beijing Ping Gu District, Tianjuyuan leases the land at an annual rent of RMB 35,500 (approximately $5,591). The lease term is from February 1, 2004 to January 31, 2054. While the lease was recognized previously by our PRC counsel as invalid and unenforceable due to its permitted use, we have since obtained the proper land use right certificate from the relevant government entity.

 

 33 

 

 

The details on our properties and manufacturing facilities are described in the table below:

 

Facility Location
and Production
Segment
 
 
 
 
 
Address
 
 
 
 
Area (square meters/ square
feet)
 
 
 
 
Ownership Status and
Term
             
Xi’an – Fertilizers (Jinong)     Yang Ling Agriculture High- tech Demonstration Zone, No. 6 Guhua 5 Road, Yangling, Xi’an, Shaanxi province  

30,947 sq. m.

(333,111 sq. ft.)

  Land use right (Certificate #006012633) expires in January 2051* (1)
             
Xi’an – Fertilizers (Jinong)   Yang Ling Agriculture High- tech Demonstration Zone, Guhua 5 Road, Yangling, Xi’an, Shaanxi province  

6,495 sq. m. No. 6

(69,911 sq. ft.)

  Building Ownership Certificate (Certificate # 20050722) * (1)
             
Xi’an – research and development center (Yuxing)   North Xin’an Village, Weifeng, Hu County, Shaanxi Province  

353,000 sq. m.

(3,799,660 sq. ft.)

  Land use right (Certificate #006001700) expires in August 2059
             
Beijing – fertilizers (Tianjuyuan & Gufeng)   South of Nanzhangdai Village, Donggaocun Town, Ping Gu District, Beijing  

42,726 sq. m.

(459,898 sq. ft.)

  Land use right (Certificate #2003189) expires in August
2053 *(1)
             
Beijing – fertilizers (Tianjuyuan & Gufeng)   South of Nanzhangdai Village, Donggaocun Town, Ping Gu District, Beijing  

17,930 sq. m.

(192,997 sq. ft.)

  Building Ownership Certificate# 33142 * (1)
             
Beijing – fertilizers (Tianjuyuan & Gufeng)   South of Nanzhangdai Village, Donggaocun Town, Ping Gu District, Beijing  

47,333 sq. m.

(509,488 sq. ft.)

  Lease from February 2004 to January 2054

 

* (1) As of June 30, 2017, the encumbrances over our land use right and building ownership are summarized as below:

 

                  Interest      
            Contract     Type of     Rate     Property under
No.   Loan Amount   Lending Institution   Period     Guarantee     (Per Annum)     Mortgage
1   RMB 30 million   Post Bank of China-     Mar 24, 2017-         Mortgage         6.3 %   Tianjuyuan’s land
    ($2,021,500)   Pinggu Branch     Mar 5, 2018                  
2   RMB 10million   Bank of Beijing-     Jun 9, 2017-       Mortgage       5.2 %   Tianjuyuan’s land
    ($1,502,000)   Pinggu Branch     Jun 8, 2018                  

 

Item 3. Legal Proceedings

 

There are no actions, suits, proceedings, inquiries or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries' officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 4. Mine Safety Disclosures.

 

This item is not applicable to us.

 

 34 

 

PART II

 

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

We have two authorized classes of equity securities: (i) common stock, par value $0.001 per share, 38,551,265 shares of which were outstanding as of September 13, 2017, and (ii) preferred stock, par value $0.001 per share, of which no shares were outstanding as of September 13, 2017. Since December 7, 2009, our common stock has been listed and traded on the NYSE under the symbol “CGA”. From March 9, 2009 to December 4, 2009, our common stock was listed and traded on the NYSE MKT, formerly known as NYSE Amex Equities. From August 27, 2007 until March 9, 2009, our common stock was traded on the Over-the-Counter Bulletin Board.

 

As of September 13, 2017, there were approximately 497 shareholders of record of our common stock. This does not reflect the number of persons or entities who held stock in nominee or “street” name through various brokerage firms.

 

Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “CGA”. The following table shows the range of high and low closing sales prices for each quarter within the last two fiscal years as reported on the NYSE:

 

Quarter Ended  High   Low 
09/30/2015  $2.20   $1.51 
12/31/2015  $1.9554   $1.43 
03/31/2016  $1.50   $1.10 
06/30/2016  $1.63   $1.22 
09/30/2016  $1.46   $1.37 
12/31/2016  $1.46   $1.20 
03/31/2017  $1.43   $1.20 
06/30/2017  $1.33   $1.22 

 

Holders

 

As of September 13, 2017, there were approximately 497 shareholders of record of our common stock. This does not reflect the number of persons or entities who held stock in nominee or “street” name through various brokerage firms.

 

Dividends

 

Our board of directors has not declared a dividend on our common stock during the last two fiscal years or the subsequent interim period due to our business expansion and integration in the last two fiscal years and in the subsequent interim period.

 

The payment of dividends, if any, is at the discretion of the Board of Directors and is contingent on the Company’s revenues and earnings, capital requirements, financial conditions and the ability of our operating subsidiaries to obtain approval to send money out of the PRC. The PRC's national currency, the Yuan or RMB, is not a freely convertible currency. Please read “ Our subsidiaries are subject to restrictions on paying dividends and making other payments to our subsidiary, Green New Jersey; as a result, we might therefore, be unable to pay dividends to you. ” under Item 1A “Risk Factors” of this Report.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

On October 27, 2009, our Board of Directors (the “Board”) adopted the Company’s 2009 Equity Incentive Plan (the “Incentive Plan”). On December 11, 2009, our stockholders approved the Incentive Plan. The Incentive Plan gives us the ability to grant stock options, stock appreciation rights (SARs), restricted stock and other stock-based awards to our employees, consultants and to non-employee members of our advisory board or our Board or the board of directors of any of our subsidiaries. On October 3, 2012, October 25, 2013 and May 15, 2015, our Board approved the amendment to increase the shares covered by the Incentive Plan by three million shares. All three amendments were approved by our stockholders on the annual meetings held on December 15, 2012, December 22, 2013, and June 30, 2015, respectively. As a result, a total of 11.26 million shares of Common Stock have been reserved under the Incentive Plan.

 

As of June 30, 2017, there was no outstanding options to purchase shares of common stock granted under the Plan. Options granted in the future under the Incentive Plan are within the discretion of our Board or our compensation committee, as delegated by the Board. The following table summarizes the number of shares of our Common Stock authorized for issuance under our Incentive Plan as of June 30, 2017.

 

 35 

 

 

Equity Compensation Plan Information

 

           Number of securities remaining 
           available for 
   Number of       future 
   securities to       issuance 
   be issued   Weighted-   under 
   upon   average   equity 
   exercise   exercise   compensation 
   of   price of   plans 
   outstanding   outstanding   (excluding 
   options,   options,   securities 
   warrants   warrants   reflected in 
   and rights   and rights   column 
Plan category  (a)   (b)   (a))(c) 
Equity compensation plans approved by security holders      $    1,618,615 
Equity compensation plans not approved by security holders            
Total      $    1,618,615 

 

Performance Graph

 

The following graph compares the cumulative total return on our common stock, the NYSE Composite Index and a peer group index consisting of companies reporting under the S&P 500 Fertilizers & Agricultural Chemicals Sub Industry Index over the period commencing on June 30, 2012 and ending on June 30, 2017.

 

    

The performance graph in this Item 5 is not deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, whether made before or after the date of this Report and irrespective of any general incorporation language in such filings.

 

Recent Sales of Unregistered Securities; Use of Proceeds from Unregistered Securities.

 

There was no unregistered sale of the Company's equity securities during the fiscal year ended June 30, 2017, that were not otherwise disclosed in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.

 

Issuer Purchases of Equity Securities

 

There was no purchase of equity securities by the Company during the fiscal year ended June 30, 2017, that were not otherwise disclosed in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.

 

 36 

 

 

Item 6. Selected Financial Data

 

The following selected consolidated income statement data for the years ended June 30, 2017, 2016 and 2015 and the selected consolidated balance sheet data as of June 30, 2017 and 2016 have been derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. These consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this Report. Our selected consolidated income statement data for the year ended June 30, 2014 and the selected consolidated balance sheet data as of June 30, 2014 and 2013 have been derived from our audited financial statements which are not included in this Report. The historical results presented below are not necessarily indicative of the results that may be expected in any future period.

 

   As of June 30, 
   2017   2016   2015   2014   2013 
                     
Revenue  $285,213,040   $268,785,020   $263,354,288   $233,402,088   $216,897,956 
Cost of goods sold   201,440,955    175,755,689    159,398,386    142,203,315    137,514,102 
Gross profit   83,772,085    93,029,331    103,955,902    91,198,773    79,383,854 
Operating expenses   51,794,314    60,437,412    62,242,978    55,881,113    23,998,392 
Income from operations   31,977,771    32,591,919    41,712,924    35,317,660    55,385,462 
Non-operating income (expense)   (313,737)   (515,759)   (1,350,983)   (1,742,019)   (427,426)
Provision for income taxes   6,511,880    7,371,967    8,916,815    8,060,946    10,183,988 
Net income  $25,152,154   $24,704,193   $31,445,126   $25,514,695   $44,774,048 
                          
Weighted average shares outstanding:                         
Basic   38,093,028    36,703,576    33,983,698    31,403,001    27,775,964 
Diluted   38,093,028    36,703,576    33,983,698    31,403,001    27,775,964 
                          
Earnings (loss) per share:                         
Basic  $0.66   $0.67   $0.93   $0.81   $1.61 
Diluted  $0.66   $0.67   $0.93   $0.81   $1.61 

 

   As of June 30, 
   2017   2016   2015   2014   2013 
                     
Total current assets  $369,429,395   $335,581,234   $304,184,346   $228,212,666   $227,164,937 
Total assets   456,173,481    418,782,527    429,582,618    393,110,210    348,728,342 
Total current liabilities   50,209,967    48,298,195    56,633,144    61,070,418    51,875,050 
Total liabilities   58,645,428    48,298,195    56,633,144    61,070,418    51,875,050 
Total stockholders' equity  $397,528,052   $370,484,332   $372,949,474   $332,039,792   $296,853,292 

 

 37 

 

 

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as the slow-down of the global financial markets and its impact on economic growth in general, the competition in the fertilizer industry and the impact of such competition on pricing, revenues and margins, the weather conditions in the areas where our customers are based, the cost of attracting and retaining highly skilled personnel, the prospects for future acquisitions, and the factors set forth elsewhere in this report, our actual results may differ materially from those anticipated in these forward-looking statements. Considering these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will in fact occur. You should not place undue reliance on the forward-looking statements contained in this report.

 

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by U.S. federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Further, the information about our intentions contained in this report is a statement of our intention as of the date of this report and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices, and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.

 

Unless the context indicates otherwise, as used in the notes to the financial statements of the Company, the following are the references herein of all the subsidiaries of the Company (i) Green Agriculture Holding Corporation (“Green New Jersey”), a wholly-owned subsidiary of Green Nevada incorporated in the State of New Jersey; (ii) Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd. (“Jinong”), a wholly-owned subsidiary of Green New Jersey organized under the laws of the PRC; (iii) Xi’an Hu County Yuxing Agriculture Technology Development Co., Ltd. (“Yuxing”), a Variable Interest Entity in the PRC (“VIE”) controlled by Jinong through contractual agreements; (iv) Shaanxi Lishijie Agrochemical Co., Ltd. (“Lishijie”), a VIE controlled by Jinong through contractual agreements; (v) Songyuan Jinyangguang Sannong Service Co., Ltd. (“Jinyangguang”), a VIE in the PRC controlled by Jinong through contractual agreements; (vi) Shenqiu County Zhenbai Agriculture Co., Ltd. (“Zhenbai Agri”), a VIE controlled by Jinong through contractual agreements; (vii) Weinan City Linwei District Wangtian Agricultural Materials Co., Ltd. (“Wangtian”), a VIE controlled by Jinong through contractual agreements; (viii) Aksu Xindeguo Agricultural Materials Co., Ltd. (“Xindeguo”), a VIE controlled by Jinong through contractual agreements; (ix) Xinjiang Xinyulei Eco-agriculture Science and Technology Co., Ltd (“Xinyulei”), a VIE controlled by Jinong through contractual agreements; (x) Sunwu County Xiangrong Agricultural Materials Co., Ltd. (“Xiangrong”), a VIE controlled by Jinong through contractual agreements; (xi) Anhui Fengnong Seed Co., Ltd. (“Fengnong”), a VIE controlled by Jinong through contractual agreements; (xii) Beijing Gufeng Chemical Products Co., Ltd., a wholly-owned subsidiary of Jinong in the PRC (“Gufeng”); and (xiii) Beijing Tianjuyuan Fertilizer Co., Ltd., Gufeng’s wholly-owned subsidiary in the PRC (“Tianjuyuan”). Yuxing, Lishijie, Jinyangguang, Zhenbai, Wangtian, Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred to as the “the VIE Companies”; Lishijie, Jinyangguang, Zhenbai, Wangtian, Xindeguo, Xinyulei, Xiangrong and Fengnong may also collectively be referred to as “the sales VIEs”.

 

Unless the context otherwise requires, all references to (i) “PRC” and “China” are to the People’s Republic of China; (ii) “U.S. dollar,” “$” and “US$” are to United States dollars; and (iii) “RMB”, “Yuan” and Renminbi are to the currency of the PRC or China.

 

Overview

 

We are engaged in research, development, production and sale of various types of fertilizers and agricultural products in the PRC through our wholly-owned Chinese subsidiaries, Jinong and Gufeng (including Gufeng’s subsidiary Tianjuyuan), and our VIE companies. Our primary business is the manufacturing and sales of fertilizer products. Specifically, the manufactured fertilizers are humic-acid based compound fertilizer produced by Jinong and compound fertilizer, blended fertilizer, organic compound fertilizer, slow-release fertilizer, highly-concentrated water-soluble fertilizer and mixed organic-inorganic compound fertilizer produced by Gufeng. While the sales VIEs don’t manufacture fertilizer products, being the Company’s newly founded sales segment, they are dedicated to procuring various agriculture materials from different suppliers for sale to customers across the nation. In addition, through Yuxing, we develop and produce various agricultural products, such as top-grade fruits, vegetables, flowers and colored seedlings. For financial reporting purposes, our operations are organized into three business segments: fertilizer products (Jinong), fertilizer products (Gufeng) and agricultural products production (Yuxing).

 

The fertilizer business conducted by Jinong and Gufeng generated approximately 74% and 96.9% of our total revenues for the years ended June 30, 2017 and 2016, respectively. The sales VIEs generated 23% and 0% of our revenues for the years ended June 30, 2017 and 2016, respectively. Yuxing serves as a research and development base for our fertilizer products.  

 

 38 

 

 

As of June 30, 2017, we had developed, produced, and sold a total of 717 different fertilizer products in use, of which 134 were developed and produced by Jinong, 332 by Gufeng, and 251 by the eight sales VIEs (namely Lishijie, Jinyangguang, Zhenbai Agri, Wangtian, Xindeguo, Xinyulei, Xiangrong and Fengnong) that we acquired on June 30, 2016 and January 1, 2017. Through the acquisition of these eight sales VIEs, we expanded our product offering and begin to offer our customers a broader range of products. 

 

Below is a table that shows the metric tons of fertilizer sold by Jinong and Gufeng and the revenue per ton for the periods indicated:

 

   Year Ended June 30,   Change 2016 to 2017 
   2017   2016   Amount   % 
   (metric tons)         
Jinong   51,506    55,259    (3,753)   (7.3)%
Gufeng   309,882    358,374    (48,492)   (15.6)%
    361,388    413,633    (52,245)     
                     
    Year Ended June 30,           
    2017    2016           
    (revenue per tons)           
Jinong  $2,070    2,275           
Gufeng   337    376           

 

For the fiscal year ended June 30, 2017, we sold approximately 361,388 metric tons of fertilizer products, as compared to 413,633 metric tons for the fiscal year ended June 30, 2016. For the fiscal year ended June 30, 2017, Jinong sold approximately 51,506 metric tons of fertilizer products, as compared to 55,259 metric tons for the fiscal year ended June 30, 2016. For the fiscal year ended June 30, 2017, Gufeng sold approximately 309,882 metric tons of fertilizer products, as compared to 358,374 metric tons for the fiscal year ended June 30, 2016.   

 

Our sales of fertilizer products to five provinces accounted for approximately 41% of our manufactured fertilizer revenue for year ended June 30, 2017. Specifically, the provinces and their respective percentage contributed to our fertilizer revenues were: Hebei (16%), Heilongjiang (8%), Liaoning (6%), Inner Mongolia (5%) and Shaanxi (5%),

 

As of June 30, 2017, we had a total of 1,917 distributors covering 22 provinces, 4 autonomous regions and 4 central government-controlled municipalities in China. Jinong had 1,112 distributors in China. Jinong’s sales are not dependent on any single distributor or any group of distributors. Jinong’s top five distributors accounted for 2.39% of its fertilizer revenues for the fiscal year ended June 30, 2017. Gufeng had 307 distributors, including some large state-owned enterprises. Gufeng’s top five distributors accounted for 71.81% of its revenues for the fiscal year ended June 30, 2017. In addition to the distributors Jinong and Gufeng has had for its respective products, we also gained access to 528 new distributors through the acquisition of the six VIEs completed in June 2016.

 

Agricultural Products

 

Through Yuxing, we develop, produce and sell high-quality flowers, green vegetables and fruits to local marketplaces and various horticulture and planting companies. We also use certain of Yuxing’s greenhouse facilities to conduct research and development activities for our fertilizer products. The three PRC provinces that accounted for 87.8% of our agricultural products revenue for the fiscal year ended June 30, 2017 were Shaanxi (67.4%), Sichuan (7.6%), Zhejiang (4.7%).

    

Recent Developments

 

New Products

 

During the three months ended June 30, 2017, Jinong launched 2 new fertilizer products. Jinong also added 16 new distributors for the three months ended June 30, 2017. During the three months ended June 30, 2017, Gufeng added 1 new distributor.

 

 39 

 

 

Strategic Acquisitions

 

On June 30, 2016 and January 1, 2017, through Jinong, we entered into (i) Strategic Acquisition Agreements (the “SAA”), and (ii) Agreements for Convertible Notes (the “ACN”), with the shareholders of the companies as identified below (the “Targets”).

 

June 30, 2016:

 

      Cash   Principal of 
      Payment for   Notes for 
      Acquisition   Acquisition 
Company Name  Business Scope  (RMB[1])   (RMB) 
Shaanxi Lishijie Agrochemical Co., Ltd.  Sales of pesticides, agricultural chemicals, chemical fertilizers, agricultural materials; Manufacture and sales of mulches.   10,000,000    3,000,000 
              
Songyuan Jinyangguang Sannong Service Co., Ltd. 

Promotion and consulting services regarding agricultural technologies; Retail sales of chemical fertilizers (including compound fertilizers and organic fertilizers); Wholesale and retail sales of pesticides, agricultural machinery and accessories; Collection of agricultural information; Development of saline-alkali soil; Promotion and development of high-efficiency agriculture and related information technology solutions for agriculture, agricultural and biological engineering high technologies; E-commerce; Cultivation of freshwater fish, poultry, fruits, flowers, vegetables, and seeds; Recycling and complex utilization of straw and stalk; Technology transfer and training; Recycling of agricultural materials ; Ecological industry planning.

   8,000,000    12,000,000 
              
Shenqiu County Zhenbai Agriculture Co., Ltd.  Cultivation of crops; Storage, sales, preliminary processing and logistics distribution of agricultural by-products; Promotion and application of agricultural technologies; Purchase and sales of agricultural materials; Electronic commerce.   3,000,000    12,000,000 
              
Weinan City Linwei District Wangtian Agricultural Materials Co., Ltd.  Promotion and application of new agricultural technologies; Professional prevention of plant diseases and insect pests; Sales of plant protection products, plastic mulches, material, chemical fertilizers, pesticides, agricultural medicines, micronutrient fertilizers, hormones, agricultural machinery and medicines, and gardening tools.   6,000,000    12,000,000 
              
Aksu Xindeguo Agricultural Materials Co., Ltd.  Wholesale and retail sales of pesticides; Sales of chemical fertilizers, packaged seeds, agricultural mulches, micronutrient fertilizers, compound fertilizers, plant growth regulators, agricultural machineries, and water economizers; Consulting services for agricultural technologies; Purchase and sales of agricultural by- products.   10,000,000    12,000,000 
              
Xinjiang Xinyulei Eco-agriculture Science and Technology Co., Ltd 

Sales of chemical fertilizers, packaged seeds, agricultural mulches, micronutrient fertilizers, organic fertilizers, plant growth regulators, agricultural machineries, and water economizers; Purchase and sales of agricultural by-products; Cultivation of fruits and vegetables; Consulting services and training for agricultural technologies; Storage services; Sales of articles of daily use, food and oil; On-line sales of the above-mentioned products.

      
              
Total      37,000,000    51,000,000 

 

(1)The exchange rate between RMB and U.S. dollars on June 30, 2016 is RMB1=US$0.1508, according to the exchange rate published by Bank of China.

 

 40 

 

 

 

January 1, 2017:

 

        Cash     Principal of  
        Payment for     Notes for  
        Acquisition     Acquisition  
Company Name   Business Scope    (RMB[1])      (RMB)  
Sunwu County Xiangrong Agricultural Materials Co., Ltd.   Sales of pesticides, agricultural chemicals, chemical fertilizers, agricultural materials; Manufacture and sales of mulches.     4,000,000       6,000,000  
                     
Anhui Fengnong Seed Co., Ltd.   Wholesale and retail sales of pesticides; Sales of chemical fertilizers, packaged seeds, agricultural mulches, micronutrient fertilizers, compound fertilizers and plant growth regulators     4,000,000       6,000,000  
                     
Total         8,000,000       12,000,000  

 

(1)The exchange rate between RMB and U.S. dollars on January 1, 2017 is RMB1=US$0.144, according to the exchange rate published by Bank of China.

 

Pursuant to the SAA and the ACN, the shareholders of the Targets, while retaining possession of the equity interests and continuing to be the legal owners of such interests, agreed to pledge and entrust all of their equity interests, including the proceeds thereof but excluding any claims or encumbrances, and the operations and management of its business to Jinong, in exchange of an aggregate amount of RMB45,000,000 (approximately $6,731,600) to be paid by Jinong within three days following the execution of the SAA, ACN and the VIE Agreements, and convertible notes with an aggregate face value of RMB 63,000,000 (approximately $9,418,800) with an annual fixed compound interest rate of 3% and term of three years.

 

Jinong acquired the Targets using the VIE arrangement based on our need to further develop our business and comply with the regulatory requirements under the PRC laws.

 

As our business focuses on the production of fertilizer, all our business activities intertwine with those in the agriculture industry in China. Specifically, we deal with compliance, regulation, safety, inspection, and licenses in fertilizer production, farm land use and transfer, growing and distribution of agriculture goods, agriculture basic supplies, seeds, pesticides, and trades of grains. It is an industry in which heavy regulations get implemented and strictly enforced. In addition, E-commerce, which is also under strict government regulations in the PRC, has lately become a sale and distribution channel for agricultural products. Currently, we are developing an online platform to connect the physical distribution network we either own or lease.

 

Compared with the regulatory environment in other jurisdictions, the regulatory environment in the PRC is unique. For example, the “M&A Rules” purports to require that an offshore special purpose vehicle controlled directly or indirectly by PRC companies or individuals and formed for purposes of overseas listing through acquisition of PRC domestic interests held by such PRC companies or individuals obtain the approval of the China Securities Regulatory Commission (the “CSRC”) prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published procedures regarding its approval of overseas listings by special purpose vehicles.

 

For both e-commerce and agriculture industries, PRC regulators limit the investment from foreign entities and set particularly rules for foreign-owned entities to conduct business. We expect these limitations on foreign-owned entities will continue to exist in e-commerce and agriculture industries. The VIE arrangement, however, provides feasibility for obtaining administrative approval process and avoiding industry restrictions that can be imposed on an entity that is a wholly-owned subsidiary of a foreign entity. The VIE agreements reduce uncertainty and the current limitation risk. It is our understanding that the VIE agreements, as well as the control we obtained through VIE arrangement, are valid and enforceable. Such legal structure does not violate the known, published, and current PRC laws. While there are substantial uncertainties regarding the interpretation and application of PRC Laws and future PRC laws and regulations, and there can be no assurance that the PRC authorities will take a view that is not contrary to or otherwise different from our belief and understanding stated above, we believe the substantial difficulty that we experienced previously to conduct business in agriculture as a foreign ownership ca be greatly reduced by the VIE arrangement. Further, as an integral part of the VIE arrangement, the underlying equity pledge agreements provide legal protection for the control we obtained. Pursuant to the equity pledge agreements, we have completed the equity pledge processes with the Targets to ensure the complete control of the interests in the Targets. The shareholders of the Targets are not entitled to transfer any shares to a third party under the exclusive option agreements. If necessary, they may transfer shares to our company without consideration.

 

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While the VIE arrangement provides us with the feasibility to conduct our business in the E-Commerce and agriculture industries, validity and enforceability of VIE arrangement is subject to (i) any applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or similar laws affecting creditors’ rights generally, (ii) possible judicial or administrative actions or any PRC Laws affecting creditors’ rights, (iii) certain equitable, legal or statutory principles affecting the validity and enforceability of contractual rights generally under concepts of public interest, interests of the State, national security, reasonableness, good faith and fair dealing, and applicable statutes of limitation; (iv) any circumstance in connection with formulation, execution or implementation of any legal documents that would be deemed materially mistaken, clearly unconscionable, fraudulent, coercive at the conclusions thereof; and (v) judicial discretion with respect to the availability of indemnifications, remedies or defenses, the calculation of damages, the entitlement to attorney’s fees and other costs, and the waiver of immunity from jurisdiction of any court or from legal process. Validity and enforceability of VIE arrangement is also subject to risk derived from the discretion of any competent PRC legislative, administrative or judicial bodies in exercising their authority in the PRC. As a result, there can no assurance that any of such PRC Laws will not be changed, amended or replaced in the immediate future or in the longer term with or without retrospective effect.

 

Results of Operations

 

Fiscal Year ended June 30, 2017 Compared to the Year ended June 30, 2016.

 

FOR THE YEARS ENDED JUNE 30

 

   2017   2016   Change$   Change% 
Sales                
Jinong   106,642,032    125,716,937    (19,074,905)   -15.2%
Gufeng   104,446,239    134,661,420    (30,215,181)   -22.4%
Yuxing   8,517,231    8,406,663    110,568    1.3%
Sales VIEs   65,607,538    0    65,607,538      
Net sales   285,213,040    268,785,020    16,428,020    6.1%
Cost of goods sold             0      
Jinong   48,056,379    53,515,169    (5,458,790)   -10.2%
Gufeng   89,913,446    116,427,052    (26,513,606)   -22.8%
Yuxing   6,872,878    5,813,468    1,059,410    18.2%
Sales VIEs   56,598,252    0    56,598,252      
Cost of goods sold   201,440,955    175,755,689    25,685,266    14.6%
Gross profit   83,772,085    93,029,331    (9,257,246)   -10.0%
Operating expenses             0      
Selling expenses   32,472,315    48,596,184    (16,123,869)   -33.2%
Selling expenses - amortization of deferred asset             0      
General and administrative expenses   19,321,999    11,841,228    7,480,771    63.2%
Total operating expenses   51,794,314    60,437,412    (8,643,098)   -14.3%
Income from operations   31,977,771    32,591,919    (614,148)   -1.9%
Other income (expense)             0      
Other income (expense)   (82,491)   (5,473)   (77,018)   1407.2%
Interest income   318,404    485,673    (167,269)   -34.4%
Interest expense   (549,650)   (995,959)   446,309    -44.8%
Total other income (expense)   (313,737)   (515,759    202,022    -39.2%
Income before income taxes   31,664,034    32,076,160    (412,126)   -1.3%
Provision for income taxes   6,511,880    7,371,967    (860,087)   -11.7%
Net income   25,152,154    24,704,193    447,961    1.8%
Other comprehensive income (loss)             0      
Foreign currency translation gain (loss)   (568,274)   (31,404,626)   31,972,900    -101.8%
Comprehensive income (loss)   25,720,428    (6,700,433)   32,420,861    -483.9%
              0      
Basic weighted average shares outstanding   38,093,028    36,703,576    1,389,452    3.8%
Basic net earnings per share   0.66    0.67    -0.01    -1.9%
Diluted weighted average shares outstanding   38,093,028    36,703,576    1,389,452    3.8%
Diluted net earnings per share   0.66    0.67    -0.01    -1.9%

 

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Net Sales

 

Total net sales for the fiscal year ended June 30, 2017 were $285,213,040, an increase of $16,428,020 or 6.1%, from $268,785,020 for the fiscal year ended June 30, 2016. This increase was primarily due to an increase in sales VIE’s and Yuxing’s net sales.

 

For the fiscal year ended June 30, 2017, Jinong’s net sales decreased $19,074,905, or 15.2%, to $106,642,032 from $125,716,937 for the fiscal year ended June 30, 2016. This decrease was mainly attributable to the decrease in Jinong’s sales volume during the last fiscal year.

 

For the fiscal year ended June 30, 2017, Gufeng’s net sales were $104,446,239, a decrease of $30,215,181, or 22.4% from $134,661,420 for the fiscal year ended June 30, 2016. The decrease was mainly attributable to the decrease in Gufeng’s sales volume during the last fiscal year.

 

For the fiscal year ended June 30, 2017, Yuxing’s net sales were $8,517,231, an increase of $110,568 or 1.3%, from $8,406,663 for the fiscal year ended June 30, 2016. The increase was mainly attributable to the increase in market demand during the last fiscal year.

 

For the fiscal year ended June 30, 2017, as a brand-new segment, the sales VIEs’ net sales were $65,607,538.

 

Cost of Goods Sold

 

Total cost of goods sold for the fiscal year ended June 30, 2017 was $201,440,955 an increase of $25,685,266, or 14.6%, from $175,755,689 for the fiscal year ended June 30, 2016. This increase was mainly due to increase in cost of goods sold in for Yuxing and the sales VIEs.

 

Cost of goods sold by Jinong for the fiscal year ended June 30, 2017 was $48,056,379, a decrease of $5,458,790, or 10.2%, from $53,515,169 for the fiscal year ended June 30, 2016. The decrease in cost of goods was mainly due to the decrease in Jinong’s sales volume during the last fiscal year.

 

Cost of goods sold by Gufeng for the fiscal year ended June 30, 2017 was $89,913,446, a decrease of $26,513,606, or 22.8%, from $116,427,052 for the fiscal year ended June 30, 2016. This decrease was primarily attributable to a decrease in its sales volume. 

 

For year ended June 30, 2017, cost of goods sold by Yuxing was $6,872,878, an increase of $1,059,410, or 18.2%, from $5,813,468 for the fiscal year ended June 30, 2016. This increase was mainly due to the increase in Yuxing’s net sales and the procurement expense.  

 

Cost of goods sold by the sales VIEs for the fiscal year ended June 30, 2017 was $56,598,252.

 

Gross Profit

 

Total gross profit for the fiscal year ended June 30, 2017 decreased by $9,257,246 to $83,772,085, as compared to $93,029,331 for the fiscal year ended June 30, 2016. Gross profit margin was 29.4% and 34.6% for the fiscal years ended June 30, 2017 and 2016, respectively.

 

Gross profit generated by Jinong decreased by $13,616,115, or 18.9%, to $58,585,653 for the fiscal year ended June 30, 2017 from $72,201,768 for the fiscal year ended June 30, 2016. Gross profit margin from Jinong’s sales was approximately 54.9% and 57.4% for the fiscal years ended June 30, 2017 and 2016, respectively. The decrease in gross profit margin was mainly due to the increase in product costs and the decrease in sales prices. 

 

For the fiscal year ended June 30, 2017, gross profit generated by Gufeng was $14,532,793, a decrease of $3,701,575, or 20.3%, from $18,234,368 for the fiscal year ended June 30, 2016. Gross profit margin from Gufeng’s sales was approximately 13.9% and 13.5% for the fiscal years ended June 30, 2017 and 2016, respectively. The increase in gross profit margin was mainly due to the slightly decrease in product costs and the decrease in sales prices.

 

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For the fiscal year ended June 30, 2017, gross profit generated by Yuxing was $1,644,353, a decrease of $948,842, or 36.6% from $2,593,195 for the fiscal year ended June 30, 2016. The gross profit margin was approximately 19.3% and 30.8% for the fiscal years ended June 30, 2017 and 2016, respectively. The decrease in gross profit percentage was mainly due to the increase in product costs and the decrease in sales prices.

 

Selling Expenses 

 

Our selling expenses consisted primarily of salaries of sales personnel, advertising and promotion expenses, freight-out costs and related compensation. Selling expenses were $17,908,010, or 6.3%, of net sales for the fiscal year ended June 30, 2017, as compared to $13,527,912, or 5.0% of net sales for the fiscal year ended June 30, 2016, an increase of $4,380,098, or 32.4%. The selling expenses of Yuxing were $43,168 or 0.5% of Yuxing’s net sales for the fiscal year ended June 30, 2017, as compared to $200,983 or 2.4% of Yuxing’s net sales for the fiscal year ended June 30, 2016. The selling expenses of Gufeng were $420,433 or 0.4% of Gufeng’s net sales for the fiscal year ended June 30, 2017, as compared to $545,652 or 0.4% of Gufeng’s net sales for the fiscal year ended June 30, 2016.

 

The selling expenses of the sales VIEs were $1,414,469 or 1.9% of the sales VIEs’ net sales for the fiscal year ended June 30, 2017.The selling expenses of Jinong for the fiscal year ended June 30, 2017 were $16,029,940 or 15.0% of Jinong’s net sales, as compared to selling expenses of $12,781,276 or 10.2% of Jinong’s net sales for the fiscal year ended June 30, 2016. The increase in Jinong’s selling expenses was due to Jinong’s further expanded marketing efforts led to the increase in shipping costs and packaging cost.

 

Selling Expenses – amortization of deferred assets

 

Our selling expenses - amortization of our deferred assets were $14,564,305, or 5.1%, of net sales for the fiscal year ended June 30, 2017, as compared to $35,068,273 or 13.0% of net sales for the fiscal year ended June 30, 2016, a decrease of $20,503,968, or 58.5%. This decrease was since some of the deferred assets were fully amortized and therefore no amortization was recorded on the fully amortized assets during the last year.

 

General and Administrative Expenses

 

General and administrative expenses consisted primarily of related salaries, rental expenses, business development, depreciation and travel expenses incurred by our general and administrative departments and legal and professional expenses, including expenses incurred and accrued for certain litigation. General and administrative expenses were $19,321,999, or 6.8% of net sales for the fiscal year ended June 30, 2017, as compared to $11,841,228, or 4.4%, of net sales for the fiscal year ended June 30, 2016, an increase of $7,480,771, or 63.2%.

 

Total Other Expenses

 

Total other expenses consisted of income from subsidies received from the PRC government, interest income, interest expenses and bank charges. Total other expense for the fiscal year ended June 30, 2017 was $313,737, as compared to $515,759 for the fiscal year ended June 30, 2016, a decrease in expense of $202,022, or 39.2%. The decrease in total other expense partly resulted from a decrease in interest expense by $446,309 or 44.8%, to $549,650 during the year ended June 30, 2017 as compared to $995,959 during the year ended June 30, 2016, due to a lesser amount of short term loans outstanding in 2017 as compared to 2016.

 

Income Taxes

 

Jinong is subject to a preferred tax rate of 15% because of its business being classified as a High-Tech project under the PRC Enterprise Income Tax Law (“EIT”) that became effective on January 1, 2008. Jinong incurred income tax expenses of $3,521,978 for the fiscal year ended June 30, 2017, as compared to $3,592,823 for the fiscal year ended June 30, 2016, a decrease of $70,845 or 2%.

 

Gufeng is subject to a tax rate of 25%, and incurred income tax expenses of $2,148,326 for the fiscal year ended June 30, 2017, as compared to $3,779,145 for the fiscal year ended June 30, 2016, a decrease of $1,630,819, or 43.2%.

 

Yuxing has no income tax for the years ended June 30, 2017 and 2016 because of being exempted from paying income tax due to its products falling into the tax exemption list set out in the EIT.

 

Net Income

 

Net income for the fiscal year ended June 30, 2017 was $25,152,154, an increase of $447,961, or 1.8%, compared to $24,704,193 for the fiscal year ended June 30, 2016. The increase was attributable to the decrease in selling expenses and other expense. Net income as a percentage of total net sales was approximately 8.8% and 9.2% for the fiscal year ended June 30, 2017 and 2016, respectively.

 

Discussion of Segment Profitability Measures

 

As of June 30, 2017, we were engaged in the following businesses: the production and sale of fertilizers through Jinong and Gufeng, the production and sale of high-quality agricultural products by Yuxing, and the sales of agriculture materials by the sales VIEs. For financial reporting purpose, our operations were organized into four main business segments based on locations and products: Jinong (fertilizer production), Gufeng (fertilizer production) and Yuxing (agricultural products production) and the sales VIEs. Each of the segments has its own annual budget about development, production and sales.

 

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Each of the four operating segments referenced above has separate and distinct general ledgers. The chief operating decision maker (“CODM”) makes decisions with respect to resources allocation and performance assessment upon receiving financial information, including revenue, gross margin, operating income and net income produced from the various general ledger systems; however, net income by segment is the principal benchmark to measure profit or loss adopted by the CODM.

 

For Jinong, the net income decreased 4.8%, by $952,111 to $18,699,889 for the year ended June 30, 2017, from $19,652,000 for the fiscal year ended June 30, 2016. The difference was due to the decrease in net sales.

 

For Gufeng, the net income decreased by $4,112,337 or 39% to $6,444,979 for the year ended June 30, 2017 from $10,557,316 for year ended June 30, 2016. The difference was due to the decrease in net sales.

 

For Yuxing, the net income decreased 261.5% by $3,847,373 to $-2,375,961 for the year ended June 30, 2017 from $1,471,412 for year ended June 30, 2016. The loss was mainly due to a significant increase for general and administrative expense.

 

For the sales VIEs, the net income was $2,552,459 for year ended June 30, 2017.

 

Liquidity and Capital Resources

 

Our principal sources of liquidity include cash from operations, borrowings from local commercial banks and net proceeds of offerings of our securities consummated in July 2009 and November/December 2009 (collectively the “Public Offerings”).

 

As of June 30, 2017, cash and cash equivalents were $123,050,548, an increase of $20,154,062, or 19.6%, from $102,896,486 as of June 30, 2016.

 

We intend to use some of the remaining net proceeds from the Public Offerings, as well as other working capital if required, to acquire new businesses such as the eight sales VIEs described above, upgrade production lines and complete Yuxing’s new greenhouse facilities for agriculture products located on 88 acres of land in Hu County, 18 kilometers southeast of Xi’an city. Yuxing purchased a set of agricultural products test equipment for the year of 2016. We believe that we have sufficient cash on hand and positive projected cash flow from operations to support our business growth for the next twelve months to the extent we do not have further significant acquisitions or expansions. However, if events or circumstances occur and we do not meet our operating plan as expected, we may be required to seek additional capital and/or to reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives. Notwithstanding the foregoing, we may seek additional financing as necessary for expansion purposes and when we believe market conditions are most advantageous, which may include additional debt and/or equity financings. There can be no assurance that any additional financing will be available on acceptable terms, if at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants. 

 

The following table sets forth a summary of our cash flows for the periods indicated: 

 

   Year Ended June 30, 
   2017   2016 
Net cash provided by operating activities  $16,302,049   $34,358,655 
Net cash provided by (used in) investing activities   (402,067)   689,545 
Net cash provided by (used in) financing activities   3,393,065    (17,102,600)
Effect of exchange rate change on cash and cash equivalents   861,015    (8,031,678)
Net increase (decrease) in cash and cash equivalents   20,154,062    9,913,922 
Cash and cash equivalents, beginning balance   102,896,486    92,982,564 
Cash and cash equivalents, ending balance  $123,050,548   $102,896,486 

 

Operating Activities

 

Net cash provided by operating activities was $16,302,047 for the fiscal year ended June 30, 2017, a decrease of $18,056,606, or 59.4% from cash provided by operating activities of $34,358,665 for the fiscal year ended June 30, 2016. The decrease was mainly attributable to the decrease in depreciation and amortization during the year ended June 30, 2017 as compared to the same period in 2016.

 

Investing Activities

 

Net cash used in investing activities for the fiscal year ended June 30, 2017 was $402,067, a decrease of $1,091,612, or 158.3% from cash provided by investing activities of $689,454 for the fiscal year ended June 30, 2016. This decrease was due to cash acquired with acquisitions, cash paid for construction in process and purchase of PP&E in 2017.

 

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Financing Activities

 

Net cash provided by financing activities for the fiscal year ended June 30, 2017 was $3,393,065, an increase of $20,495,665 from cash used in financing activities of $17,102,600 for the fiscal year ended June 30, 2016.   During the year ended June 30, 2017, we received $5,948,021 from the proceeds from loans compared to $3,110,000 of proceeds from loans for the fiscal year ended June 30, 2016.

 

As of June 30, our loans payables were as follows:

 

   2017   2016 
Short term loans payable:  $7,678,111   $4,665,500 
Total  $7,678,111   $4,665,500 

 

Accounts Receivable

 

We had accounts receivable of $141,665,179 as of June 30, 2017, as compared to $117,055,376 as of June 30, 2016, an increase of $24,609,803 or 21%. As of June 30, 2017, Gufeng had accounts receivable of $59,002,630, an increase of $11,656,568, compared to $47,346,062 as of June 30, 2016. As of June 30, 2017, VIEs had accounts receivable of $30,687,859, an increase of $23,637,658 or 335.3%, compared to $7,050,201 as of June 30, 2016. 

 

Allowance for doubtful accounts in account receivable for the fiscal year ended June 30, 2017 was $9,457,423, an increase of $9,060,300 or 2281.5% from $397,123 as of June 30, 2016. And the allowance for doubtful accounts as a percentage of accounts receivable was 6.3% as of June 30, 2017 and 0.34% as of June 30, 2016.

 

Deferred assets

 

We had deferred assets of $864,070 as of June 30, 2017, as compared to $13,431,621 as of June 30, 2016. During the twelve months, we assisted the distributors in certain marketing efforts and developing standard stores to expand our competitive advantage and market shares. Based on the distributor agreements, the amount owed by the distributors in certain marketing efforts and store development will be expensed over three years if the distributors are actively selling our products. If a distributor defaults, breaches, or terminates the agreement with us earlier than the contractual terms, the unamortized portion of the amount owed by the distributor is payable to us immediately. The Company’s Chairman and CEO, Mr. Li, provided credit backup guarantee toward potential losses to the Company of any amounts due from distributors in this matter.

 

Inventories

 

We had inventories of $78,013,891 as of June 30, 2017, as compared to $87,436,315 as of June 30, 2016, a decrease of $9,422,424, or 10.8%. The principal reason for the decrease is attributed to the decrease of Gufeng’s inventory. As of June 30, 2017, Gufeng’s inventory was $54,444,465, compared to $60,183,741 as of June 30, 2016. 

 

Advances to Suppliers

 

We had advances to suppliers of $24,063,062 as of June 30, 2017 as compared to $24,588,070 as of June 30, 2016, representing a decrease of $565,008 or 2.3%. Our inventory level may fluctuate from time to time, depending how fast the raw material is consumed and replenished during the production process, and how fast the finished goods are sold. The replenishment of raw material relies on the management’s estimate of numerous factors, including but not limited to, the raw materials future price, and spot price along with their volatility, as well as the seasonal demand and future price of finished fertilizer products. Such estimate may not be accurate, and the purchase decision of raw materials based on the estimate can cause excessive inventories in slow sales and insufficient inventories in peak times.

 

Accounts Payable

 

We had accounts payable of $19,643,897 as of June 30, 2017 as compared to $5,246,153 as of June 30, 2016, representing an increase of $14,397,744, or 274.4%. The increase was primarily due to the increase of accounts payable for VIEs. It has account payable of $18,355,921 as of June 30, 2017 as compared to $3,840,052 as of last year, representing an increase of $14,515,869, or 378%.

 

Unearned Revenue (Customer Deposit)

 

We had unearned revenue of $7,046,570 as of June 30, 2017 as compared to $6,302,452 as of June 30, 2016, representing an increase of $744,118, or 11,8%. The increase was mainly attributable to Gufeng’s $3,478,713 unearned revenue as of June 30, 2017, compared to $2,123,669 unearned revenue during the same period last year, caused by the advancement of deposits made by client. We expect to deliver products to our customers during the next three months at which time we will recognize the revenue.

 

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Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See Note 2 to our consolidated financial statements, “Basis of Presentation and Summary of Significant Accounting Policies.” We believe that the following paragraphs reflect the more critical accounting policies that currently affect our financial condition and results of operations: 

 

Use of estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and the amount of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those estimates.

 

Revenue recognition

 

Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, we have no other significant obligations and collectability is reasonably assured. Payments received before all the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

 

Our revenue consists of invoiced value of goods, net of a value-added tax (VAT). No product return or sales discount allowance is made as products delivered and accepted by customers are normally not returnable and sales discounts are normally not granted after products are delivered.

 

Cash and cash equivalents

 

For statement of cash flows purposes, we consider all cash on hand and in banks, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents.

 

Accounts receivable

 

Our policy is to maintain reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Any accounts receivable of Jinong and Gufeng that are outstanding for more than 180 days will be accounted as allowance for bad debts, and any accounts receivable of Yuxing that are outstanding for more than 90 days will be accounted as allowance for bad debts.

 

Assets held for sale

 

Assets held for sale represent certain equipment from our Jintai facility that has been relocated. The carrying amount of the assets held for sale equals the fair value of the assets less disposal costs. These assets were sold prior to June 30, 2017.

 

Deferred assets

 

Deferred assets represent amounts the Company advanced to the distributors in their marketing and stores development to expand our competitive advantage and market shares. Based on the distributor agreements, the amount owed by the distributors in certain marketing efforts and store development will be expensed over three years if the distributors are actively selling our products. If a distributor defaults, breaches, or terminates the agreement with us earlier than the realization of the contractual terms, the unamortized portion of the amount owed by the distributor is to be refunded to us immediately. The Company’s Chairman and CEO, Mr. Li, provided credit backup guarantee toward potential losses to the Company of any amounts due from distributors in this matter.

 

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Segment reporting

 

FASB ASC 280 requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other way management disaggregates a company.

 

As of June 30, 2017, we were organized into eleven main business units: Jinong (fertilizer production), Gufeng (fertilizer production), Yuxing (agricultural products production), Lishijie (agriculture sales), Jinyangguang (agriculture sales), Zhenbai Agri (agriculture sales), Wangtian (agriculture sales), Xindeguo (agriculture sales), Xinyulei (agriculture sales), Fengnong (agriculture sales) and Xiangrong (agriculture sales). For financial reporting purpose, our operations were organized into four main business segments based on locations and products: Jinong (fertilizer production), Gufeng (fertilizer production) and Yuxing (agricultural products production) and the sales VIEs. Each of the segments has its own annual budget regarding development, production and sales.

 

Item 7a. Quantitative and Qualitative Disclosures About Market Risks

 

Disclosures About Market Risk

 

We may be exposed to changes in financial market conditions in the normal course of business. Market risk generally represents the risk that losses may occur because of movements in interest rates and equity prices. We currently do not use financial instruments in the normal course of business that are subject to changes in financial market conditions.

 

Currency Fluctuations and Foreign Currency Risk

 

Substantially all our revenues and expenses are denominated in RMB. However, we use the U.S. dollar for financial reporting purposes. Conversion of RMB into foreign currencies is regulated by the People’s Bank of China through a unified floating exchange rate system. Although the PRC government has stated its intention to support the value of RMB, there can be no assurance that such exchange rate will not again become volatile or that RMB will not devalue significantly against the U.S. dollar. Exchange rate fluctuations may adversely affect the value, in U.S. dollar terms, of our net assets and income derived from our operations in the PRC.

 

Our reporting currency is the U.S. dollar. Except for the U.S. holding companies, all our consolidated revenues, consolidated costs and expenses, and our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. dollars and RMB. If the RMB depreciates against the U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and shareholders’ equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of shareholders’ equity. As of June 30, 2017, our accumulated other comprehensive loss was $5.2 million. We have not entered into any hedging transactions to reduce our exposure to foreign exchange risk. The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. Between July 1, 2016 and June 30, 2017, China’s currency dropped by a cumulative 1.8% against the U.S. dollar on hopes of boosting the domestic economy, making Chinese exports cheaper and imports into China more expensive by that amount. The effect on trade can be substantial. Moreover, it is possible that in the future, the PRC authorities may lift restrictions on fluctuations in the Renminbi exchange rate and lessen intervention in the foreign exchange market.

 

Interest Rate Risk

 

We deposit surplus funds with Chinese banks earning daily interest. We do not invest in any instruments for trading purposes. All our outstanding debt instruments carry fixed rates of interests. The amount of short-term debt outstanding as of June 30, 2017 and June 30, 2016 was $7.7 million and $4.7 million, respectively. We are exposed to interest rate risk primarily with respect to our short-term bank loans. Although the interest rates, which are based on the banks’ prime rates with respect to our short-term loans are fixed for the terms of the loans, the terms are typically three to twelve months for short-term bank loans and interest rates are subject to change upon renewal. There were no material changes in interest rates for short-term bank loans renewed during the fiscal year ended June 30, 2017. The original loan term on average is one year, and the remaining average life of the short term-loans is nine months.

 

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Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions to reduce our exposure to interest rate risk.

 

Credit Risk

 

We have not experienced significant credit risk, as most of our customers are long-term customers with superior payment records. Our receivables are monitored regularly by our credit managers.

 

Inflation Risk

 

Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.

 

Item 8. Financial Statements and Supplementary Data

 

Balance sheets, as of June 30, 2017 and 2016, and statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended June 30, 2017 and 2016, together with the related notes and the reports of independent registered public accounting firms, are set forth on the “F” pages of this report.

 

Item 9. Changes in and Disagreements with Accountants On Accounting and Financial Disclosure

 

Not applicable.

 

Item 9a. Controls and Procedures

 

Disclosure Controls and Procedures

 

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 ("Exchange Act"), at the conclusion of the fiscal year ended June 30, 2016 we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this Report, our disclosure controls and procedures were effective and adequately designed to ensure that the information required to be disclosed by us in the reports we submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms and that such information was accumulated and communicated to our Chief Executive Officer and Chief Financial Officer, in a manner that allowed for timely decisions regarding required disclosure.

 

Management Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. 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. generally accepted accounting principles, 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.

 

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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. In addition, the design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Therefore, any current evaluation of controls cannot and should not be projected to future periods.

 

Management assessed our internal control over financial reporting as of the year ended June 30, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework (COSO) in the report entitled "Internal Control-Integrated Framework." The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring.

 

Based on management’s assessment using the COSO criteria, management has concluded that the Company’s internal control over financial reporting was effective as of June 30, 2017 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

 

We are not required to have our internal control over financial reporting as of June 30, 2017 audited by our auditors because we are a smaller reporting company.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting that occurred during our last fiscal quarter ended June 30, 2017 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

Item 9b. Other Information

 

There is no other information required to be disclosed under this item which was not previously disclosed.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

Set forth below are the names of our directors, executive officers and significant employees of our company as of the date of this Form 10-K, their ages, all positions and offices that they hold with us, the periods during which they have served as such, and their business experience during at least the last five years.

 

          Term as 
          Director of 
Name  Position with the Company  Age   Company 
            
Tao Li  Chairman of the Board of Directors, Chief Executive Officer   51    2007 - Present 
              
Zhuoyu “Richard” Li  President   25    2016 - Present 
              
Ken Ren  Chief Financial Officer   40    2010 - Present 
              
Ale Fan  Director   36    2015 - Present 
              
Daqing Zhu  Director   52    2017 - Present 
   Chairman of the Audit Committee          
   Compensation Committee Member          
   Nominating Committee Member          
              
Lianfu Liu  Director   78    2007 - Present 
   Chairman of the Nominating Committee          
   Audit Committee Member          
   Compensation Committee Member          
              
Jinjun Lu  Director   44    2017 - Present 
   Chairman of the Compensation Committee          
   Audit Committee Member          
   Nominating Committee Member          

 

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Name   Position with the Company and Principal Occupations
     
Tao Li   Chairman of the Board of Directors and Chief Executive Officer since December 26, 2007. Mr. Li has served as the President and CEO of Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd., our wholly-owned subsidiary (“Jinong”), since 2000. Mr. Li established Xi’an TechTeam Industry (Group) Co., Ltd. in 1996 and established Jinong in 2000. Mr. Li is also currently the Chairman of Kingtone Wirelessinfo Solution Holding Ltd, a NASDAQ listed company. He graduated from Northwest Polytechnic University in Xi’an, China with a Master’s degree in heat and metal treatment. Mr. Li is the current Vice Chairman of the China Green Food Association. Previously, he has held positions at the World Bank Loan Office of China Education Commission, National Key Laboratory for Low Temperature Technology, and Northwest Polytechnic University. Mr. Li is active in Shaanxi Province business and trade organizations including as a member of the CPPCC Shaanxi Committee, the Shaanxi Provincial Decision-Making Consultation Committee, Vice Chairman of the Shaanxi Provincial Federation of Industry and Commerce, Vice President of the Shaanxi Overseas Friendship Association, Vice Chairman of the Shaanxi Provincial Credit Association, Vice Chairman of the Shaanxi Provincial Youth Entrepreneurs Association, Vice Chairman of the Xi’an Municipal Federation of Industry and Commerce and Vice Chairman of the Xi’an Municipal Youth Entrepreneurs Association. Mr. Li, as the founder of our company, has been critical to our success and his experience brings to the board of directors an irreplaceable perspective with respect to our business and the industry in which we compete. These attributes make Mr. Li an ideal candidate to serve as our Chairman.
     
Zhuoyu “Richard” Li   Mr. Li has served as the President of our company since May 11, 2016. Mr. Li has four years of experience in the agricultural industry. Prior to joining the Company, Mr. Li has served as Chief Operating Officer at the Company’s affiliate, 900LH.com Food Co., Ltd. (“900LH.com”) since January 2016. From January 2015 to January 2016, Mr. Li served as a senior manager at the international department of 900LH.com, where he helped to develop the international market. Richard served as a senior manager at the customer center of 900LH.com from March 2013 through January 2015. He studied business at the University of Auckland in 2012. We believe Mr. Li is a good fit for the position given his background in the agricultural industry, and his practical experience from 900LH.com is a valuable addition to the Company.
     
Ken Ren   Mr. Ren has served as the Chief Financial Officer of our company since 2010. Prior to joining our company, he served as a capital market analyst for the Federal Home Loan Bank of Des Moines since April 2009, where he analyzed, priced, and assisted in trading investments and issuing debt, conducted hedges and performed relative value analysis in the bank’s capital market group. From earlier, Mr. Ren served as a senior investment associate at an asset management subsidiary of Wells Fargo, which provides money management services to institutional clients. Mr. Ren received a Ph.D. degree in Operations Research in 2006, and a M.S. degree in Computational Finance in 2004, both from Purdue University. We believe Mr. Ren is a good fit to serve as our Chief Financial Officer, given his credentials mentioned above.

 

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Ale Fan     Director. Ms. Fan had served as a Director of our company since 2015 and a Director of Finance at Jinong since January 2013. Ms. Fan had served as the deputy Director of Finance at Jinong since January 2013. She has also served as comptroller of the financial department at Jinong from September 2007 to December 2012. Prior to that, she worked as an accountant at Jinong from August 2003. Ms. Fan holds a degree in Accounting from Baoji University of Arts and Sciences. We believe that Ms. Fan’s knowledge of the Company’s history and day-to-day operations and her experience in accounting and finance in the PRC qualify her to serve a director of our company.
     
Lianfu Liu               Director, Chairman of Nominating Committee, Audit Committee Member and Compensation Committee Member. Mr. Liu has served as a director of our company since December 26, 2007. Mr. Liu has served as the Chairman of the China Green Food Association since 1998. From 1992 to 1998, Mr. Liu was a Director and Senior Engineer for the China Green Food Development Center. Prior to that, Mr. Liu was a Vice Director of the PRC Ministry of Agriculture. Mr. Liu graduated from Beijing Forestry University and studied soil conservation. We believe Mr. Liu’s experience in the agricultural industry in the PRC allows him to bring a unique perspective as an independent director of our company.
     
Daqing Zhu     Director, Chairman of the Audit Committee, Compensation Committee Member and Nominating Committee Member. Mr. Zhu has served as the president of Shaanxi Aisuo Consulting Co. Ltd., a company specializing in providing professional management and finance services, since 2014. In 2004, Mr. Zhu founded Shaanxi Xintianyou Auto Dealership Co. Ltd, a dealership of auto sales and services for various brands, including BYD Auto, and had served as its CEO and Chairman of the Board until 2014. In addition to founding and developing commercial businesses, Mr. Zhu had also worked in the public sector since the 1990s. His public administration experience includes working at various agencies and offices of the Shaanxi provincial government from 1990 to 2004. Earlier in his career, in the 1980’s, Mr. Zhu was a corporate banking officer at Industrial and Commercial Bank of China in Xi’an. As the corporate leader with responsibility for all aspects of business management, Mr. Zhu has executive level experience in financial management, internal control, marketing to individuals and small businesses, sales, customer care, operations, product management, electronic commerce, financial services, executive compensation, strategic planning, technology, and mergers and acquisitions.
     
Jinjun Lu     Director, Chairman of Compensation Committee, Audit Committee Member and Nominating Committee Member. Mr. Lu, aged 44, is the co-founder of Shaanxi Jinfenghui Technology Co. Ltd (“Jinfenghui”) since he started in 2014. Drawing on years of entrepreneurial experience, Mr. Lu plans to grow Jinfenghui into one of the largest mobile terminal device manufacturers in northwestern China. At Jinfenghui, Mr. Lu oversees corporate growth plans, budgets capital expenditures, seeks investment funds, and designs marketing strategies for Jinfenghui products to penetrate target markets. Before founding Jinfenghui, in 1998 he founded Xinjiang Yongan Engineering Co. Ltd in Xinjiang Uyghur Autonomous Region, a provincial-level autonomous region of China in the northwest of the country. Earlier in the 1990s, Mr. Lu began his entrepreneurship career as a distributor for Lining-branded garment products in Henan Province, which he grew into the largest wholesale venture for Lining in the region. As a founder of several enterprises and a seasoned entrepreneur, Mr. Lu not only has executive experience in strategic management, marketing and sales, and technology, but also brings his experience as a founder from different industries.

 

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All directors of our company hold office until the next annual meeting of our shareholders or until their successors have been elected and qualified. The executive officers of our company are appointed by our board of directors and hold office until their death, resignation or removal from office.

 

Family Relationships

 

Except for Mr. Tao Li and Mr. Zhuoyu “Richard” Li, who are father and son, there is no family relationship among any of our officers or directors.

 

Involvement in Certain Legal Proceedings

 

To the best of our knowledge, none of our directors or executive officers was involved in any legal proceedings during the last 10 years as described in Item 401(f) of Regulation S-K.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who own more than 10% of a registered class of our equity securities (“Reporting Persons”), to file reports of ownership and changes in ownership with the SEC. The Reporting Persons are also required to furnish us with copies of all such reports. Based solely on our review of the reports received by us, we believe that, during the year ended June 30, 2017, our directors, executive officers and holders of ten percent (10%) or more of our common stock complied with Section 16(a) filing requirements applicable to them.

 

Code of Ethics

 

We have adopted a Code of Ethics that applies to all our employees and officers, and the members of our Board of Directors, which was amended and restated in 2010. The Amended and Restated Code of Ethics (the “Code of Ethics”) is available on our website at www.cgagri.com. Printed copies are available upon request without charge. Any amendment to or waiver of the Code of Ethics will be disclosed on our website promptly following the date of such amendment or waiver.

 

Corporate Governance Guidelines

 

We have adopted a Code of Ethics that applies to all our employees and officers, and the members of the Board, which was amended and restated in 2010. The Amended and Restated Code of Ethics (the “Code of Ethics”) is available on our website at www.cgagri.com. Printed copies are available upon request without charge. Any amendment to or waiver of the Code of Ethics will be disclosed on our website promptly following the date of such amendment or waiver.

 

Audit Committee

 

The Audit Committee is responsible for: (i) overseeing the corporate accounting and financial reporting practices; (ii) recommending the selection of our registered public accounting firm; (iii) reviewing the extent of non-audit services to be performed by the auditors; and (iv) reviewing the disclosures made in our periodic financial reports. The members of the Audit Committee are Messrs. Daqing Zhu, Lianfu Liu, and Jinjun Lu, each of whom is an independent director within the meaning of the rules of the NYSE and Rule 10A-3 promulgated by the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In addition, the Board has determined that Ms. Zhu qualifies as an Audit Committee Financial Expert under applicable SEC Rules. The Chairman of the Audit Committee is Mr. Zhu. The Audit Committee held four meetings during the fiscal year ended June 30, 2017. The Audit Committee carries out its responsibilities in accordance with the terms of its Audit Committee Charter, a copy of which was attached as Annex A to our Definitive Proxy Statement on Schedule 14A for our 2010 Annual Meeting, filed with the SEC on October 28, 2010, and is also available on our website at www.cgagri.com.

 

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Compensation Committee

 

The Compensation Committee determines matters pertaining to the compensation of executive officers and other significant employees, and administers our stock and incentive plans. The members of the Compensation Committee are Messrs. Jinjun Lu, Lianfu Liu and Daqing Zhu. The Chairman of the Compensation Committee is Ms. Lu. The Compensation Committee held one meeting during the fiscal year ended June 30, 2017. Each of the members of the Compensation Committee is a “non-employee director” within the meaning of Rule 16b-3 under the Exchange Act, and an “outside director” within the meaning of Section 162(m) under the Internal Revenue Code. The Compensation Committee carries out its responsibilities pursuant to a written charter, a copy of which was attached as Annex C to our Definitive Proxy Statement on Schedule 14A for our 2009 annual meeting, filed with the SEC on October 28, 2009, and is also available on our website at www.cgagri.com.

 

Nominating Committee

 

The Nominating Committee identifies and nominates candidates to serve on our Board. The members of the Nominating Committee are Messrs. Jinjun Lu, Lianfu Liu and Daqing Zhu. The Chairman of the Nominating Committee is Mr. Lu. The Nominating Committee held one meeting during the fiscal year ended June 30, 2017. A copy of our Nominating Committee Charter was attached as Annex B to our Definitive Proxy Statement on Schedule 14A for our 2010 annual meeting, filed with the SEC on October 28, 2010, and is also available on our website at www.cgagri.com. See “Director Nominations” below for the procedures for the nomination of directors.

 

Board Leadership Structure and Board’s Role in the Oversight of Risk Management

 

Our Board believes it is important to select our Chairman and our Chief Executive Officer in the manner it considers in the best interests of our company at any given point in time. Due to Mr. Li’s substantial experience in the industry, our Board has determined that the most effective leadership structure for our company is for Mr. Li to serve as both our Chairman and Chief Executive Officer. Our Board benefits from the Chairman having direct knowledge of the operations of, and opportunities and challenges facing, our business on a regular and company-wide basis. Mr. Li’s combined role as Chairman and Chief Executive Officer fosters greater communication between the Board and management and provides unified leadership for carrying out our company’s strategic initiatives and business plans.

 

To counterbalance the potential for ineffective Board oversight, we have adopted a governance structure that includes: (i) a designated lead independent director; (ii) annual elections of directors by most votes cast at the annual meeting of shareholders; (iii) committees composed entirely of independent directors; and (iv) established corporate governance and ethics guidelines. Our Board appointed Mr. Daqing Zhu to serve as the Board’s lead independent director. The lead independent director acts as an intermediary between the Board and senior management. Among other things, the lead independent director is responsible for facilitating communication among directors and between the Board and the Chief Executive Officer, working with the Chief Executive Officer to provide an appropriate information flow to the Board, and chairing executive sessions of the independent directors. Executive sessions of our independent directors occur following regularly scheduled quarterly audit committee meetings, and at such other times as the independent directors deem appropriate. However, the Board recognizes that circumstances may change over time and as they do, changes to the leadership structure may be warranted.

 

The Board has an active role, directly and through its committees, in the oversight of our risk management efforts. The Board carries out this oversight role through several levels of review. The Board regularly reviews and discusses with members of management information regarding the management of risks inherent in the operations of our businesses and the implementation of our strategic plan, including our risk mitigation efforts.

 

In accordance with corporate governance standards of the NYSE, the Audit Committee charter assigns to that committee the responsibility to review our policies and practices with respect to risk assessment and risk management, including major financial risk exposures, and the steps management has taken to monitor and control such exposures. Additionally, each of the Board’s committees also oversees the management of our risks that are under each committee’s areas of responsibility. For example, the Audit Committee oversees management of accounting, auditing, external reporting, internal controls, and cash investment risks. The Nominating Committee oversees our compliance policies, Code of Conduct, conflicts of interests, director independence and corporate governance policies. The Compensation Committee oversees risks arising from compensation practices and policies. In this manner, the Board can coordinate its risk oversight.

 

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Director Nominations

 

The Nominating Committee recommends director candidates and will consider for such recommendation director candidates proposed by management, other directors and stockholders. All director candidates will be evaluated based on the criteria identified below, regardless of the identity of the individual or the entity or person who proposed the director candidate.

 

The selection of director nominees includes consideration of factors deemed appropriate by the Corporate Governance and Nominating Committee and the Board. We may engage a firm to assist in identifying, evaluating, and conducting due diligence on potential board nominees. Factors will include integrity, achievements, judgment, intelligence, personal character, any prior contact or relationship between a candidate and a current or former director or officer of our company, the interplay of the candidate’s relevant experience with the experience of other Board members, the willingness of the candidate to devote adequate time to Board duties and the likelihood that he or she will be willing and able to serve on the Board for a sustained period. The Corporate Governance and Nominating Committee will consider the candidate’s independence, as defined by the rules of the SEC and the NYSE. Relating to the selection, due consideration will be given to the Board’s overall balance of diversity of perspectives, backgrounds, and experiences. Experience, knowledge, and skills to be represented on the Board include, among other considerations, financial expertise (including an “audit committee financial expert” within the meaning of the SEC’s rules), financing experience, related industry experience, strategic planning, business development, and community leadership.

 

Item 11. Executive Compensation

 

Compensation Discussion and Analysis

 

Overview

 

This section contains a discussion of the material elements of compensation awarded to, earned by or paid to our principal executive officer, our principal financial officer, and our other executive officers whose total compensation exceeded $100,000 during the fiscal year ended June 30, 2017. Accordingly, our “Named Executive Officers” are i) Mr. Tao Li, our Chairman, and Chief Executive Officer, ii) Mr. Zhuoyu “Richard” Li, our President, and iii) Mr. Ken Ren, our Chief Financial Officer.

 

Our Board established the Compensation Committee to assist with the analysis and determination of the compensation structure for our executive officers. Our Compensation Committee, consisting of three independent directors, reviews and approves, or in some cases recommends for the approval of the full Board, the annual compensation for our executive officers. Typically, management recommends to the Compensation Committee compensation package proposals based on prevailing compensation standards in our industry, which in turn reviews and approves such proposals. Our Compensation Committee may consult with the executive officers to form consensus on such packages. Our executive officers may discuss any disagreements and needed amendment to such proposals with our Compensation Committee before such proposals are finalized and approved by the Compensation Committee.

 

Compensation Objectives

 

Our compensation objectives are as follows:

 

We strive to provide competitive executive compensation programs that will help to attract highly qualified individual’s necessary for our continued growth. Once an executive is hired, our goal is to retain and motivate them to achieve higher levels of performance and be appropriately rewarded for that effort.

 

Compensation and benefits are competitive with the local labor markets in which we compete, and focus also will be given to companies that operate in the agriculture, feed, and fertilizer industries. Peer companies will typically have annual revenues that are one-half to double that of us, for the purposes of compensation benchmarking.

 

We provide an executive compensation package consisting of base salary, incentives (short term & long term), and benefits that are consistent with similar positions at our recognized competitors. Each component addresses individual and company performance with a focus on long-term profitable growth and shareholder return, competitive conditions, and our overall financial performance.

 

All compensation programs are administered without regard to race, religion, national origin, color, sex, age, or disability, and adhere to all local laws and regulations.

 

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Elements of Compensation

 

Base Salary

 

Our approach is to pay our executives a base salary that is competitive with those of other executive officers in similar positions and with similar responsibilities in our peer group of competitive companies. We believe that a competitive base salary is a necessary element of any compensation program that is designed to attract and retain talented and experienced executives. We also believe that attractive base salaries can motivate and reward executives for their overall performance.

 

Stock-Based Awards under the Equity Incentive Plan

 

In addition to base salary, the other key component of executive compensation we provide to our Named Executive Officers is equity-based compensation. In October 2009, our Board adopted our 2009 Equity Incentive Plan (the “Plan”), which was approved by our shareholders at our annual shareholders meeting in December 2009 and amended in December 2012, December 2013 and June 2015. The Plan gives us the ability to grant stock options, stock appreciation rights (SARs), restricted stock and other stock-based awards to employees or consultants of our company or of any subsidiary of our company and to non-employee members of our advisory board or our Board or the board of directors of any of our subsidiaries. The Board and the Compensation Committee believe the ability to grant restricted stock, stock options and make other stock-based awards under the Plan is an important factor in attracting, stimulating and retaining qualified and distinguished personnel with proven ability and vision to serve as employees, officers, consultants or members of the Board or advisory board of our company and our subsidiaries, and to chart our course towards continued growth and financial success.

 

During the fiscal year ended June 30, 2017, effective December 30, 2016, the Compensation Committee granted (i) 400,000 shares of restricted stock to Mr. Tao Li, the Company’s CEO; (ii) 200,000 shares to Mr. Zhuoyu “Richard” Li, the Company’s President, (iii) 200,000 shares to Mr. Ken Ren, the Company’s Chief Financial Officer. Also, the Compensation Committee granted 30,000 shares to Ms. Yiru Shi, 20,000 shares to Mr. Jianlei Shen and 20,000 shares to Mr. Lianfu Liu, each of whom is an independent director of the Company. The Stock Grants were vested immediately for the CEO, CFO and the three independent directors.

 

On June 29, 2016, the Company granted (i) 400,000 shares of restricted stock to Mr. Tao Li, the Company’s CEO; (ii) 200,000 shares of restricted stock to Mr. Ken Ren, the CFO, and (iii) 30,000 shares of restricted stock to Ms. Yiru Shi. . Also, the Compensation Committee granted 20,000 shares of restricted stock to Mr. Jianlei Shen and 20,000 shares of restricted stock to Mr. Lianfu Liu, each of whom is an independent director of the Company. The Stock Grants were vested immediately for the CEO, CFO and the independent directors.

 

On October 3, 2015, the Company granted an aggregate of 1,000,000 shares of restricted stock under the 2009 Plan to certain key employees. The stock grants are subject to time-based vesting schedules, vesting in various installments until June 30, 2016. The value of the restricted stock awards was $1,660,000 and is based on the fair value of the Company’s common stock on the grant date.

 

On September 30, 2014, the Company granted an aggregate of 1,750,000 shares of restricted stock under the 2009 Plan to certain executive officers, directors and employees, among which (i) 240,000 shares of restricted stock to Mr. Tao Li, the CEO; (ii) 100,000 shares of restricted stock to Mr. Ken Ren, the CFO, (iii) 40,000 shares of restricted stock to Mr. Yizhao Zhang, 30,000 shares of restricted stock to Ms. Yiru Shi, and 20,000 shares of restricted stock to Mr. Lianfu Liu, each an independent director of the Company; and (iv) 1,320,000 shares of restricted stock to key employees. The stock grants are subject to time-based vesting schedules, vesting in various installments until March 31, 2015 for the CFO and the three independent directors, until June 30, 2015 for the CEO and until December 31, 2016 for the employees.

 

Employee Stock Purchase Plan

 

On August 9, 2012, the Board adopted the Company’s 2012 Employee Stock Purchase Plan (the “ESPP”), which became effective as of such date. The Board adopted the Company’s Third Amended and Restated Employee Stock Purchase Plan (the “Restated ESPP”) on May 15, 2015. The Restated ESPP reserved a total of 3,750,000 shares of Common Stock, including 1,250,000 shares of Common Stock that was increased the third time. Shareholder approval is not required with respect to the issuance under the ESPP pursuant to Sections 303A.08 or 312.03 of the NYSE Listed Company Manuel. The ESPP has been delegated to be administered by the Compensation Committee since October 19, 2012. Any employee of the Company or any parent (if any) and subsidiary corporation of the Company (the “Affiliate”), who is not a natural person resident in the United States, who has been in the employ of the Company or any Affiliate for such continuous period as required by the Board preceding the grant of rights under the ESPP is eligible to participate in the ESPP during the applicable offering period, subject to administrative rules established by the Compensation Committee.

 

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The ESPP is implemented by sequential offerings, the commencement and duration of which are determined by the Compensation Committee. The purchase price at which each share of Common Stock may be acquired in an offering period upon the exercise of all or any portion of a purchase right are established by the Compensation Committee. However, the purchase price on each purchase date shall not be less than the fair market value of a share of Common Stock on the purchase date.

 

During the fiscal year ended June 30, 2014, the Company issued 118,778 shares of common stock at the market price of $4.42 per share to Mr. Tao Li ($525,000 in total), the Company’s Chairman and Chief Executive Officer under the ESPP on September 26, 2013. The Company also issued 533,165 shares of common stock at the market price of $2.35 per share to certain employees enrolled in the ESPP ($1,252,938 in total) on May 26, 2014. During the year ended June 30, 2015, the Company issued 1,362,495 shares of common stock to its employees under the ESPP for cash of $2,946,746 and the Company issued 326,483 shares of common stock to its Chairman, Mr. Li, for cash proceeds of $626,847 under the ESPP.

 

Retirement or Pension Benefits

 

Currently, we do not provide any company sponsored retirement benefits to any employee, including the Named Executive Officers.

 

Deferred Compensation

 

We do not have any qualified or nonqualified deferred compensation plans.

 

Perquisites

 

Historically, we have provided our Named Executive Officers with minimal perquisites and other personal benefits that we believe are reasonable. We do not view perquisites as a significant component of compensation, but do believe they can be useful in attracting, motivating and retaining the executive talent for which we compete. We believe that these additional benefits assist our Named Executive Officers in performing their duties and provide time efficiencies for them. It is expected that our historical practices regarding perquisites will continue and will be subject to periodic review by our Board.

 

Summary Compensation Table— Fiscal Years Ended June 30, 2017, 2016 and 2015

 

The following table sets forth information concerning cash and non-cash compensation we and/or Jinong paid to our principal executive officer and our other most highly paid executive officer (the “named executive officers”) for services rendered in all capacities during the noted periods. No other executive officers received total annual salary and bonus compensation more than $100,000 during each of the three fiscal years ended June 30, 2017, 2016, and 2015.

 

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SUMMARY COMPENSATION TABLE

  

                           Nonqualified         
Name                      Non-Equity   Deferred         
and              Stock   Option   Incentive Plan   Compensation   All Other     
Principal      Salary   Bonus   Awards   Awards   Compensation   Earnings   Compensation   Total 
Position  Year Ended   ($)   ($)   (1)($)   ($)   ($)   ($)   ($)   ($) 
                                              
Tao Li                                             
Chief Executive   June 30, 2017   $200,000   $102,000   $480,000           —        —       $782,000 
Officer, and Chairman   June 30, 2016   $200,000   $24,000   $536,000                   $760,000 
of the Board (2)   June 30, 2015   $300,000   $36,000   $504,400                   $840,000 
                                              
Zhuoyu “Richard” Li   June 30, 2017    100,000    44,000    240,000                   $384,000 
President (2)   June 30, 2016    100,000    12,000                       $112,000 
    June 30, 2015                            —    $ 
                                              
Ken Ren Chief   June 30, 2017   $160,000   $61,600   $240,000                   $461,600 
Financial Officer   June 30, 2016   $160,000   $16,800   $268,000                   $444,800 
   June 30, 2015   $160,000   $16,800   $210,000                   $386,800 

 

(1)

The amounts reported in this column reflect the fair value on the grant date of the restricted stock awards granted to our Named Executive Officers. These values are determined by multiplying the number of shares granted by the closing price of our common stock on the trading day immediately preceding the grant date. The dollar amounts do not necessarily reflect the dollar amounts of compensation realized or that may be realized by our Named Executive Officers.

 

(2)Mr. Tao Li resigned as the President and Mr. Zhuoyu “Richard” Li was appointed as the President on May 19, 2016.

 

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The Company has not used a compensation consultant to determine or recommend the amount or form of executive or director compensation but its management believes that its executive officer compensation package is comparable to similar businesses in our location of operations.

 

Grants of Plan-Based Awards

 

The following table sets forth information regarding grants of awards to Named Executive Officers during the year ended June 30, 2017:

  

GRANTS OF PLAN-BASED AWARDS

 

                               All             
                               Other   All         
                               Stock   Other       Grant 
                               Awards:   Option       Date 
                               Number   Awards:   Exercise   Fair 
                      of   Number   or   Value 
       Estimated Future Payouts   Estimated Future Payouts   Shares   of   Base   of Stock 
       Under   Under   of   Securities   Price of   and 
       Non-Equity Incentive Plan Awards   Equity Incentive Plan Awards   Stock or   Underlying   Option   Option 
   Grant   Threshold   Target   Maximum   Threshold   Target   Maximum   Units   Options   Awards   Awards 
Name  Date   ($)   ($)   ($)   (#)   (#)   ($)   (#)   (#)   ($ /Sh)   ($)(1) 
                                                        
Tao Li   December 30, 2016                              400,000       $1.20